Sleep Number Corp (SNBR) 2011 Q3 法說會逐字稿

Good afternoon. Welcome to Select Comfort's third quarter 2011 earnings conference call. All lines have been placed in a listen-only mode until the question-and-answer session.

I would like to introduce Mr. Mark Kimball, General Counsel. Sir, you may begin.

Thank you, Angie.

Good afternoon, and welcome to the Select Comfort Corporation's third quarter 2011 earnings conference call. Thank you for joining us.

I am Mark Kimball, Senior Vice President and General Counsel. With me on the call today are Bill McLaughlin, our President and Chief Executive Officer; as well as Shelly Ibach, Executive Vice President and Chief Operating Officer; and Wendy Schoppert, Executive Vice President and Chief Financial Officer.

This telephone conference is being recorded and will be available on our website at sleepnumber.com. Please refer to the details set forth in our news release to access the replay on our website. We also have posted an updated version of our investor presentation on the Investor Relations section of our website, which provides helpful information for investors, and which management may refer to in the Q&A section of this afternoon's call. Please also refer to our news release for a reconciliation of certain non-GAAP financial measures included in the news release, or that may be discussed on this call.

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 news release and discussed in some detail in our annual report on Form 10-K and other periodic filings with the SEC. The Company's actual future results may vary materially.

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

Thanks, Mark. And welcome to Select Comfort's discussion of our terrific third quarter performance and exciting plans for the future.

Before I begin, I would like to thank Shelly Ibach for joining us today. Given the importance of understanding our growth formula and its sustainability, I thought it helpful for you to hear from the architect and leader of this position within our business. Shelly recently assumed the role of Chief Operating Officer, which includes consumer insights, marketing, sales, and product direction. During her more than 4 years with the Company, she has played a key role in developing and driving sales and marketing strategies that helped stabilize the Company and are now sustaining a high level of profitable growth.

Today we have organized our presentation as follows. I will start with a high-level perspective of the business. Shelly will provide a more in-depth review of our growth formula year-to-date, with emphasis on the third quarter and on sales drivers going forward. Wendy will follow with the financial highlights of the recent quarter, our outlook for the remainder of the year, and updated long-term expectations. I will then return for a quick summary and to open the call to your comments and questions.

We were thrilled with our third quarter and are increasingly confident in Select Comfort's ability to consistently advance our leadership position, both in the industry and as an investment opportunity. In 2011, we prioritized sustainable earnings growth, with goals to expand margin and to build our balance sheet. We have also focused on our growth formula, narrowing to a few core strategies and refining key tactics for greater consistency of performance. Brief highlights from the quarter include net sales of $200 million, 25% greater than prior year, with company-controlled channel comp growth of 26%; earnings per share of $0.31, 63% greater than prior year; and annual operating margin tracking to exceed our first milestone of 12%, which is more than 200 basis points greater than our previous average annual high; and a cash balance at the end of the quarter of $136 million, while remaining debt-free.

We have been lapping relatively strong prior year performance all year, particularly in the third quarter. The third quarter has historically been the industry's and our most developed sales period. Achieving a 26% comp during this quarter confirms the progress of our growth programs. Margin expansion and cash generation further accelerated shareholder value creation. We achieved record profit margins by focusing on our core business and leveraging our fixed costs. Looking ahead, we believe we are well-positioned to continue building long-term shareholder value in an uncertain environment.

As for industry outlook, we remain relatively positive. After 30 years of steady growth, our industry was reset at the end of 2007 and through 2009, dropping approximately 20%, with little recovery since. The industry association's outlook for mid-single digit revenue growth, led by premium and non-spring segments, seems reasonable. The industry is not likely to see another major pull back, and should benefit from any economic stabilization or recovery. Sleep Number's opportunity is to increase consumers' understanding of the value of personalized comfort as well as the value of our unique store experience. And our focus on brand and store awareness is clearly working.

Looking at market share, you begin to understand our opportunity to continue expanding within our core US consumer mattress and sleep products market. Currently, we have less than a 5% share of the US mattress dollars sales. In our lead markets, where our advertising, store count, and Sleep Number bed ownership are more established, both brand awareness and market share are as much as twice our national average and still growing. On the other hand, the largest metro areas and mattress markets are among our at least developed, which represents significant opportunity for both sales growth and further margin leverage. We see significant opportunity to continue increasing share and sustaining our growth in a profitable manner.

As we move forward, our immediate priority is navigating the fourth quarter and holiday season, which in recent years has been challenging and less predictable. Then, in 2012, it sets up to be an exciting year for continued shareholder value acceleration. We will build upon our core foundation, importantly layering on initiatives, with the potential to further accelerate sales and margin growth. For example, in 2012, we expect to increase our store base while continuing to increase average sales per store. We expect to add additional weeks of national TV, and also continue to accelerate local market development. Product enhancements will continue, designed to sustain gross margin improvement and incremental sales per transaction. And after increasing capital expenditures to support store expansion, we will consider alternative uses of cash to further accelerate shareholder value.

More stores, more sales per store, more marketing support and more product advances -- all focused on even greater customer satisfaction. That is our formula for continued profitable growth.

To share more insight into our growth formula and its sustainability, let me introduce Shelly Ibach.

Thank you, Bill, and greetings to everyone on the call.

I'm excited to speak about how we are growing the business. As Bill mentioned, our third quarter performance represented important and meaningful advancements in our consumer-focused strategy. We have been deliberate with our investments in order to solidify our predictable formulas to accelerate profitable and sustainable growth. As the consumer's only choice for adjustable, personalized comfort in beds and bedding, we are focused on setting a new standard in the sleep industry and becoming the consumer's first choice in sleep. Today, you hear how we are advancing our integrated strategy, starting with the customer.

Our number one opportunity is to broaden awareness and consideration of Sleep Number, which includes our exclusive product and store experience. Over the past year, we have rebranded all consumer touch points, from Select Comfort to our more recognized Sleep Number brand. In addition, we have redefined our target customer, broadening who we are speaking to -- specifically, a younger, more affluent, aspirational, and active customer. Our results are encouraging, which has given us confidence in our outlook.

I would like to highlight 3 important growth advancements during the quarter, which focus on product, marketing, and distribution. First, consumer insight-driven product introductions. We learned that understanding our personalized dual comfort is one of the top 2 attributes correlated to our customer making their purchase decision. To support this insight in our rebranding, we launched new Performance and Innovation series beds, featuring our proprietary Sleep Number Dual Air technology, with an elevated signature look and feel that unifies our products and brand. As part of the launch, we increased the price of each bed by $100 to $200. Our sleep professionals and customers have responded positively to these new products. Our 12% company-controlled ASP growth in the third quarter represents the impact of these changes, in addition to growth from adjustable foundations and bedding collections.

Second, marketing and advertising. As we previously shared, awareness of our brand, product, and where to find it, is a significant opportunity. Earlier this year, we tested national TV advertising during key consumer mattress selling periods, with consistent success. We applied our layered national advertising strategy to the Labor Day event, our biggest event of the year. Leveraging our competitive advantage as the only national mattress specialty retailer resulted in record performance for our Company. We reached a broader consumer segment with our benefit-driven and exclusive Sleep Number experience. All markets responded positively, regardless of the various economic climates or our stage of brand development in a given market. And our consistent value and urgency promotional strategy continues to deliver growth in our mid- to high-end products, and steady performance in our entry-level offerings.

Third, our market-based distribution strategy, which involves increasing our availability to the consumer and enhancing our personalized selling environment. Earlier this year, we introduced an accelerated growth pilot for under-developed markets. Our goal was to prove a cost-effective formula to double our market share in these key markets within 3 years. Our plan focused on building consumer awareness and scale in major markets to compete aggressively on a local level. We are now confident in our formula, and we expect to deliver over half of our 3-year expectation in year 1 in all 4 pilot markets.

We also introduced a non-mall store pilot to increase awareness in real estate flexibility. This new non-mall store has a billboard-like impact, and is positioned where our customer expects to find us, and also near our competitors. We are on track to have to 20 of these stores by year end. Importantly, we implemented a unique and experiential store design in these new locations to support our relationship-driven customer experience and our Sleep Number brand vision. Sales and profit results are ahead of expectations. With specific consumer insight from this new non-mall design, we developed a scalable new design for our mall stores. In August, we remodeled 4 mall locations. And although early, we are very pleased with the results.

In summary, our growth strategies are proving successful, and we are building a more profitable business model. Our 29% increase in average sales per store resulted in surpassing our historical high of $1.55 million per store. We now have 66 stores, or 18% of our portfolio, averaging over $2 million, compared to just 6% a year ago. The selling expense leverage is funding growth and increasing operating margins.

As we move into the fourth quarter, we will continue to aggressively drive our profitable growth strategy, and progress our sales per store with the following key initiatives. First, we are introducing a proprietary Air Fit adjustable pillow, just in time for holiday gift giving. We are positioning it as the most innovative gift of the year, with a dominant store presentation to capitalize on holiday mall traffic. Our Sleep Number bedding collection continues to be a source of average sale price growth for us, and a competitive advantage supporting our sleep expertise, as well as building our repeat and referral sales.

Second, we will continue to speak to a broader consumer base with our national media strategy, and advance our learning in the fourth quarter during a less-developed mattress shopping period. Third, we will progress our market-based development by strategically expanding our store base. During the fourth quarter, we plan to add 7 new stores and remodel 10, with our new Sleep Number design. This design elevates our brand aesthetic, accentuates our key brand attributes, and enhances our customers' experience. We have defined and executed a core growth formula for Sleep Number that demonstrates our ability to grow in an uneven economic environment, with fixed cost efficiency that allows us to remain flexible.

In summary, our integrated strategy includes reaching a broader national and local consumer base, accentuating our individualized customer experience in all aspects of our branding and product, and strategically increasing distribution. Our goal is to ensure everyone will know Sleep Number and how it will improve their life. I am confident we will make important advancements against this goal in the fourth quarter and in 2012. Thank you for the opportunity to share highlights about our consumer-driven growth strategies, and I look forward to future updates.

I will now turn the call over to Wendy to provide more details about third quarter performance and our outlook going forward.

Thanks, Shelly, and good afternoon.

My remarks today will focus on providing detail behind our outstanding third quarter results. I will also discuss our current outlook for the remainder of 2011, as well as our longer-term expectations for the business. During the third quarter, we achieved earnings per share of $0.31, a 63% increase versus last year. This performance reflects continued success around our priorities in 2011 of expanding margins and building our balance sheet, while also advancing top line growth and share. Total sales during the quarter increased 25%. Additionally, sales grew 26% in our company-controlled channels, including retail stores, our direct call center and e-commerce. This increase was driven by a 12% unit growth in our company-controlled channels. We also continued to experience strong growth in our average selling price during the quarter, with company-controlled channel ASP also up 12% year-over-year. Our ASP increase was driven by a higher mix of adjustable foundations and bedding, as well as the pricing actions we took between January and July of this year. In total, pricing contributed approximately 4 points to overall ASP growth for the quarter.

We enjoyed strong comp growth throughout the quarter, as we benefited from the successful growth initiatives that Shelly just described. As expected, average retail sales per store on a trailing 12-month basis reached a record-breaking $1.6 million. And, as you all are well aware, we achieved this performance against the backdrop of a still-depressed macroeconomic environment. We are pleased with the market share gains we are achieving. As a retailer, our top line results are not directly comparable to the estimated industry results reported by ISFA That said, ISFA's industry growth of 8% year-to-date through August provides good context when looking at our sales growth of 21% year-to-date through September. As we project forward to the balance of the year, we expect to continue to outpace the industry and gain market share, with fourth quarter company-controlled comp growth anticipated to be between 20% and 25%.

Again, our priority in 2011 has been margin expansion and cash generation, and we performed extremely well on both measures during the quarter. Our operating income during the quarter of $26.5 million, and operating margin of 13.3%, were both third quarter records for the Company. Gross margin during the quarter of 63% was 50 basis points higher than the prior year period. During the quarter, we invested in enhancements to our customer service policies, and without this $1.6 million charge, gross margin would have been 63.8%, or 130 basis points higher than last year. This year-over-year improvement in gross margins was driven by both manufacturing efficiencies and year-to-date pricing actions. As we look to the fourth quarter, we expect gross margins to be between 63.5% and 64%, as we continue to benefit from manufacturing efficiencies and price increases.

Selling expenses continue to be a source of leverage and margin gain, with marketing of variable investments. Sales and marketing expenses as a percentage of sales improved to 42.1% from 42.6% last year. Selling expenses as a percentage of sales declined by over 200 basis points, and this was partially offset by planned increases in media and other marketing. Media increased by 38% during the quarter to $24 million, or 12% of sales, as planned. We remain on track for media on a full-year basis in 2011 to be 12.5% of sales. G&A was 7.2% of sales, which was 170 basis points better than the third quarter of last year, and is the lowest quarterly rate we have reported since 2007. Currently, we expect full-year 2011 G&A to be approximately $57 million to $59 million.

Moving to the balance sheet, we continue to benefit from our differentiated business model, as we self-fund investments in growth. Our just-in-time supply chains and the showroom nature of our stores allow us to maintain very minimal inventory levels. And we enjoy an advantaged working capital position as a result of our negative cash conversion cycle. Our trailing 12-month EBITDA now exceeds $100 million.

Cash and marketable securities totaled $136 million at the end of the quarter, and we have no borrowings under our line of credit. I will note that our cash and marketable securities balance of $136 million now exceeds our previously communicated target minimum of $100 million to $125 million. We expect to end the year at a similar level as the third quarter, and look forward to providing updates on our 2012 priorities for capital allocation during our fourth quarter earnings call in early February. Our priority is, and will continue to be, to deploy cash in a manner that maximizes long-term value for our shareholders, while prudently maintaining sufficient liquidity to weather any future steep macroeconomic declines.

As expected, our year-to-date capital expenditures increased, from $3.5 million in 2010 to $14.5 million in 2011, as a result of increased investment in stores and systems. We now expect full-year 2011 CapEx to be approximately $25 million. Finally, given the strength of our third quarter and current short-term outlook for the business, we have raised our full-year 2011 earnings guidance from between $0.90 and $0.96 per diluted share, to between $0.99 and $1.01 per diluted share, which is approximately 75% higher than the $0.57 per share we reported last year.

To recap, our outlook assumes we end the year at approximately 380 stores, with company-controlled comp growth in the fourth quarter of 20% to 25%, gross margin in the fourth quarter of 63.5% to 64%, media as a percentage of sales for the full year of approximately 12.5%, and G&A for the full year of $57 million to $59 million. Our outlook assumes no further deterioration in broad US consumer sentiment.

As we look beyond 2011, we are providing new growth goals for the next 3 years, including comp growth of at least 10% to 12% per year, net store growth of between 5% to 7% per year, and EPS growth of at least 20% per year. We are also targeting at least 15% operating income by 2015, as highlighted in our updated investor presentation that was posted today. More detailed guidance about 2012 in particular will be provided in early February. To summarize, we are very proud of our performance during the quarter, both the high-quality top line growth we achieved, and the significant growth in profits and cash we generated. And as we look to 2012, we are encouraged by the success we are seeing in our growth initiatives in the areas of product, marketing and distribution, which are now ready to be fine-tuned and scaled, as we progress with our longer-term growth plan.

I'll now turn it back over to Bill for final comments.

Thank you, Wendy.

2011 continues to be a year of Sleep Number records. Sales per store has now passed historic peaks and is expected to continue to climb, even as we add stores. Operating profit dollars and margin continue to set new records and position us to sustain growth investments, as we realize the significant leverage opportunity of our business model. Employee engagement, pride, and retention are at record highs, and are critical to delivering a unique customer experience and to continue to innovate. And we have achieved a new all-time record sales event in Labor Day of 2011, which we aim to beat next year.

Congratulations are in order to our employees and our partners across the organization who made this happen. Thank you all. We have benefited from simplifying and refining our focus, boldly developing our growth formula and its execution. Our performance has been more predictable, even as market conditions have become less so. We remain disciplined and committed to margin expansion and cash generation, as we increasingly drive sales and share growth.

This is a rewarding and exciting time for Select Comfort and the Sleep Number brand. We are looking forward to advancing our proven strategies and advantages, and to improving many more lives through the continued passion and innovation of our team. On behalf of the Company, and Mark, Shelly, and Wendy, I thank you all for your time and your interest.

Angie, we'd like to now open the call for your comments and questions.

Thank you. (Operator Instructions)

Our first question comes from Budd Bugatch. Please state your company name, and you may ask your question.

Hello. Raymond James. Good afternoon Bill, Wendy, Shelly, Mark.

I guess my first question is can you talk a little bit about the mix of sales between mattresses and some of the accessory products, which I know that you've beefed up lately. And maybe, have the accessories started to move the needle, and can you kind of give us a feeling on that?

Sure. Hello, Budd. Our bedding collection has increased about a point in penetration to prior year, year-to-date. And we saw a 20% growth in our ASP during Q3.

Okay. That's great. By the way, congratulations, too, on a great quarter. I meant to say that.

Secondly, as you think about the other selling and marketing expense outside of media, it looks like that grew about $10 million, sequentially. And it looks like the pull through ratio grew a bit as well. Are there any particular items in there that may not be recurring, and how should we think about that going forward?

Well, what I would say there, Budd, is that we continued to see leverage overall with our selling and marketing. We did increase our media expenses a bit higher, but that was per our plan, and per our plan to achieve a 12.5% of sales for media for the full year.

I understand media. I was looking outside of media. The other items. The other part of selling and marketing. Is there anything going on in there that -- accruals of incentive compensation or other items that might have been a little bit abnormal?

Budd, I don't -- there's nothing that comes to my mind. But let us look at it, and we'll get back to you if we find something that's--

Okay. Congratulations again and good luck on the future.

Great. Thanks.

Thank you. John Baugh, please state your company name, and you may ask your question.

Stifel Nicholas. My congratulations as well. Terrific quarter.

Did the price increases -- were they fully in effect for the third quarter? And then, are there contemplated increases on the Classic line at some point in the future?

Yes, John, the bulk of the pricing increases came in late July. So we did see those for about half of the quarter.

Great. And John, or I think it is Steve, we are really focused on building a consumer insight driven bed and bedding product innovation pipeline. And as part of our growth formula, you will see more frequent product introductions. And obviously, the Classic line would be a natural that you will see from us in the future.

But John, I'm not sure that I would count on pricing as a given, just when we have product news. We will be leading with product news. And then, if we see value opportunity there, then we will look to take pricing.

The pricing is not we are going to base our growth on next year. It is really consistent media and sales effectiveness and store expansion. That is the core of our growth.

Okay.

Price would be bonus to that.

Super. Thanks for that, Bill.

And then the $1.6 million on additional customer service reserves, can you tell us exactly what is going on there?

Yes. I mean, as we learn more about our customer, we are constantly looking for opportunities to further delight them in ways that are important to them. Our goal is obviously to generate more satisfied customers, which leads to more repeat and more referral, and that is the long-term payback on that.

Basically, the opportunities that we identified in the third quarter to significantly increase customer satisfaction are now fully reserved, and we don't expect any ongoing incremental expenses from those actions.

Okay. That's super.

And I heard, I think it was Shelly, you were commenting about some pilots for markets delivering half of a three-year plan. Did I hear you right? Those were larger metro markets? And just explain exactly what you are doing. I don't know if you'd care to discuss which cities, to develop penetration into the bigger metro markets.

Sure, yes. The strategy here is an aggressive growth strategy for underdeveloped metro markets, as you stated. And we have really unlocked a critical formula for us for the market share growth. It is a three-year acceleration strategy, and we do have consistent performance in all four of the markets we put in pilots this year around sales, profit and share growth. The strategy focuses on layered investments, optimizing store locations, along with breakthrough local marketing, consistent with what makes sense for that specific market, for both type and weight.

And you are right, I probably will not share the specific markets. But we are pleased with -- very pleased with the pilot, feel confident in our formula, and we'll look to progress it in 2012.

So the problem, as I understand it before, has been to build out a market like a Boston or New York, either the media spend required to blanket that area is so big, and you can't obviously initially open that many stores that quickly to get the benefit of that. So do I hear you saying you have kind of found a way to locally target advertising and get into these markets without a lot of red ink?

Yes. It is a very targeted strategy with layered investments. Going in strategically between real estate and marketing investments. And we have a formula that is a bit of a spend ahead of sales initially. It is profitable here in the first year, even with the heavy up.

And John, just to be clear. You are exactly right, that has been our challenge, we think particularly about a New York or a Boston. We have got a lot of other metro markets, though, that are underdeveloped, and we are using those kind of on our learning curve, as Shelley says, of getting that balance of marketing and stores and learning our way what the incremental return is. And I think it is a really important part of our growth formula as we go forward.

Right. Thanks for answering my questions.

Another add to the strategy which has really helped us is our national media strategy. And that is giving us some additional efficiency as we move forward with these big markets.

Thank you. Brad Thomas, you may state your company name and ask your question.

Yes. This is actually Jason Campbell standing in for Brad from KeyBanc this evening. Hello.

My first question is you have kind of talked about a, roughly a 30 50 20 mix between your CP and I series. And I was wondering with the price increases that you've put through on certain models, has that kind of affected that mix, or even the mix within the different categories or the different lines?

Yes. We are seeing a similar mix overall this year as we have in the past. So consistent with some growth, as I indicated, in the mid-to upper, but a very stabilized entry.

Okay. And then just one other question.

I know it seems like you are -- you have talked about some new products being developed and that's more of a focus. It looks like your research and development costs will be about roughly twice what it was last year. How should we think about that going 2012 and forward? Is this going to be kind of a similar run rate to what we are at right now?

Yes, Jason. We will look forward, as I said, in our February call when we announce our fourth quarter earnings to get in a bit more detail about our assumptions. And so as we think about 2012, I would really stick with the longer-term growth goals that I talked about previously.

All right. Thanks.

Thank you. Todd Schwartzman, please state your company name and you may ask your question.

Sidoti and Company. Good afternoon, everybody.

You seem to have really benefited nicely from your recent price actions. But irrespective of that, I'm just wondering, was there any trade down evident within the Sleep Number line during the quarter that there was maybe offset by some of the hikes on the higher end beds?

No. We did not actually -- it was lightly the opposite traction. You know, we continue to speak to an opening price point to broaden our consideration for the overall brand. But have had steady to growing mix throughout the year.

Okay. And for the quarter, for Q3, what can you say about the company-controlled comps by geographic segment?

First of all, as I believe it was Wendy said in her comments, we were pleased with consistency of comp growth through the whole quarter and across all markets. So we saw consistent results from our -- particularly our national advertising in the quarter, across the whole country.

Okay. And looking to the fourth quarter, is there anything planned out of the ordinary with regards to promotional activity?

As I indicated for the fourth quarter strategies, we will be progressing our national media strategy along with our aggressive growth at the local level, in combination with introducing our Air Fit adjustable pillow, which should serve us well during the holiday gift giving, particularly in malls to advantage us with the mall traffic.

And just to refresh, how many initial -- initially, how many SKUs will there be of the air pillows?

Of the Air Fit pillow, we have three different SKUs.

Okay. A good, better, best kind of scenario?

Yes. It's a cool fit foam, a memory fiber, and a goose down. Yes.

Okay.

Earlier on in the opening remarks, you alluded to additional ways and means of increasing shareholder value. Looking to 2012, what do you see? Bow would you rank if you will, your uses of cash for the year?

Yes, you know, our first priority is to maintain, as I said in my remarks, a sufficient level of liquidity. Like I said, to weather any deep -- future steep macro declines. But then after achieving that, and certainly we have achieved that today, our first priority is investing in our growth. And you know, you just don't see a lot of companies with our return opportunities.

And then as I said in my remarks, eventually we will look to other ways to return value to shareholders, and look forward to communicating those plans to you in our next call in February.

And within the growth, obviously first and foremost it is store expansion and store remodel. And then there's systems, and then there's a little bit of product. Product and infrastructure.

Got it.

On the off mall, non-mall stores, what have you learned thus far from that experience?

Sure. Well, our real estate strategy, as we've indicated, is market-based, and targets building market share. And the non-mall advances awareness, which aligns with our number one priority, and it also provides us flexibility to achieve our market development goals.

You know, oftentimes in the past, we may not have been able to find a location or mall within a certain market, or possibly we were not able to procure the exact type of location we would want within the mall. So the non-mall really gives us that flexibility to target the quality location that we are looking for, and also serving the market better to reach the broadened target customer from a demographic and psychographic perspective.

Is there any meaningful difference in the consumer demos that the non-mall stores have attracted thus far? I realize that it's early in the game and the sample size may not be all that large, at this point.

Right. Well, not as much in the demos, because I think it is tied also with us broadening who we are speaking to. So I think we're able to more effectively reach that broader customer. And we are also seeing minimal cannibalization with our mall stores. And in many cases, see that awareness helping to contribute to a higher performance in nearby mall stores.

Okay.

Lastly, Wendy, I wonder if you could just tell us what tax rate your fourth quarter guidance assumes, and also any outlook you'd care to offer with regard to raw materials going forward?

Sure. With respect to tax rate, as you know, we update the estimated tax rate each quarter. So it can cause some fluctuations on a quarter-by-quarter basis. But as we look to Q4, really using that year-to-date 36% would be the best planning estimate.

With respect to -- I believe your other question was regarding commodities. I guess as you think about what's happened in 2011, you know we have seen oil and other commodities go up but then back down. And we have been managing those increases with our manufacturing efficiencies and working with our suppliers. So as we look to Q4, we would expect sort of a similar environment as we had in Q3.

Okay. That's helpful. Thanks a lot.

Thank you. Eric Halawati, please state your company name and you may ask your question.

Stephens Incorporated. But all my questions have been answered. Thanks.

Great. Thanks.

Thank you. (Operator Instructions)

Mark Rupe, your line is open. Please state your company name, and you may ask your question.

Hello. It's Mark Rupe, Longbow Research. Great quarter, guys.

Relative to kind of what you were expecting, I know there was a lot of factors where you guys tended to perform very well on. Was there may be a couple of the items that maybe stood out as maybe surprised you during the quarter to the positive side, from a demand standpoint?

Well, to be honest, the first surprise in the quarter was how low our stock and how volatile our stock was. (Laughter)

But more to your question is, Shelly talked a lot about a formula driven business approach. And that is what we have been working hard on all year. And the result of getting the formula right is that it actually minimizes surprises. It gives us a much more predictable model going forward, even in an uncertain world.

I think that 's one thing that we learned in the third quarter, is that it applied to -- and you know the third quarter was choppier in the economic sense than the previous two. And our formulas still held. And I think that was important learning.

And second, and related to that, was just the level of growth that we had, but also that others had in the quarter, from what we have seen in some of the other reports coming out here lately, which is potentially really good news in terms of the underlying strength of the consumer and this certain segment.

Okay.

And as it relates to kind of the media strategy, you had indicated that looking into 2012 there would be additional weeks of national TV and I guess more expansion of the local market strategy. Any anecdotes on specific numbers that you can provide? Or maybe if not, maybe from a mix standpoint, I know you have moved some of the local reach from I guess the high 30s into the 40s. And national from 0 to 20. Is there maybe an optimal kind of mix that you want from I guess a media budget standpoint going forward?

Yes. So, you are right that we are not prepared to talk yet about 2012. But I will let Shelly answer the second part of the question regarding the evolution of the media.

Okay. perfect

Well, you can see from the investor deck that was posted on page 9, it indicates that evolution in directionally what it will look like. And you see some solidification as we move forward, strengthening our national. So I would expect the national to increase along with the local.

Again, speaking to a broader-based consumer target customer, and doing so with more vehicles, more high profile targeting of our media spend.

Okay. So is it fair to say then that the national kind of media spend and local, albeit it is a little more expensive than the direct response, it is more than effective?

Right. Yes. And it really speaks to some of the previous historic DR TV that we had to -- that we have been very focused on delivers a lower reach and some insufficiencies against our expanded target. So we are seeing the efficiencies and the growth overall with the media migration that we have executed this year.

Perfect. Congrats again and good luck.

Thank you.

Thanks, Mark.

Thank you. At this time, I would like to hand the call back to our speakers for closing comments.

Well, if there are no further questions at this time, then we will conclude the call. We wish to thank you all for your support, and we look forward to reporting further to you, following our fourth quarter.

Thank you very much.

Thank you. That does conclude today's conference. Thank you for your participation. You may now disconnect from the audio portion.