Sleep Number Corp (SNBR) 2008 Q3 法說會逐字稿

Welcome, and thank you for standing by. (Operator Instructions). Today's conference is being recorded. If anyone has any objections, you may disconnect at this time.

I would like to go ahead and turn today's call over to Mark Kimball. Sir, you may begin.

Thank you, Julie. Good afternoon, and welcome to the Select Comfort Corporation third 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 our website. Please refer to the details set forth in our news 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 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 at 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 for joining us today.

Select Comfort did what we said we would do. We returned to profitability in the third quarter.

At the end of the second quarter, after a difficult start to the year, with two quarters of losses, we stated our goal of returning to profitability in the second half of the year, assuming normal seasonality. We achieved our goal despite a sales environment that continued to deteriorate and that did not provide the quarter's normal seasonal lift.

While important advances were made in new products and new marketing approaches, we have not stabilized sales and share trend. Our improved results were driven primarily by gains in gross margin and reductions in expenses.

Gross margin in the quarter was 62%, improved versus both prior-year and on a sequential basis. Gross margin has been an area of focus during these inflationary times, with specific programs to strengthen mix and raise average selling price. New bed models targeted mid-to-higher price points and met their mixed goals, and increased bedding accessory sales further supported overall gross margin.

Operating profit margin benefited from expense restructuring and cost controls across the Company. During the quarter, costs decreased approximately $18 million versus prior year. So in the quarter, we did what we said we would do, delivering $12 million more in profit than each of the previous two quarters, despite battling weak sales.

In spite of the progress we made and achieved in the third quarter, like all retailers, we expect significant challenges going forward. Our sales trends deteriorated after Labor Day, as the financial crisis deepened and consumers pulled back from discretionary spending. There have been a few small signs of potential improvement along the way, but in general, we have no reason to believe consumer sentiment will improve anytime soon.

We expect the fourth quarter will be more challenging than the third. We are doing what we can, to continue to adjust our cost base, and have specific plans to address what we can control and influence.

Specific initiatives in the fourth quarter and into 2009 include -- first, we are moving to the next phase of cost restructuring by closing additional stores. In 2008, our cost reductions have not included a significant change in our total store infrastructure. Most of the year we have operated with close to 475 stores. With new store openings similar in number to store closures that we were able to effect through natural lease expirations.

We recently concluded an evaluation to optimize our store base. That analysis was conducted market by market, considering a range of projected potential volume trends, and with a view toward footprint by market for the future.

With a range of potential reductions identified, we engaged a real estate consulting firm to work with us to evaluate options to cost effectively reduce store -- our total store base and associated costs. We're in the midst of evaluating these options, and are not able to provide greater detail at this time, other than to say that we expect to reduce our store count by 20 stores in the first quarter of 2009, taking advantage of lease expirations and exit clauses of underperforming stores.

Second, we believe we have additional opportunity to enhance our product cost competitiveness. Our R&D teams have been redirected to focus on design opportunities and quality improvements of current products, in an effort to counter inflationary pressures of commodities, and deleverage. Our goal is to provide more flexibility in our pricing and promotion, particularly at price points under $1,500, while protecting variable operating margins.

Third, we will decrease marketing expense more aggressively, targeting a percent of sales two to three points lower than in 2008. In the quarter, we discontinued the SHeDAISY Creative. We improved cost per lead with proven direct-response TV, and introduced new radio focus on Dual Comfort and store locations in support of the Labor Day events.

Results over the Labor Day period were positive, but have been difficult to read since, and we -- and were not sustained through Columbus Day.

We believe pulling back to lower levels of spending is absolutely prudent as we brace for a slow holiday season and until we prove that incremental spending can deliver sales and market share improvement.

With the decision to revise marketing direction, we consolidated marketing leadership under a long-term internal leader, Tim Warner. Tim has been with Select Comfort for 12 years, and for the past several years, he has let our Direct and E-Commerce business units. Tim has important experience with the Sleep Number brand, having worked on the initial launch. His Company knowledge will also be helpful in integrating brand and traffic-building activities across the Company.

For the fourth quarter, Tim and his team have a strong set up programs. First, targeting our owners, emphasizing new products and accessories for the holidays. Second, working with our sales teams to emphasize the value that we have in our product line today with Queen sets starting under $1,000. And third, to complete the refreshing of our direct-response TV campaign for launch in early 2009.

To conclude before turning the call over to Jim, let me reiterate that I am proud of our team's results in the third quarter, achieving what we set out to do even as conditions have become more difficult. We're now planning and executing the next phase of our restructuring, anticipating continued marketplace changes.

We expect the fourth quarter to be more difficult than the third, and are doing everything that we can to reduce costs. In the end, the severity of the consumer pull-back through the holiday season and our ability to offset it, will impact our ability to maintain our profitability.

I will now turn the call over to Jim for greater insight into the quarter and the outlook.

Thanks, Bill. I'll start by restating Bill's initial point. In the third quarter we demonstrated our ability to return to profitability by aggressively pursuing cost and margin enhancement. While we did not benefit from normal third-quarter seasonality, we improved operating income by $12 million compared to the second quarter on a $5 million sales increase. A 260 basis point increase in gross margin led the improvement, as pricing and product mix more than offset the impact of inflation.

In addition, we aggressively managed fixed and discretionary spend levels. As compared to a year ago, the consumer environment remains challenging, with sales declining 26%, from $213 million last year to $157 million this year. Sales in all channels declined on a year-over-year basis, with comparable store sales down 27%.

We experienced a strong Labor Day period, indicating that the consumer will purchase during traditional holiday shopping periods. However, the volatility week to week in month-to-month sales has increased.

Also, as compared to a year ago, net operating profit declined from $19.1 million to $2.1 million this year. Lower sales led to the decline in profits in the quarter, partially offset by improvements in gross margins and lower fixed and variable costs.

Gross profit margins improved from 61.6% last year to 62.2% this year. Two key product initiatives drove the improvement. First, our mattress sales mix grew stronger following the introduction of our 6000 model this past spring. And second, our focus on accessory offerings in our stores, and the efforts of our new accessories team resulted in higher bedding accessory sales our mattress unit, as well as higher gross margins on these products.

Pricing action covered commodity cost increases for materials, but did not fully cover cost increases from fuel and the deleverage from lower unit volumes. Maintaining gross margins at the third-quarter rate will be a challenge as we continue to face the deleverage impact of lower unit volumes. And recent declines in oil costs are not yet reflected in materials costs.

We are aggressively pursuing reductions in the fixed-cost infrastructure of our plants and home delivery, as well as opportunities to reengineer our product offerings to offset the impact of inflation, but more importantly, to provide flexibility for pricing and promotions. We expect gross margins to remain above 60% in the fourth quarter.

Below the gross margin line, we reduced our selling, general, and administrative costs by approximately $18 million compared to last year. Variable costs made up roughly a third of this reduction. The remainder reflects a $12 million reduction in infrastructure and discretionary spending, including a 14% reduction in media investments to $23 million in the quarter. In addition, third quarter costs include store asset impairment charges totaling $1.5 million.

On the balance sheet, our borrowings increased to $60 million compared to $58 million last quarter. Inventory and accounts receivable balances were comparable to the second quarter, while accounts payable declined, reflecting lower sales volumes and actions to reduce our cost structure.

We remain in compliance with our debt covenants. Maintaining this compliance has required, and will continue to require, proactive management of costs and cash, and could be challenged if sales trends deteriorate further or cost reductions are not realized.

Cash flows from operations year-to-date are positive $12 million, including $2 million in operating cash flow for the third quarter. Our adjusted EBITDA year-to-date is a positive $4.2 million, and in the quarter, was positive $10 million. Adjusted EBITDA for us is equal to our operating profit or loss plus add backs for non-cash costs, including depreciation, non-cash compensation, and asset impairment charges.

Cash outlays for capital expenditures year-to-date are $28 million, and were $7 million in the quarter. As we look forward to 2009, we expect cash requirements for cash expenditures will be much lower than in 2008.

As Bill indicated, the outlook for the balance of the year and 2009 continues to be very challenging. Recent industry data indicating declines in consumer confidence in home sales, along with their own experience, all point to no improvement and the likelihood for worsening conditions in the fourth quarter, and continued softness in 2009.

I will remind you, though, that we do get an additional week in the fourth quarter of 2008.

Bill outlined our plans to manage those things within our control in the coming months and quarters, focusing on actions that are -- address our cost structure, and improve our financial flexibility, including reducing our media investment, closing additional stores, and lowering the cost of producing our products, while working to improve the effectiveness of marketing initiatives to drive consideration and purchase of our products.

We remain confident in the long-term opportunity for our product and business model, and remain committed to navigating through the current economic challenges to realize that opportunity.

I would now like to turn the call back to Bill for some final comments.

Thanks, Jim. In summary, the third quarter was an important one for us as we achieved our goal of returning to profitability. However, we recognize that there is a tremendous amount of work still ahead of us as the sales environment and economic outlook have unfortunately continued to deteriorate.

We have been proactive and aggressive in confronting our issues and will continue to do so. We have specific new initiatives under way to combat the continued sales decreases we anticipate. Our team has demonstrated ability to execute and deliver results, and we are motivated by knowing that we are helping to improve people's lives by improving their sleep.

Our opportunity is to communicate our products' unique solution to consumers' needs and to have a cost structure that allows us to deliver compelling value and to sustain profitability. Everything we're working on is designed for immediate results and to make us a stronger Company for the future.

I would like to now open the call to your questions. Julie?

(Operator Instructions). Bob Evans.

First, I believe you had given guidance before as it relates to second-half profitability. I know you were profitable this quarter. Do you still expect second-half profitability?

Well, Bob, our -- we don't give guidance. At the end of the second quarter, we stated our goal to be profitable in the second half, and we positioned that as it being dependent on the normal seasonality, but we also positioned it as a second-half goal. We're doing everything we can do, as we've said, to offset some of the negative trends we've seen, to maintain the profitability. But it is not a certainty at this time.

How should we think about sales and marketing spend, going forward? I know you touched on this, but I'm trying to get a sense of should we expect that it's going to be managed as it relates to trying to provide profitability? Or how are you targeting your sales and marketing, particularly your media spending?

Yes, the media spending, Bob, we will -- as I mentioned, we will be trying to manage that to a couple of points lower than what we have been running here in 2008. Obviously, that will help towards profitability, but more importantly, it gets it in line to where we've historically been spending our media. We want to pull it back to that base run rate until we have proven that we can on a sustained basis spend at a higher level and then get the resulting sales from that. So for the time being, I would look for that media spending to be a couple of points lower than the run rate that we have been running here in 2008.

Okay. And if the environment stays difficult, could we expect that to be pulled back further, or do you want to try to maintain at that level?

Well, we really don't have a formula on this. We are -- we adjust our marketing -- one of the strengths of our marketing model is that we are not committed on spending into the future very far, so we've been able to adjust it. We've been trying to use marketing to offset some of the negative consumer trends, but we're going to -- and therefore spending at a little higher rate than we had in the past. We're going to be managing that back down to where we believe the volume is going right now.

And Bob, to that point, I think historically we've spent median at 13% -- 12%, 13% of sales range. As Bill said, that's run a little bit higher, but we're going to move back more towards the historical levels, and we will be flexible with the sales volumes.

And can you to comment on sales trends towards the end of the quarter, latter part of September and then early fourth quarter? Give us some level of color as to how it's gone more recently with all the -- everything that's happened?

I would say, Bob, that we're not any different than I think what you're hearing from most retailers, which was post-Labor Day, slowed a bit. And currently with the financial crisis, it's gotten more difficult.

Just a reminder, though, as you look at -- here again, as you look at Q4 numbers, we do have the extra week. And if you recall, we saw a softening after Thanksgiving. So if you are thinking in comp terms, the comparisons get a bit easier at the back half of the quarter, as well. So those are just some considerations.

Would you characterize things as a gradual weakening, or has it been more abrupt during the last three to four weeks? Just trying to get a sense, because retailers have been across-the-board here.

Yes. I would just say it's notable. We certainly had our sales challenges before. And so I would say that it certainly fell off in a more meaningful way after some of the banking crisis things occurred. But I don't know that I would say more than that.

John Powell.

I was wondering if you could tell us the lease exposure. What's the gross number? And then you discussed the flexibility of exiting some leases early. I wonder if you could give us some color on how that works, and how much flexibility there is, and whether there's any plan beyond the 20 stores in Q1 for fiscal '09? Thank you.

Sure. First -- answer your first question, just total leases including our corporate facilities, as well as our store leases, run on an annualized basis kind of mid-40's -- $45 million or so.

As we look to 2009, as we indicated, we'll close approximately 20 stores with normal lease terms, as well as -- we do have kick-out clauses in a number -- in really all of our leases that allow us to get under -- out of them if we're -- and without cost if we're not running to kind of predetermined performance levels. If you look at it in the aggregate for 2009, there's in the range of 70 stores that through normal kick outs or exit clauses, we would have the option to terminate without cost.

And Jim, could you give us -- I don't know if there's a typical store example of a closure, but how does that impact your cash flow. And I assume -- are you able to -- just if there's any color you can give on the amount of money you save versus the amount of money you have to spend in severance or some lease obligation or something?

Yes. From the standpoint of exit costs, exit costs are really (technical difficulty) you know, in most cases we can manage them, we could move the people in the stores to stores in the surrounding -- to a store in the same market. So we're able to manage through that pretty well. There's not a lot of inventory. So there's not those types of costs that a lot of retailers have to deal with. So exit costs are really very nominal.

The -- it's difficult to kind of point to a normal store closing, because there is a fair amount of variability in them. But our stores do tend to be pretty favorable from the standpoint of just relatively low operating costs to run, small footprints, low inventory, those types of things. But in kind of reducing the overall store base, it provides opportunities for other types of reductions in infrastructure, media spend, those types of things. So without getting specific dollars, I think it does create some opportunities for us to kind of manage the overall cost structure of the business over the long term.

Jim, let me clarify one point that I think maybe I misheard is -- we have about 40 to 50 leases a year that come due on a normal cycle, just by the way we opened them. And then the kick outs that Jim referred to are if we don't achieve a certain volume level within the first couple of years of a lease. Beyond that, then, there are expenses of getting out of leases. But what Jim was referring to in all of that he just shared is the normal expiration of a lease.

Okay. And I don't want to put words in your mouth, Jim, so I just mean, if we closed -- I don't know -- 50 stores next year, would that be a cash flow positive event, or a cash flow negative event?

Oh, it would -- if it's store closures within the normal expiration of leases, on main, kick outs, it's a cash flow positive.

Arieh Coll.

You'll be getting one new customer from me, so we will help you as much as we can.

Great.

Regarding just covenants you have on the lending side, do you foresee any opportunity to try and reduce or somehow reduce any of the restrictive clauses you have regarding cash flow and on a quarterly or monthly basis, going forward?

Well, I think that we've demonstrated that we're proactive in both how we manage our cost and our cash relative to our banking relationships, but also we've had a good relationship with our banks throughout this past year and since we've begun the relationship.

You know, and we'll continue to do the things that we need to do to work with them and with our cost structure to maintain compliance with our covenants. If that includes going back to the banks, if necessary, that would be something we would consider. But I think it's just within the normal relationship that we would evaluate those types of considerations.

Okay. And then, just secondly, can you just comment on average price points or transaction sizes in the quarter, in terms of how that was changing or not versus year-over-year, or trends in '08?

Sure. Our average selling price for our mattresses within our Company-owned sales channels was a little over $1900. That's about an 11% increase over a year ago. I think what we've seen -- some of that is pricing, but a good piece of that is matt -- is the mix within our product lines. The 6000 introduction has resulted in some step-up in the overall mix of our product line. And so that's been a positive impact from our overall margin perspective and our ASP.

And then just finally, for 2008 in grand total, inflationary cost increases -- I'm looking mostly at material goods or energy related -- were how large? And do you have any sort of guesstimate for 2009, if these new lower price points for certain raw materials and energy are sustained, how much of a reduction you'll have in these raw material costs?

That's a tough one to answer. There's certainly been some inflationary pressure from the energy on the flow through of our commodities. We've been able to defer some of those to a certain extent. And unfortunately, the commodity prices tend to take a little bit longer to step up, with the increases, but they even take longer to come down.

I think we're hopeful that as we look forward to 2009, some of the oil price declines that we've seen we can translate into better pricing in 2009. But it's clearly a difficult environment to predict, from a commodity price standpoint. So I'd hesitate to quote any particular numbers.

Could you give us a sense for energy costs as being how material a number relative to your sales levels?

You know, it is a -- input to a number of components within our product makeup, from our foundations to our -- the foam that's in our beds, and within the home delivery, which all are -- the fuel prices, diesel prices, with our home delivery, those are all -- that represents somewhere in the range -- those three components represent somewhere in the range of 50% of our total product costs.

Obviously, the oil cost is not a majority of any one of those individual components. But needless to say, it does happen. It is a factor. And it can have an impact on the overall inflationary cost of our products.

Joel Havard.

One question I wanted to ask following up John's comment on real estate was, if you-all were seeing any relief yet on rental rates, and would you anticipate any as we get into '09 on existing or leases you intend to keep?

That would be some things that we would look at with the people who are working on the real estate side to see what kind of opportunities there are. I will say that it is a difficult environment with real -- in the real estate space, because the landlords are certainly in a challenging environment, as well. So it's tough to predict, but I think we're looking at all the options to try to reduce our overall cost structure on that fixed cost of the occupancy within our stores.

Working on the cost structure is a good segue into number two here. In your priorities and outlook you're talking about product costs and pricing, you focus on reducing product costs and creating price flexibility on products. Now, is that -- I don't know how much you want to go into here, but do you -- could you tell us if that means more a matter of a more aggressive promotional stance, and is it tied one-to-one with what you can cut out on the production end? Just give us a sense, if you can, of sort of what you're thinking and how you might respond in this kind of environment.

Joel, this is Bill. Let me give it a try. First of all, our product line today has opportunity within it just to help consumers understand the breadth of the price points that we actually offer. Many people think that our product is $3,000, $4,000 and are surprised actually when they come in the store and learn that you can get a queen-size Sleep Number bed for less than $1,000 already.

And then if you look at the way our product line steps up from there, we have three models that are currently below $2,000. And what we've seen is that our mix really has not changed. It actually -- it's gotten a little stronger in the last year, which is good news for the new products that we have launched at the higher price points, over $2,000.

But in this environment, we believe there may be opportunity that we are not taking full advantage of for incremental sales, and that's what we keep looking at -- is our opportunity to stabilize sales, stabilize share, and get some leverage back into our whole system -- is how to maintain the higher price points, but look for incremental volume at those lower price points, but not sacrificing our operating margin to the degree. And that's where we're working on cost reductions in product and also looking at other cost opportunities in the system to support (multiple speakers)

No. I recognize y'all have got a lot of levers involved in that. So would that be to say possibly that the -- that this is more a matter of the marketing message or focus, either media driven or in the stores, versus tweaking the product line -- in quotation marks -- putting a different cover on it and calling it model X1 instead of model X?

First of all, I think, yes. It is part of the marketing message, making sure that it is more clearly communicating the value advantages that we already offer.

Secondly, though, we will -- we believe we have opportunity to test really what the elasticity of demand is at some of those price points, through promotional efforts most likely. We've done that in the past at learning in the past, but I think this is a different consumer today, and we need to pursue that -- support that though, with some of the product cost reductions, so that -- and that's back to the essence of your question, was we're working on our product costs to give us flexibility to test different price elasticities at those lower ends without sacrificing our operating margin.

Yes. And I would say that certainly we would like to protect the margin by finding cost opportunities to kind of fund those opportunities on kind of the middle and lower price points. I wouldn't say that we will necessarily restrict it to that. I think that if we can find things that will drive incremental gross margin dollars and that means we have to give up a little bit of gross margin percent, we'll do that.

But I think, as Bill said, there's a couple of things going on here. We would like to fund it. We would like to find -- and we do think we can find opportunities on the cost side of the product. But there is also some testing and understanding of really how we can drive incremental volume at those price points.

Thanks for the insight. Best of luck.

Bill [Mathie].

Just to follow up on I believe it was the prior gentlemen, Joel's question. I actually had one -- first, a question before that, and then a follow-up on his question. And the first question is regarding your advertising. You indicated it could have been a couple of points lower as a percent of sales, but then I think, Jim, you indicated that your historical level was sort of closer to 12% or 13%. I just want to reconcile those two things, because it looks to me like last year -- sorry, this year -- that advertising is closer to 15%. So are we talking more like a 300- to 400-basis-point reduction as we go forward into '09, or more like a 200-basis-point reduction? Just trying to make the math (multiple speakers)

Bill, I think the disconnect is really between kind of Bill's -- Bill commented on marketing dollars in the whole, and there's a media component to that, and I was speaking more to media, so there's a little -- I think we are talking about really needing to be a little bit more efficient on total marketing dollars as a whole. A component of that is some reduction in the media as well. But talking a little bit of two different funds (multiple speakers)

Gotcha. A little bit of apples and oranges. Okay. Then just a further question on that, and then my follow-up. On your advertising spend on your media dollars, how forward are you bought? So just to use round numbers, if it's $100 million a year, at this point right now, are you bought through the rest of the year, or are you buying sort of three months in advance? Just give me some idea how flexible the dollar commitment is in terms of your ability to dial it back at any point in time?

We're very flexible. The answer depends a little bit on which type of media that you're talking about. For example, the bulk of our media -- almost 60%, 70% of -- 60% of it is direct-response, and within that, the TV part -- much of it is bought just two or three weeks out.

The print is bought -- the print -- so the magazines -- it's bought closer to two to three months out. And then everything else is somewhere in between, but closer to the weeks and months, as opposed to half years or anything like that.

Is it fair -- I don't want to conclude something based on what you just said, that is fair for me to presume that if -- the environment, obviously, is tough. You guys are showing a great discipline on the cost structure, keeping the business as healthy as you can in a really difficult environment. Is it fair for me to presume that there's no sacred cow on advertising? If comps are down 35%, you're not going to spend that money just because you said you would?

Right. And then, in the third quarter, we pulled back a ways as well. But the timing of when you start to see things in the quarter can affect exactly how fine you can cut it on a quarter. But going into the new year now, we're planning it in a -- at the lower rates, as we talked --

Then the question sort of to follow-up on the prior gentleman's question about pricing and the cost of the beds. You guys have had a unique history iteratively, that your models seem to grow to a certain level, hit something of a plateau; and back in the early -- in the 2001, 2002 period. And then you found the next leg of growth in terms of communicating a more succinct message, etc., and you were able to double the revenues and really advance the branding of the Company.

Now we find ourselves in a similar situation. The market is particularly bad for the business and overall, and it gives you perhaps a chance to think about the third iteration, if you will, of the business. And my question -- and thinking less about '08 and less about '09 and more about where this Company will be in four to five years -- do you guys view something like your gross margin rate, that's 60 points of product margin -- is that also a sacred cow that you feel you have to protect going forward, or are you considering a more aggressive unit expansion strategy that would allow you to essentially take the gross margin down and drive unit acceleration? -- in light of that comment you made about price points. I just want to take it beyond the immediate into sort of the strategic, I guess, is what I'm ultimately asking.

Yes. My answer is (technical difficulty) there really are no sacred cows. What we have long believed is that there's a balance needed here of generating awareness, so you've got to fund a certain level of marketing or sales promotion activities to support awareness as both a branded Company and also as a retailer. So you've got to keep both of those [stoked].

But I think we're going to learn a lot here in the coming months and year about the price elasticity, and as Jim said, if we have to forgive some points of gross margin to make the incremental work, we'll do that.

But at this point, we've already gotten a very good value in our product line as it exists. I think part of our marketing opportunity, sales opportunity is to communicate the value that exists in the line today.

And then just a last question, and then I will beg off and let somebody else have a turn. To the comment you just made, Bill, you clearly do have value, and it's fair to I think say that perhaps people don't understand that as well.

But I also question whether or not part of what happens if your average price point is still in that $2,000-ish range for your Company-owned stores, do you think that it's less an issue of having a product available under $1,000, and more an issue of the spreads between the products not being so wide that -- I guess my point is, as a retail analyst you sometimes feel like if you're buying the lowest priced product that a company sells, you're getting the cheap product. So if the price points go $1,000, $2,000, $3,000, $4,000, people might have an aversion to the $1,000 price point, where if the price points went $1,000, $1,300, $1,600, $2,000, you might not have that problem. You (multiple speakers)

All good points. And that exact charge has been put in front of the task force that's working on this, because our entry-level bed is a terrific bed. It's really what the Company was founded on, and we need to be able to communicate that positioning more clearly.

And I would say, Bill, I -- certainly what we have done in the past year with regard to filling in price points indicates that having appropriate spreads is -- between the products -- is certainly important.

We do need to do a better job of that at the lower price points. I think when we've done some things like when we did a special edition bed back earlier in the year, which was kind of in that in-between price point, we had a lot of success with it. So those are the things, as Bill said, we're testing and looking at, and I think it's an opportunity for us.

Great. Thanks, guys. I appreciate your willingness to answer those questions. Thank you.

(Operator Instructions). Bob Evans.

Hello, again. Not to beat the media spending to death, but trying to get your perspective on if 12% to 13% has kind of been your historical trend, is there something magical about that level, or have you made thoughts towards the 10% to 11% spending level, and if you did that, do you believe it would have a long-term impact on the business? Or can you give us your thoughts in terms of backing down the media spend even farther given the current economic environment?

That's a good question, Bob. We're really doing a kind of a bottoms-up build as we look to the new year. But as we released the preliminary looks at that, we are prioritizing our spending against really four buckets, the first being awareness and driving leads. It's almost like you've got to fill up the swimming pool.

Then there's the urgency around the consumer events and promotions, particularly as consumers are increasingly focused on buying around special holiday weekends. So that's the promotion spend.

Then for us, because our owner base is so strong and so loyal and so important to referrals, that's a bucket of spending.

And then there's a small amount in the regional development.

When we lay all of that out, you still get back to about a 13%, 14% range. But we're going to be looking at different alternatives off of that to test in different markets.

Budd Bugatch, Raymond James.

Budd Bugatch, Raymond James. We've talked kind of about the structural changes at the store level. Are there any other structural or organizational changes that you can maybe address in sort of either some detail, and then quantify up some of the impacts?

We're always looking at our overhead structure. But to be honest, we -- that has been pretty aggressively dealt with here year to date. The next phase of that will really be somewhat dependent upon how many stores we end up moving out of, because that will change our -- the workload structure that we need to support them. That's the next biggest change.

The other changes, they'll come, Budd, after we've done SAP and a few of the other key implementations we have there. There will be some efficiencies generated from that, as well.

Is SAP still planned for next year, now? You were going to delay it a year, if I remember right.

Yes. We were -- we delayed it till 2009. It is still scheduled for 2009. The timing of that will be somewhat dependent upon some of the other programs. We don't want to interfere with important programs that we have to stabilize the business through the SAP launch.

And just hub-and-spoke, is that working yet like you want it to? What about the capacity utilization at the two factory levels?

I would have to say that, as you would expect, the whole infrastructure is getting somewhat deleveraged as you go through the unit declines that we've had. We have flexibility to adjust shifts and the rest, but in general, they are deleveraged.

But I would say that the plants particularly have responded very well to that. And you see that in the gross margin. It's there -- of impacting their costs.

And the hub-and-spoke -- similarly, though the nice thing about the hub-and-spoke program is, there is some flexibility built into it. We could variable some of the -- the numbers of hubs is an example that we operate out of.

My last question is more of a nit. Can you give us the individual add backs to EBIT to get to the adjusted EBITDA?

Sure. The basically three individual components that get added back -- the first one is depreciation and amortization, which in the quarter was $5.1 million, non-cash compensation was $1.2 million, and then the asset impairments was $1.5 million. So that's added back to our operating profit to get to your ER adjusted EBITDA.

Good luck. And nobody is having any fun right now, but it was certainly nice to see a black number at the bottom of the page.

Right now I show no other questions. I would like to go ahead and turn today's call back over to the speakers for any closing remarks. Thank you.

Well, thank you all for joining us. Thank you for your continued support. We look forward to speaking with you again next quarter.

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