Sleep Number Corp (SNBR) 2011 Q4 法說會逐字稿

Welcome to the Comfort fourth quarter and full year of 2011 Earnings Conference Call. (Operator Instructions). I would like to introduced Mr. Mark Kimball, General Counsel. Sir, you may begin.

Thank you, Tamara. Good afternoon, and welcome to the Select Comfort Corporation fourth quarter and full year 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. Please also refer to our news release for our 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 new 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 to those on the call, thank you for joining us to learn more about Select Comfort and the Sleep Number brand. There is always a lot of ground to cover in a year-end earnings call. Performance during the past quarter, full-year insights, and outlook for the current year. The key takeaway from the information that we will provide today is that Select Comfort and the Sleep Number brand are confidently entering a new chapter of sustained profitable growth.

We will divide today's call into three parts. I will cover our strategic opportunity, Shelly Ibach will review key initiatives that are driving and sustaining growth, and Wendy Schoppert will follow with more in-depth financial insight. We then look forward to your questions and comments. Before I start, let me extend my congratulations to the Sleep Number team and our partners for an outstanding close to last year.

Let me provide some perspective on what this team has accomplished. Fourth quarter comp sales growth was the strongest of the year and our highest since fourth quarter of 2003. Our rate of sales growth in the quarter outpaced our key competitors both manufacturers and retailers. Fourth quarter capped a year of record profit both in dollars an operating profit margin. And after funding a significant step-up in CapEx, our cash balance exceeded our goal, and we remain debt-free.

Beyond the financials, 2011 programs and performance give us confidence to increase targeted investments in our unique products brand and business model to sustain profitable growth and leadership. Over the next few years, we will remain focused on our core business providing the best individualized sleep solutions to our target consumers in the United States. We are focused on at least doubling our share to 10% to 15% of the $12 billion mattress industry targeting approximately $1.5 billion in revenue by 2015 and increasing profit margin to at least 15%.

Our focus is on organic growth providing unmatched individualized customer experiences through our Company controlled channels and partners. We are encouraged by consumer led changes within the sleep industry that favor our unique products and business model. Consumers are responding to the idea of better sleep through better mattresses, and in just ten years the non- innerspring mattress segment has increased from a 5% share to nearly a 30% share of the industry and this growth does not appear to be slowing. Sleep

Number's three part formula for sustained growth is unique to our opportunity. It includes awareness, increasing brand and store awareness among our target consumer base.

Distribution. Accelerating local market development and expanding availability, convenience and quality of experience.

End product. Advancing individualized comfort in the sleep-surface foundations and accompanying bedding.

Our focus has been on optimizing the integration of these three elements both on a national and local basis. The past year has involved deliberate testing, learning, and then applying of programs to profitably accelerate growth. And the consistency of our performance over the past two years demonstrates this learning and is the source of confidence going forward.

The opportunity to accelerate investment behind proven growth drivers coincides with our financial readiness. Increasing operating profit margin both accelerates earnings growth and increases operating flexibility over time. And a strong balance sheet also enables accelerated investment as well as the flexibility to take advantage of opportunities in a wide range of economic conditions.

Let me summarize Sleep Number's strategic opportunity. Our industry and consumers are undergoing change that are Company is well positioned to lead. Our growth formula is proven with unlimited incremental opportunity.

Financial resources and flexibility are stronger than ever, and our people and our culture our secret sauce are dedicated to setting a new standard in consumers' individual sleep experiences. 2011 offered both clarity and confidence to further step-up investment in proven initiatives, and our 2012 plans accelerate targeted investment for-profitable growth. I will any turn it over to Shelly for additional context about our past performance and future opportunities.

Good afternoon everyone. It is really exciting to discuss our exceptional 2011 and fourth quarter performance with you today. I will briefly speak about last year's performance and then outline our opportunities in 2012 and beyond.

In 2011 we made important progress against our number one strategic initiative to ensure everyone will know Sleep Number and how it will improve their life. We made this progress by continuing to advance and refine our growth formula which focuses on broadening awareness. And consumers responded.

This led to exceptional quarterly performances throughout 2011culminating in our strongest quarter with 31% comparable sales growth. Specifically, there are five integrated initiatives that drove our revenue and share growth in 2011. Reaching a broader consumer target, driving motivated traffic to our stores, successfully launching new products, differentiating our brand experience and strategically expanding distribution.

Now let us take a deeper look into each of these integrated growth initiatives which were so critical to our success in the fourth quarter. First, we reached a broader consumer target by shifting media dollars from narrowly focused direct marketing to national broad reach while at the same time, increasing our overall investment in national and local advertising. Media spending was up 29% in the quarter.

Second, we drove motivated consumers to retail stores with our Sleep Number experience TV's campaign strong persuasive messaging. These adds which feature our stores in sleep professionals promise an individualized product and service experience. Company controlled mattress units were up 16% in the quarter.

Third, we experienced outstanding consumer response to the launch of our new Sleep Number AirFit Adjustable Pillow. This proprietary benefit driven product was a key contributor to increase customer traffic during the gift-giving season.

Fourth, we leveraged increased interest in Sleep Number products with our differentiated brand experience at retail. Our Company-controlled distribution continues to be a significant competitive advantage in converting sales from increased traffic. Average sales per store is an important indicator of strength of performance. And 24% of our store portfolio is now over $2 million in annual revenue and 3% is over $3 million. Our average sales per store was $1.7 million

in 2011, up 33% from 2010 and up 65% over two years. And finally for the first time in more than three years, we grew our store base sequentially from prior quarters. Our strategic expansion in the fourth quarter included adding seven net new stores and remodeling ten. And with less than 5% national market share there is still significant upside. As Bill mentioned, 2011 was an important year of refining our formula designed for steady sustainable growth focused on core business expansion in the United States.

Building on this success, our number one priority in 2012 will again see broadening awareness as we accelerate our strategy to ensure everyone will know Sleep Number and how it will improve their life. Highlights of our customer focused strategy again include; 1) reaching a broader target consumer; 2) offering differentiated product; 3) providing a unique brand experience and, 4) advancing local market development. Let us look at each of these in more detail for 2012.

First, we will again increase media investment to support our broader national and local strategy. This layered approach allows us to leverage national media and store base while developing our local markets. We expect to increase our media spending by at least 30% versus 2011.

This media investment will also support local market development efforts which we call our aggressive growth strategy. This multi-year strategy is designed to more than double market share in about 13 large under developed markets that represent approximately one-third of the bedding sales in the US. 2012 marks the second year in four markets in the first year in three additional markets with this strategy.

Second, we are strengthening our leadership position as the most differentiated mattress and bedding company in the industry with new product introductions including the following; In January we launched a new Sleep Number m7 Memory Foam Bed to expand our product offering and appeal to a broader consumer target.

Consumer research provided important insights resulting in combining our proprietary gel-infused CoolFit Foam which customers have loved in our best selling pillow with exclusive Sleep Number DualAir technology. This redefined memory foam that cools, contours, and adjusted for individualized support has been met with enthusiasm by both our sleep professionals and customers. The m7 Queen Set retails in the upper third of our line at $3199.

We also re launched the Classic Series in January. This series the performance an Innovation Series with our signature look and has improved features and benefits including our Whisper Quiet Firmness Control System. The opening price points offering known as our Sleep Number C2 bed now also comes with our Iconic Sleep Number Setting Remote. Yet, a queen set still retails for just $999 to support our value strategy.

While we maintained our important opening price point, we increased the C3 and C4 pricing by $100 each for the queen sets. Third, we will advance our brand experience at retail by implementing our unique experiential store design. In 2012, we will more than triple the number of stores that have this design through a combination of remodeled relocations and new store openings. We are pleased to report that year-one revenue in new stores is higher than average sales per store, and we believe the new store design is a key driver.

Lastly, we will expand our distribution with net store growth of between 5% and 8% by strategically building-out local markets while leveraging our national position. Our real estate strategy going forward includes adapting to specific local market conditions and executing based on the best outcome for our customer and Company. In late 2010, we introduced the non-mall Format. During

the past year, the performance of these stores has exceeded our expectations. And so too have new mall stores. We believe non-mall locations contribute positively to local market store awareness.

Our pilot was a success, and we are moving forward with both formats while we continue to test and learn from a variety of location and design iterations in 2012. Growing sales per store and expanding operating margins while increasing total store count is an important part of our strategy. In summary, our integrated strategy includes reaching a broader consumer base with our differentiated product and service experience and strategically increasing distribution.

So the bottom line is this. 2011 was an outstanding year, and as I have outlined, we are positioned well and fully expect continued success in the current year and beyond. Thank you and now Wendy will share the details of our financials and 2012 outlook.

Thanks, Shelly and good afternoon. I am pleased today to be sharing detail behind our fourth quarter and full year 2011 results, and I will emphasize the predictability and sustainability of our growth formula. I will also discuss our outlook for 2012 as well as our strategy for optimally deploying cash. For those that may be new to the Sleep Number story, I will begin with a few key points around our longer-term financial performance and opportunities.

First, we are delivering top tier rates of sales growth as we expand market share and expect annual comp growth of at least 10% to 12% over the next three years even as we grown and we grown store counts by at least 5% to 8% per year.

Second, we are achieving significant operating profit leverage and expect earnings-per-share growth of at least 20% per year over the next three years. And third, we are self-funding our growth with a strong balance sheet including cash and securities above our minimum target at year end with no debt. Now to our 2011financial performance.

We began the year with a goal of expanding margins and strengthening our balance sheet while also advancing top line share growth. We were successful on all fronts delivering strong performance for our shareholders. During the fourth quarter, we achieved earnings-per-share of $0.27, which included $0.03 associated with a non-recurring net decrease to income taxes related to the favorable resolution of prior year's tax matters. Excluding this $0.03 tax

adjustment fourth quarter earnings-per-share was up 85% versus last year. On a full year basis earnings per share was $1.07 which also included a similar adjustment for prior years' tax matters. Excluding this $0.03 tax adjustment full year 2011 earnings-per-share was up 82% versus last year.

The success of our growth strategies drove total sales growth of 27% during the fourth quarter. Sales grew 30% in our Company controlled channels including retail stores, our direct call center, and E-commerce. This increase was driven by a 16% unit growth in our Company controlled channels. We also continue to grow average selling price during the quarter with Company controlled channel ASP up 13% year-over-year.

As we saw last quarter, our ASP increase was driven by a higher mix of adjustable foundations and beddings as well as the pricing actions we took between January and July of last year. In total, pricing contributed approximately five points to overall ASP growth for the quarter. As Shelly stated, we drove strong Company controlled comp growth during the quarter and our full year Company controlled comp growth of 26% was our strongest full year comp since 2003. We also saw continued advancements in the performance of our store portfolio during 2011 with 93% of our comp stores generating over $1 million of sales and 24% of our comp stores generating over $2 million in sales.

During the fourth quarter and full year 2011, we continued to achieve significant bottom line leverage as we grew sales. As a vertically integrated company our most important pre-tax measurements of leverage is operating margin. During the quarter our operating margin of 10.6% was 290 basis points higher than prior year, and our fourth quarter operating income growth rate of 74% represented the 12th consecutive quarter of double-digit year-over-year growth.

Finally, full year operating income of $90.5 million and operating margin of 12.2% were both full-year records for the Company. Gross margin during the quarter of 62.9% was roughly flat on a year-over-year basis with favorable impact from pricing actions and manufacturing efficiencies offset by lapping favorable warranty adjustments in the prior-year period. Full year 2011 gross margin of 63.3% was 80 basis points higher year-over-year driven by favorable product mix, pricing actions, and manufacturing efficiencies which builds on the 90 basis point year-over-year increase we achieved in 2010.

Selling expenses continue to be a primary source of leverage and margin gain with marketing a variable investment. Selling expenses as a percentage of sales improved by over 300 basis points during the fourth quarter, and this was partially offset by planned increases in media and other marketing. Media spend was $24 million during the quarter and for the full year media increased by 30% to $92 million or 12.3% of sales.

G&A also continued to be a source of leverage with fourth quarters G&A as a percentage of sales improving by 90 basis points versus the prior year and on a full year basis G&A improved by 100 basis points. We generated strong cash flow during 2011. Full year EBITDA exceeded $109 million, a $40 million increase over prior year.

Cash and Marketable securities totalled $146 million at the end of the year, a $70 million increase over prior year, and we have no borrowings under our line of credit. By all accounts, 2011 was a strategic and financial home run for Sleep Number, and we are already building on that momentum in 2012. Regarding our outlook, we currently expect earnings per diluted share to increase from $1.07 in 2011 to between $1.32 and $1.40 in 2012. A 23% to 31% increase. This growth rate increases to 27% to 35% when you adjust 2011 down for the $0.03 tax adjustments noted earlier.

Our earnings guidance assumes Company controlled comps of at least 15% in 2012 with growth expected in both units and ASP as we continue to benefit from pricing actionsboth lapping 2011 price increases as well as additional pricing actions in 2012. Total sales are also expected to benefit from a 5% to 8% increase in store growth from 381 at year-end 2011 to between 400 and 410 by year end 2012.

We expect to continue our trends in annual gross margin growth of at least 50 basis points in 2012, primarily driven by the pricing actions I noted earlier. While we are planning for low single-digit raw material cost increases, we expect to offset these costs with continued manufacturing efficiencies in our plants and those of our suppliers.

Moving down the P&L, we plan to grow media at a rate that exceeds the 30% growth we saw in 2011. And media as a percentage of sales may exceed 13% as we invest in awareness with continued leverage in selling expenses and G&A. We are planning for continued growth in operating margins during 2012 with an increase of at least 100 basis points from 12.2% in 2011 to at least 13.2% in 2012 continuing on our path to at least 15% by 2015, and we expect our 2012 tax rate to be approximately 36%.

Lastly, capital expenditures during 2012 are expected to double from $24 million in 2011 to approximately $50 million in 2012. As we add, reposition, and remodel stores and continue enhancing our customer information systems. As you would expect, we are anticipating meaningful free-cash flow generation in 2012 even with this year-over-year increase on CapEx. And as I have stated on the last two quarterly calls, our priority is and will continue to be to deploy cash in a manner that maximizes long-term value for our shareholders.

We plan to maintain a cash balance of at least $125 million and remain growth-oriented under a wider range of economic conditions. Beyond that, our first priority is to continue investing in our profitable growth. Our business is generating strong returns on investments. Accordingly, we want to ensure we maintain adequate liquidity to fund our proven growth initiatives.

We also plan to reinitiate a modest share buy-back program in 2012 with the objective of maintaining our share count at current levels. To summarize, our fourth quarter and full year 2011 results give us confidence in our strategy, and we are taking actions to deliver another strong year in 2012 as we continue to invest in the proven programs that Shelly described. And the exciting part is that as an early a stage growth company, we are just getting started on our journey. As we continue to increase sales, earnings-per-share and cash. I will now turn it back over to Bill for final comment.

Thanks, Wendy. Our confidence in Sleep Number's ability to make a difference in our consumers' lives as has been a constant and is stronger today then ever. We continue to execute against the strategic plan that we established more than three years ago, and we are now entering a new chapter of sustained profitable growth.

We have refined our growth formula innovating and investing in marketing product and distribution, and we have advanced what sets us apart, our unique products that offer real benefits, our advantaged business model that allows us to own the end-to-end customer experience, and our mission in performance driven people and culture that serve our customers. These are the elements that make Sleep Number unique and that will allow us to win for years to come. I want to again thank and congratulate the Sleep Number team for their dedication, ingenuity, and determination to serve our customers. I also want to thank and congratulate our partners and vendors who work hard to support us every day, and let me also express our appreciation for our investors and their continued support as they share the vision of Sleep Number's leadership potential.

I have been concluding these calls for sometime with the same message. This is an opportune time to learn more about Select Comfort, and it continues to be an appropriate close. We are committed to continue building shareholder value and look forward to talking with many of you over the coming weeks and months including during our Investor Day in Chicago in early May. Tamara, we would now like to open the call for comments and questions.

Thank you. (Operator Instructions). Our first one comes from Budd Bugatch. Your line is open and please state your company.

Good morning. Good afternoon. Budd Bugatch with Raymond James. Can you hear me?

Yes.

Bill, Wendy, Shelly, congratulations on a terrific quarter, terrific year and best wishes for going forward.

Thank you, Bud.

A couple of questions. One, obviously -- there have been some new stores opened up a previous off-mall competitor is now opening some and testing some non-mall stores that seem targeted to be fairly much co-located with -- with Sleep Number stores. Do you have any early read on that? There are only a couple of them open, but maybe you have got some early read on that.

Budd, we welcome all investments that are going to help raise the customer consumer awareness of quality sleep and the opportunity to compare the experience in our stores versus any others. We are very confident in how that will go down. Our most direct experience was when we opened our own off-mall stores against some competitors this past year and that all went very well.

And you were going to test about 20 if I remember right, maybe 20 or two dozen off-mall stores. How many are now open?

We did open the 20 that we had indicated that we would.

And in the growth next year how many will be on-mall or off-mall?

Well, to begin with, Budd Hi. this is Shelly. Our first priority is broadening awareness, and we are excited about the role that the non-mall stores play with products with broadening awareness and, second, is our distribution expansion and strategically approaching that depending on what specific market really needs for the trade area. What we love about the non-malls is it gives us flexibility to position ourselves to reach consumers we may not have been able to in the past being limited just to mall. So you will see us open a combination between mall and non-mall, but most importantly is both our working well and we really appreciate the flexibility.

And Budd, this is Wendy, I can add a few numbers that may be helpful. We began this year at 381 stores. During 2012, we plan to open between 50 to 60 and as Shelly said the majority of those are expected to be non-malls, and we also expect that growth to be somewhat backloaded in the second half. We expect to close around 30 stores, but most of those are the repositions that we have spoken of. Many of those were mall to non-mall, so we plan to end 2012 on a net basis up around 20 to 30.

And of those 50 to 60, Wendy, how many are going to be off-mall, how many are on-mall?

We shared that the majority of them are expected to be non-mall.

Non-mall. Okay. Just and new market versus existing market how do -- how does that break out?

Well, with our current distribution strategy one of the great things about our business model is we are national today. We are represented in over 45 states, and we are very underpenetrated, however, with a low-market share. So you will see our expansion almost all within existing markets that we reside in today.

Okay. But there are a couple of major metropolitan areas where you exited a couple years ago. When do you plan to get back into those?

Yes. We -- we have some major markets that are very understored as you're indicating, and I think that speaks to our aggressive growth strategy that we highlighted both on the last call and this call, and I would like to give you an example of aggressive growth. We have 13 markets, large underdeveloped markets, that we have identified and developed and aggressive growth formula to be able to apply, and these 13 markets represent about one-third of the bedding sales in the US.

So I can give you an example of what a market may look like here is a good example. Bedding sales overall may be over $300 million, our market share less than 5% and we are not heavily stored, but we do have some store count with fragmented competitive landscape, and this is a real example from this last year, and we took bold actions with breakthrough media spending, investing a bit ahead of our sales. We repositioned two stores to non-mall for high visibility near our competitors and remodeled another three stores, and essentially we kept the same store count. So we had a very strong impact where we were able to achieve sales profit and market share gains well above expectations.

And last for me, I'm sorry. Go ahead.

Well, by that kind of strategy to these large underdeveloped markets.

Okay. And last for me, I am impressed with the 24% of the stores over $2 million and 3% now over $3 million. Is there a point which you reach capacity in a store? I suspect not, but I just watched to hear you say whether or not you are running into any of that with any of the stores.

You are absolutely right, Budd. We expect not, and the beauty of our business model, we have a market-based approach with an integrated real estate and marketing strategy and supported with incredible talent. For us it is about site location, traffic, and conversion. And the reason this works so well is we have exclusive distribution and no inventory constraints and today if you take a $2 million average sale store, it is basically two beds a day, and we can do a lot more than that.

Got you. Thank you very much. Congratulations again and good luck on 2012 and beyond.

Thanks, Budd.

Thanks, Budd.

Thank, Budd,

Next question comes from Leah Villalobos. Your line is open. Please state your company.

It is Longbow Research. Good afternoon. Just kind of to follow up on those 13 markets that you were just referring to. You had given some numbers in the prepared remarks, and I just kind of missed them. What did you do this year -- I think it was -- did you say four markets and then you are adding three more next year? Is that right?

That's right.

Okay. Can you just talk a little bit about your incremental media investment and how that - - that local strategy versus increasing the investment nationally, just talk a little bit more about what is driving that.?

Sure. Well, our number one opportunity for growth is awareness and ultimately that is what is driving it. So building awareness and we -- we entered last year with a new strategy of moving to a national broad reach which really was a game changer for us. We moved from a narrow focus direct media buy to a national broadreach, and so the investment is behind both national broadreach as well as local market development.

And then in terms of the mix in the increase. Is it pretty even?

From a mix perspective, what is important to note is for 2012, we have planned about 70% national broadreach compared to the -- the 30% national direct. Historically that number has been more like a 55% direct.

Okay. So that's helpful. And then just on the comp guidance for this year, I understand that you have some pricing that we will see in the first half the year, and then there were some new pricing that you implemented here in January, but clearly seeing some very strong unit-growth results. Could you just talk a little bit more in detail about the drivers there.

Well, I will start with the pricing which you brought up, Leah. For 2012 -- well, let me start with 2011 we saw about a 3% increase overall for the year due to pricing and 5% in the fourth quarter. As we look to 2012, we also expect about a 3% increase in pricing. We would expect that to be fairly frontloaded with about 4% to 5% growth from pricing in the first half and about 1% to 2% increase in the second half due to pricing.

In terms of the unit expectations versus we have seen a lot of improvement in terms of the mix this year. Q yes.

Yes,and as I mentioned, we expect to continue to see a balanced approach to the growth with growth in both units and in ASP, units driven by many of the initiatives and programs that Shelly just described in her remarks and ASP. We expect primarily driven by the pricing which I just spoke to.

Okay. Thanks so much. Best of luck.

Thank you.

Next question comes from Brad Thomas. Your line is open and please state your company.

Thanks. Good afternoon. Let me add my congratulations as well and a great quarter and a great year. It is clearly a very exciting time for the Company.

Thanks, Brad.

I want to just ask about one metric that -- that fell a little bit short of what your guidance had been for the quarter. Gross margin. Could you just talk a little bit about what it was that played out that had it come in a little bit lower then you had guided to for the quarter

Sure. Hi Brad. It is Wendy. First, gross margin versus the guidance.

We ended up in the quarter driving more of our traffic proportionately during our promotional time periods. So it ended up being a very highly efficient use of our media. During that time period we grew both the top line an the bottom line, but let me back up for a moment and just make sure everyone on the call understands our broader financial strategy. We really run the business with a goal of maximizing overall operating margins, and we are real pleased with our results therein Q4 and the full year up around 300 basis points, and we are very focused on our path to exceeding 15% by 2015. With respect to gross margins, we are pleased with our full year gross margin increase of 80 basis point, and as I mentioned, we expect to be up at least 50 basis points for the full year of 2012.

Okay. Great. And then as you look at the accessory business could you talk a little bit about the performance of it during the quarter where are accessories as a percentage of sales and how important is that in your sales guidance for 2012?

Well, a product is a key part of our integrated strategy to broaden awareness, and the Sleep Number Bedding Collection plays a great role with both awareness as well as the cash which drives our ASP and with the Sleep Number Bedding Collection, we also have exclusive proprietary solutions that support that individualization, and we saw a terrific comp increase in 2011 with the Bedding Collection and overall, this business has great growth potential in the future.

And Brad, it is Wendy. I will just share a couple of numbers that may be helpful. Last quarter Shelly shared that we increased the penetration or percent of sales for Bedding Collection by about a point. We continued to see that kind of strength over a 100 basis improvement in Bedding Collection penetration in the fourth quarter and looking forward to 2012, we do expect to continue to grow that metric.

Great. And if I could just ask one last question around CapEx. Obviously, the number of store openings you are going to do is about double in 2012. Are there any other drivers for the increase in CapEx around systems or R& d? I recall a number of years ago you were looking at rolling out ASP, but I believe you have shelved that primarily at this point, if I understand correctly.

Right. Well, first our CapEx plan is consistent with our number one priority for the use of cash and that is investing in growth, and as you look at that $50 million expectation that I shared the majority of that, roughly two-thirds of that is distribution related. The remainder is spread across a couple of areas. One is system.

We are not planning for a full-scale system project like S A P. We do have a couple of projects in place that are primarily focused on enhancing our customer information systems. And I will also add, Brad, that we will remain flexible on this throughout the year. We can certainly flex up or down as we get a better read on the year.

Sounds great. Thanks again and congratulations.

Thank you, Brad.

Thank you.

Next question comes from Peter Keith your line is open. Please state your company.

Hi. It's Piper Jaffray. Good afternoon and congratulations. I wanted to ask about the initiative around raising awareness.

There is an interesting metric you guys include in the presentation which you call Unaided Store Awareness. I think at the beginning of last year it started at around three and maybe by the middle the year I seem to recall it got to five. I was curious on two questions. Number one, have you been able to quantify that here at the end of the year, and then what is kind your applying this guy long-term goal on where you can ultimately take that store awareness?

Hi, Peter. Our Unaided Store Awareness at the mid point of the year was 6%. So you are right. We moved from 3% to 6% the first six months of the year. We will be able to share our year-end metrics on the next call.

Okay. From a future perspective obviously with only 6 % Unaided Awareness, we have a great deal of opportunity and will be able to better express that here in the coming months and years. Okay. Very good. Second question somewhat unrelated. Just with the comp guidance, is there any seasonality we should think of for the year where maybe certain quarters are stronger than others and maybe a little bit of price increases playing a role in that?

Yes. The couple things that can consider there, Peter, with respect to comps, and we saw fairly steady high growth in comps quarter to quarter last year. As we look forward the pricing is a consideration with the pricing impacts being more frontloaded. We will in July lapse the price increase that we took last year in the P & I series, and then as I mentioned not with respect to comp, but for total we would expect the store growth to be a bit more backloaded.

Okay.

You are familiar with our revenue waiting overall typically Q3 tends to be our strongest followed by Q1.

Yes. Okay. And the last question for me is just on the investments you are making with the customer management systems. What type of extra capabilities is that providing to your sales associates?

Yes. So Shelly spoke to the very integrated way that we are approaching our growth strategy. So one of the key benefits of our enhanced customer information system is allowing more integrations and allowing our associates sales and service to be able to have the one version of the truth and be able to have full visibility to all of the interactions that we are having with our customers. It is one of the strategic advantages that we have as being able to control that customer experience from A to Z, and we just want to make sure that our customer -- or our information systems allow us to maximize that strategic asset.

Okay. Very good. Good luck with the coming year.

Thank you, Peter.

Next question comes from Todd Schwartzman. Your line is open. Please state your company.

Hi. I am with Sidoti & Company. Good afternoon, everyone. I just wanted to follow up on the gross margin question. Thus far quarter to date, how promotional have you been? How do you think the quarter will shape up versus Q4 in terms of promotional activity?

Well, our promotional plan for the quarter, we expect it to be fairly similar year-over year, Todd.

Okay. Back-end loaded or a little more even?

I am not sure I under stand your question, Todd.

In other words, will it be more so -- more heavily promoted in March versus January?

Oh, I see your question. We tend to build our promotions more around a key consumer events and the times that couples are out shopping and shopping for home-related products and so Labor Day is a key selling period as is President's day.

Okay. As far as fre-cash flow, what are you targeting for the full year of 2012?

So, Todd, we have been running historically last couple of years about $60 million to $70 million of free-cash flow. As you look to 2012, we would expect our operating cash flow to increase as we grow the bottom line. At the same time, as we mentioned, we will be increasing CapEx, and so we would expect our free-cash flow to be in a similar range for 2012.

Great thanks. Finally, I wanted to learn a little bit more about the m7, and I realize it is very early in the game at this point, but if you could maybe speak a little to consumer acceptance and also in particular the benefits of gel infusion. I know is a big buzz word in the industry right now. Just probably be curious to get your take on the benefits to the consumer. Thanks.

So the m7 we just launched here in January and we developed this product based on insights from the consumer. Specifically, we have had a pillow in our line for about 18 months, and we call it the CoolFit pillow and that has been our -- one of our best selling pillows over the past year and our -- the great news about our strategy is we hear from our sleep professionals every day in our stores so we have their insight as well as the consumer research that we do, and there was a great demand from our team based on the properties of this CoolFit pillow that has cooling and contouring properties and very supportive overall, and so we went forward to develop a bed and take that product along with our unique Sleep Number add -- dual adjustable and combine them, and it has been extremely well received by our frontline because they already had high confidence in the pillow and, of course, with the DualAir adjustable, that is just such a unique feature that separates our product from the rest and to be able to combine them for that customer who is looking for this type of product and having the added benefit of Sleep Number makes all the difference.

And, Todd, I will just add as a results of new innovation, we also took it as an opportunity to then increase pricing and replaced a product that was at $2899, so $3199 was a $300 price increase.

Great. Okay. That's helpful. Longer-term, can we expect to see additional materials depending on changing tastes within the marketplace combined with the Sleep Number technology?

We are very committed to product innovation and individualization. So you will see us continue to bring forth advancements in product based on making sure that we are delivering on real consumer benefits.

Terrific. Thanks a lot.

Thanks, Todd.

Next question comes from Eric HollowayYour line is hope and please state your company.

Hi. Eric Holloway, Stephens Inc. Just a quick one. Wendy, in your comments you mentioned that one of the reasons, if not the only reason, gross margin was down year-over-year in the quarter was because you had some kind of adjustment in the year-ago period that I take it inflated the year-ago gross margin. Do you happen to know offhand what gross margin would have been without that adjustment last year?

Yes. It was about 70 to 80 basis, Eric.

Okay. Great. So you saw some decent gross margin improvement in the quarter X that? That is all I have. Thanks so much.

Thanks, Eric.

Next question comes from John (indiscernible). Your line is open please state your company.

Stifel Nicolaus Thank you. Bill Shilling Wendy, and that was a great quarter. Just jump right into -- well, first of all I just want to be clear. You referenced a 16% unit number. Was that a Q4 mattress unit number?

It was -- yes, Q4 mattress, correct.

And if I took out pricing -- the price increases from the ASP, and we were just talking about mattress dollars only, was there much mixed-shift change year-over-year, any benefit or drag?

Well, with respect to mix two parts to that. One is that we did see a higher mix of adjustable foundations and Bedding Collection which does drive ASP, and then in terms of overall mix of mattresses, we did see a healthy mix. I believe in the past we have talked about, you know, a 30-50-20 mix for the Classic Performance Innovation Series, and we are actually seeing that trending up a bit to more of a 30-40 range. We are seeing more of a next up into the higher Innovation Series. That is how we planned for 2012.

That is great color. And lastly on the -- you mentioned you are going to close 30 stores maybe I will direct this one to Shelly is that representative of how many mall leases are coming due this coming year or are there like twice that many? I am just curious how many mall locations you are either moving to a better spot within the mall and/or just out right moving out of the mall, and then also interested in that number sort of as we look out over the next five years or so.

Well, the 20 to 30 closes that we indicated do represent a mixture of all of the above. No, it does not represent the number of leases and with our strategic distribution strategy, we have a plan by market for the next three years of how we want to execute. And the good news about the mall and the non-mall is it gives us flexibility to look at our options. So we have -- with our new store design and the experience and how we are broadening our overall sales per store, we are looking for a little larger mall footprint than we historically have executed, and so part of our strategic approach is to explore with our landlord better positioning, looking more for that 50-yard line with an appropriate sidestore or exploring our -- and/or exploring our objections for non-mall.

Great. And then maybe for you and the final question, we are going to ramp store openings materially this year. We have not been doing that for a while can you refresh us on what, if any, implications that has on the P&L or on the EBITDA line, and I under stand it is more backloaded, so as we think about modeling EBITDA margins for the second half essentially is there some related to drag to opening new stores?

Well, I mean to state the obvious that we will see some increase obviously in occupancy expense. I would also mention, we have talked in the past about flow-through rate. Since our turnaround in 2008, 2009, we have kept our fixed costs relatively flat with very little investment in growth which flow through rates of around 30%. We are at 28% in 2011. As we go forward, we would expect something more in the low 20% as we begin to invest in our growth. So things like store growth, higher CapEx of course drives depreciation and some other infrastructure and growth. I will add, though, that this is consistent with our target of at least 15% operating margin by 2015.

Great. Thank you and congratulations.

Thanks, John.

(Operator Instructions). Our next question comes from Joan Storms (inaudible). Your line is open and please state your company.

Hi. Good afternoon. Most of my questions have been answered about the stores, but just in sync with that, so the CapEx would be if that is two-thirds of the expense would be sort of insync with the store opening schedule and also on the share buyback? So we would maintain shares at around 56.5 million for 2012?

Correct.

Thanks. That is it. Thanks.

Okay. Thanks, Joan.

Thanks, Joan.

We show no further questions.

Well, if there are no further questions at this time then we will conclude the call. Thank you all very much for joining us, and we look forward to reporting further to you following the release of our first quarter results. Thank you all.

That concludes today's connect at this time. Thank you for participating.