Sleep Number Corp (SNBR) 2009 Q1 法說會逐字稿

Welcome everyone, and thank you for standing by. At this time, I would like to inform all participants that you'll be able to listen only until the question and answer session of today's conference call. Today's conference is being recorded. If you have any objections you may disconnect at this time. I would like to introduce Mr. Mark Kimball, General Counsel. Sir, you may begin.

Thank you, Bridget. Good afternoon, and welcome to the Select Comfort Corporation first quarter 2009 earnings conference call. Thank you all for joining us. I'm Mark Kimball, Senior Vice President and General Counsel. With me on the call today 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 also will also be archived on our website at SelectComfort.com. 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 includes and our responses to your questions may include certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties outlined in our earnings release and discussed in some detail in our annual report on Form 10-K and other periodic filings with the SEC. The Company's actual future results may vary materially. I will now turn the call over to Bill for his comments.

Thank you, Mark and thank you all for joining us today. When we spoke with you in March, we discussed our expectations for the first quarter and our priorities for 2009. Today, we are pleased to report that we achieved our first quarter goals, and made measurable and sustainable progress on many fronts. While we don't anticipate any near term improvement in macroeconomic conditions for the retail environment, we are confident that we are taking the right steps to control what we can influence and to position the Company favorably for the future.

As expected, the consumer environment in the first quarter was challenging. While we reported a net loss in the quarter, we did generate positive operating income of approximately $300,000, an $11.3 million improvement compared to the first quarter of 2008 on $29 million less in revenue. And importantly, we also achieved positive operating cash flow in the quarter. Net sales for the first quarter were $139.6 million, down 17% versus the same period last year, and same store sales were down 14% versus prior year. These are improving trends versus both prior year and the fourth quarter. This early stabilization of sales is significant because we achieved it on a 36% decrease in advertising spending over the prior year. While this is a good first step, we anticipate continued volatility, particularly with our seasonally lower second quarter.

Our first quarter advances were the results of our team's successful implementation and execution of our three key priorities. As we shared on the last call, these include first aligning costs to anticipated sales trends, lowering the break even for short-term benefits and long-term leverage when volume growth returns. Second, reigniting the Sleep Number brand by cost effectively focusing on value and on our product's unique benefits that are so important to today's consumers. And third, preserving cash and improving the Company's capital structure.

With respect to reducing costs, we made significant progress in the quarter. We closed 30 stores and prepared an additional 25 stores for closure during the remainder of 2009. And for the stores we closed, we realized a 30% transfer of sales to surrounding stores. We also redesigned our product line. We lowered cost of goods and placing greater emphasis on entry price points and value within our line. We also completed the plan for restructuring for our general and administrative expenses across all functions, resulting in 40% fewer G&A positions since the beginning of 2008. Each of these actions is expected to reduce fixed costs by about $10 million or more this year, for a total of $30 million in savings from those programs.

We also carefully managed variable costs in the first quarter. As I mentioned, we significantly reduced advertising spend, and importantly even with the decreased levels of spend, we drove close to the same levels of store visits as measured by leads. We accomplished this through a disciplined approach to our media strategies, coupled with more aggressive consumer promotion and new products focused on value.

In addition to media efficiency and value initiatives, to reignite the Sleep Number brand, we also took steps to improve the effectiveness of our marketing. Our work on the Sleep Number brand is now focused on the unique feature of personalized comfort for individuals and couples, which results in the best sleep and pain relief possible for those who have found their Sleep Numbers. And all of our communications, including national direct marketing, promotional advertising, and local radio advertising consistently highlight this position.

We intend to continue in this direction in the second quarter, and as I noted on the last call, I think it's a point worth repeating. We are finding that consumer spending hasn't gone dormant, but it has changed, and we believe that companies able to offer innovative products with a proven value proposition will drive traffic and volume, even in this environment. We are confident in the unique value that only a Sleep Number bed can provide, and therefore we believe that by effectively adapting our marketing and selling approach to this evolving marketplace, we will enhance our competitive advantage.

The success of our QVC event in the first quarter demonstrates the strength of consumer interest in our product, and the demand potential when the right value message is well presented. Our March show featured a queen bed set price just under $1,300 and the event combined passionate testimonials from our owners with a clear and urgent call to action. Both QVC and the Company considered last month's show one of the most successful in our seven years of working together, which gives us much to build on in the coming months. And while QVC remains a relatively small channel for us, its success illustrates the potential of our unique product and brand.

Now, just a few words on our third area of focus, preserving cash and improving our capital structure. Our strategy calls for consolidating our infrastructure for improved scale and leverage. With no store or plant expansions, and our I Team only focused on system stabilization, we met our business needs in the first quarter with $9 million less in CapEx than the same period a year ago. In terms of addressing our capital structure, we continue to operate under amendments agreed to with our banks, with all the risks and challenges that this presents. We also are working closely with our board to assess strategic and financing alternatives, as we have shared with you in the past.

Before I turn the call over to Jim, I want to briefly comment on the second quarter and the remainder of the year. We anticipate economic conditions will remain uncertain and challenging throughout the balance of the year. That said, our goals for the full year 2009 remain unchanged, namely to deliver positive operating free cash flow, and improve trends in sales and operating profits before adjustments.

We currently are focused on the second quarter, which historically represents our most challenging sales period. The reason for this challenge is consumer behavior. There are fewer people in the mattress market and fewer people in the malls in the second quarter than other times of the year. This expected drop in second quarter revenue negatively impacts both profit and cash. Our agenda for the second quarter continues down the same path we established in the first quarter. We expect to close at least 12 stores in the quarter. Marketing spend is planned to be down more versus prior year than in the first quarter. We will continue emphasizing value with a combination of special products and promotions. We will evolve our advertising campaign with new executions of TV, radio, and print, and we anticipate CapEx to be similar to first quarter's level, a significant reduction versus prior year.

So to wrap up, let me say that this past quarter was a solid, positive step towards restoring Select Comfort's potential. We are committed to continuing to build on these improvements, recognizing that the second quarter is our next hurdle, as sales, profit, and particularly cash will be challenged. While cost reduction and preserving cash remain our top priorities, we also continue to concentrate on those actions that will drive traffic and enhance the value proposition of the Sleep Number brand.

And now I'd like to turn the call over to Jim.

Thanks, Bill. As Bill covered briefly, we reported a net loss of $2.7 million in the quarter, or $0.06 per share, versus a net loss of $7.1 million or $0.16 per share in 2008. We also reported operating income of approximately $300,000, an $11.3 million improvement compared to the first quarter of 2008. First quarter results also improved significantly as compared to the fourth quarter on modestly higher sales. This improvement is directly related to the initiatives we executed in 2008, as well as in the quarter.

First quarter sales declined by 17% on a same store sales decrease of 14%. Sales trends improved compared to the fourth quarter, although sales continued to be volatile. Average selling prices in our Company owned channels were up 2% as pricing actions taken in 2008 were partially offset by our discounting strategy. Unique factors such as the QVC show and the closeout of our old product line also contributed to the results. Our profit improvement reflects the benefit of programs that Bill outlined earlier.

Gross margins increased 2.7 percentage points sequentially from the fourth quarter to 58.6%. They also improved by one percentage point from the prior year due to improved efficiencies in our manufacturing processes, partially offset by a more aggressive promotional strategy. Our sales and marketing costs were $67.3 million, down $23 million or 26% versus prior year, improving 570 basis points to 48.2% of sales. The decrease in costs and improvement in operating leverage reflect a lower store count and media spend of $15.8 million.

Likewise, we reduced general and administrative expenses by $2.8 million to $13.3 million, or 9.6% of sales. This was driven by workforce reductions and other cost initiatives, partially offset by higher consulting fees associated with financing efforts. G&A was flat as a percentage of sales from the prior year. Below operating profit, interest expense increased by $1.5 million reflecting interest paid on higher debt balances and on higher interest rates. We also recorded a $1.2 million in income tax expense on a pre-tax loss of $1.5 million, reflecting some one time tax expense items, as well as an increase in our deferred tax valuation allowance.

During the quarter, we generated positive EBITDA of $6.3 million. We also generated operating cash flow of $24.1 million, which included the benefit of a $23 million tax refund. CapEx totaled $1.2 million, the majority of which was attributed to cash carryovers for prior year projects. With regard to the balance sheet, borrowing under the revolving credit facility decreased by $4.9 million to $74.3 million during the quarter. Subsequent to the end of the first quarter, we were able to further pay down our bank line using the $23 million tax refund, which previously had been restricted. As the same time as the debt was paid down, the current availability under the line was reduced by $18 million.

With regard to our credit agreement, we continue to operate under short-term waivers to comply with certain ongoing bank covenants. During the past quarter, like the fourth quarter, we entered into amendments to our existing credit agreement, and continue to operate under the borrowing limits provided for in the amendment modifications. The current amendment under which we are operating remains in effect through May 8, 2009.

Looking ahead, as Bill mentioned the second quarter is historically our toughest selling season. This year won't be any exception. While we continue to diligently manage our cost and cash, we anticipate a loss in the second quarter that will exceed this quarter's loss. We also expect to be operating cash flow negative in the quarter before returning to positive territory in the second half of the year.

Our seasonally low second quarter is expected to increase cash requirements, which will require continued support and future accommodations from the Company's bank syndicate. We have been working closely with them and expect to continue to do so as we work toward a longer-term solution. As you know, we are pursuing a range of strategic and financing alternatives. As you can appreciate, it would be premature to provide any further detail at this time.

Our expectations for our full year 2009 benchmark indicators are as follows. Gross margins will be at or slightly higher than the 2008 full year rate. Media investments will total approximately $60 million, G&A expenses will total approximately $48 million, and we will continue to limit our capital expenditures to only mission critical projects, which total less than $5 million. By maintaining this discipline, we expect to achieve our goals of positive EBITDA and free cash flow for the year.

Finally, I would just echo Bill's sentiments about the Company. We are confident in the long-term opportunities for our products and business. We remain committed to the actions that set us on a course for longer-term growth, while also allowing us to navigate through the current economic challenges. I would now like to turn it back to Bill for some final comments.

Thanks, Jim. In summary, we've accomplished a great deal over the past several months and are pleased with our progress. That said, we continue to operate in a difficult environment, and accordingly remain intensely focused on our priorities of reducing costs, enhancing our brand, and preserving cash. We do so with a confidence in our products, our business model, and our team, and we believe there is no better mattress or collection of sleep accessories, and no better consumer value.

We believe we have the strategies in place to not only successfully navigate through these tough economic times, but also to better position us for the future. I'd like to close by acknowledging and thanking all of the individuals on the Select Comfort team, our employees, agencies, and suppliers. We have a talented group of employees and partners that clearly understand our priorities, and we are all working extremely hard, driven by our Company's mission to improve lives.

I'd like to now thank you, and Bridget, we'd like to open the floor open for questions.

Thank you. (Operator Instructions) Our first question will be from Chad Bolen of Raymond James. Your line is open. You may ask your question.

Good evening, everyone. This is Chad filling in for Bud who is on the road tonight. Can you hear me okay?

Yes, we can.

Sure, actually one quick housekeeping item, first. It looks like there might have been a typo in the press release. I just want to make sure I have got it as, it was $15.8 million of marketing spend in this quarter and that compares with $24.6 million last year. Is that correct?

Media spend, that is correct.

Okay, media spend. All right, and then could you quantify for us at all the benefit to sales from the QVC promotion, and is that something -- I would imagine that's fairly infrequent. Is that something that's repeatable on a quarterly basis? Is it sort of a once a year thing? I mean, how often can you generate that kind of enthusiasm?

Our history with QVC has been three to five shows a year in general, I'm sorry, probably more like five shows a year, and that's about where we will be this year.

Okay, and just kind of help me understand the timing of all the events with the revolver and whatnot. So with the amendment number nine that we just got accomplished, the aggregate availability was taken down to $67 million, and it says that there was an additional -- that there was $5 million of additional availability. Where were you from a balance standpoint prior to and then following the amendment?

Well, I think maybe the easiest way to talk through that is, that just kind of looking at it on kind of a pro forma end of the quarter basis, if we would have utilized the tax refund to pay down the debt balance at the end of the first quarter, we would have had a total of outstanding debt of about a little over $51 million. We also have about $6 million of letters of credit. So the total utilized under the line would have been about $57 million and that compares to kind of what is after that pay down, the availability under the line of about $67 million. So kind of on a pro forma basis at the end of the quarter would provide about $10 million of availability.

Okay, great. And just to, I guess talking a little bit about, I mean strategically with the consumers really out there looking for value you guys have pushed a little harder into some of the entry level products. Can you talk about or maybe quantify a little bit, I guess from a financial standpoint, maybe some of the benefit that you've seen, anything you could talk to regarding mix from a volume standpoint and maybe the offsetting margin impact. Help us understand how that's effecting the business.

Well, Chad, why don't I start with more of the kind of the strategic side, and then if Jim wants to add anything on the financial side he can chime in. But the strategy remains to be a premium brand focused on quality sleep. The product changes that we made back in February really were oriented towards more of a total unit growth than any change in mix, and that's about what we're seeing now. It's hard to read natural mix because of our heavy promotions, which do effect different models. But in general, our bell curve is still pretty well centered over that $1,500 price point, $1,500 to $2,000 price point. So it hasn't changed the mix a great deal.

But the real focus, again, that we're pleased with the initial progress on is the 17% run rate decline on volume of 14% comp, same stores because that shows that we're starting to get some traction on stabilizing the growth trends.

And Chad, just a couple of things that I would add. As Bill said, still focused on the premium brand and that kind of sweet spot is about $1,500 to $2,000. But we do also see an opportunity to really take better advantage than we have in the past of the price points that are in that kind of $1,000 to $1,5000 range. And so when we made the adjustment to the product lineup, we focused on making sure that we've got a good offering there.

From a financial standpoint, in addition to the product lineup, I would say we definitely focused in this current economic environment more on gross margin dollars rather than on the gross margin percent, and that kind of fits into the whole value strategy as well. We've been pretty successful in driving traffic to maintain those gross margin dollars and expect to continue to do that. But I think we see an opportunity overall in those price ranges.

Okay, that's very helpful. Congratulations on the improvements that you saw during the quarter and good luck on the rest of the year.

Thank you. Our next question will be from Brad Thomas of Keybanc Capital Markets. Your line is open. You may ask your question.

Great, thanks so much. I wanted to follow-up on the product relaunch and I think Bill it was you who mentioned sales trends had improved in the quarter, but were obviously volatile. Was there much of a big difference when you relaunched the new products? Can you just talk a little bit more about the sales trends?

Yes, I think you said it pretty well, Brad, that the sales trends have been volatile, tends to be as much driven by some of our programming as it is by anything that we see in the macro environment. I think as Jim said in his comments, we were quite successful with the closeout of the old product line and then that's moved nicely into the new product line, where again we're getting pretty good traction from all of the new price points. As Jim said, $1,500 and below, but our promotion strategy is moving it up the line as well. So we haven't seen a significant change in trend as a result of the product launch because we're doing so many other things with promotions, and advertising, and sales efforts that I think are what is really driving our volume these days.

Okay, great, and when we think about the closeout of your older line, was there any quantifiable benefit to sales from marking down those products to get them off the floor?

Well, one thing to back up on is our closeout is not like a lot of other closeouts. It really is just a bringing an end to our -- to that model line and then we phase into a new model line. So we look at that as almost just a promotion, a promotional activity, and that's how we name it. So yes, and there was a clear -- that closeout was a very good message for consumers today. They responded to that.

Okay, great, and Jim, if I could just follow-up on the gross margin, could you maybe quantify a little bit more how much you think the lower price point mattresses maybe hurt versus some of the benefits that you're getting perhaps from input price, input material prices coming down, and any other factors effecting gross margin.

Yes, there are a number of different factors and I'm not going to reconcile exactly to the total, but let me give you just kind of a couple of big movers. We saw about a 300 basis point improvement in the margin from input prices, productivity changes, and product redesign, and roughly a third, a third, a third between commodities, productivity, and that product redesign. The combination of a little bit of a mix driven by kind of the value proposition that we had, but also the higher promotional or discounting strategy offset a good part of that. Although, the promotional strategy also helped move some people up the line as well. So about 300 basis points in the input and productivity, a couple hundred basis points offset by kind of discount promotion.

Okay, that's great. Thanks, Jim. And maybe just one last question, if I may. In terms of the store closures, you mentioned that the capture rate you estimated about 30%. If I remember correctly, I think maybe last quarter you said you thought it was around 40%. Can you talk a little bit more about that capture rate, how you're looking at it, and how you're thinking about maybe how that can pan out in future quarters?

Yes, I mean we track it closely and watch it. I think, obviously what's unique about our model is the uniqueness of the product and the exclusivity of the distribution, which is what drives a lot of transfer sales. Because people are interested in the product and they will seek it out, so when we close a store, we generally will have consumers go look for that product in one of our other stores. We also have activities around making sure that when we close a store, we're actively pursuing those customers and those leads that were in the trade area of the previous store, and that we move them over.

We continue to expect to see a 30% to 40% transfer. It does vary from store to store depending on whether the density of the market and those types of things, but that is what we saw in the first quarter.

Okay, thanks so much and best of luck.

Thank you. Our next question will be from Trey Oglesby of Friess Associates. Your line is open. You may ask your question.

Hi, guys. Nice quarter. Thanks for taking my call. I have a couple of quick questions primarily tied to your performance during the quarter. One, you threw out a number of about a negative 14 comp. Can you give us any color as to how that trended over the quarter?

We generally don't provide the monthly trend, but as we said there was certainly some volatility throughout the quarter both from a month-to-month as well as a week-to-week. I think that's really just indicative of the sales trends overall, and it's a little bit related to our business. We've tended to have seen that over time anyway, but I think any stabilization of sales and the economy are certainly going to not be a straight line. So there certainly was some volatility throughout the quarter.

Okay, nothing you can point to in saying sequential increasing or positive trending less negative if you will?

Not within the quarter, but certainly an improvement from fourth quarter to first quarter.

Second quarter, along the same lines, excuse me, second question, I'm looking at the results of your two public competitors and looking at their sales decreases, and while certainly there's a lot of moving pieces and putting it altogether, isn't very linear comparison, it looks to me like you're taking market share. I wonder if you have any comment on that, and if so, what would you attribute that to?

Trey, first of all, I'd start with saying this is clearly a challenging environment for everybody, but I have no doubt that this industry will stabilize and grow again as the economy stabilizes. The mattress industry has been a terrific industry for 40 years and it will continue to be so. Yes, we're encouraged by the traction that we're getting on some of our strategies, but we're clearly in the early innings of this game and need to continue to work our value, and our marketing, and our sales to get consistent results over time. That's what I'd say on that one.

Okay, thank you very much.

Thank you. (Operator Instructions) All right, our next question will be from Mark Rupe of Longbow Research. Your line is open. You may ask your question.

Hey Bill and Jim, just had a question, on the lower media spend, I mean historically kind of the mattress industry with media spend is kind of obviously drives traffic. Did you see any kind if change in kind of the traffic levels through the quarter as your media spend changed?

Mark, as I said, one of the real plusses in our performance in the first quarter was that we saw leads to the stores about equal to prior years, and believe that a lot of that is just because of the efficiency that we were running the media this year. Plus it was supported, I think the other thing that may not come out clearly is it was supported by a lot of the promotional activity in some other parts of the spending and sales performance that Jim had alluded to earlier. So I think we managed it not as a line by line basis, but really as a total approach to the business and the quarter.

Okay, do you think, I mean do you think you'll be to sustain that kind of efficiency going through this year, or do you kind of leave yourself some room there to move it back up?

We'll be evaluating it as we go, as I said. The second quarter will actually be -- is actually planned to be more efficient even than the first quarter was. Some of it will also depend on where media rates go. That was favorable in the first quarter. We expect it to be favorable going forward as well, but we'll have to watch that.

Thank you.

Thank you. I'm showing no further questions. I'll turn it back over to Mark Kimball for any closing remarks.

Thank you, if there are no further questions at this time then we will conclude the call. We wish to thank you all again for participating and thank you for your continued support. We look forward to talking to you again the next quarter. Thank you.

Thank you. That will conclude our conference call for today. You may all disconnect. We thank you for your participation. Have a nice day.