Sleep Number Corp (SNBR) 2012 Q1 法說會逐字稿

Welcome to the Select Comfort's first quarter 2012 earnings conference call. All lines have been placed in a listen-only mode until the question-and-answer session. Today's call 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, Tamara. Good afternoon and welcome to the Select Comfort Corporation first quarter 2012 earnings conference call. Thank you all 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 CEO, as well as Shelly Ibach, our Chief Operating Officer and incoming President and CEO, and Wendy Schoppert, our Executive Vice President and CFO. This telephone conference is being recorded and will be available on our website at sleepnumber.com. Refer to the details set forth in our news release to access the replay. You can access the latest version of our Investor Presentation in the Investor section of our website as well. 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.

Thank you Mark, and welcome to our discussion of Select Comfort's performance through the first quarter of 2012 and update about strategies and expectations going forward. We had a terrific first quarter, which was significant as we begin to build on several years of solid, profitable growth and an exceptional performance in 2011. Given the fast approaching CEO change at the end of May, I'm going to keep my remarks brief so we can focus on Shelly's insights into our programs and strategies, and Wendy's perspectives on financials and outlook.

There are four themes to consider as you evaluate our progress and potential. First, we are confident in the continued success of our growth formula. We are investing for short- and long-term profitable growth, for example driving record same store comparable sales growth, and at the same time investing in major metro market development. Second, Sleep Number is both contributing to and taking advantage of consumer and industry shifts towards quality, non-traditional bed solutions. Third, we continue to employ discipline. For us, discipline is about profitable growth and financial flexibility. It's about increasing profit margin, achieving record average sales per store, and further strengthening a balance sheet that ensures our continued ability to self-fund expansion.

Last, and perhaps most important, we are confident in our leadership team and our succession plan. Both are important, given our unique business model, established momentum and strong culture. I'd like to personally thank those who have shown an interest in Sleep Number over the years. Your support has been important to us and to me, and will continue to be critical in the future. Let me conclude by saying a few words about Shelly. What has always impressed me about Shelly is her bold yet disciplined approach to all that she does. We've benefited from those characteristics during the past five years, and it's those same attributes that will be increasingly important to Sleep Number's acceleration of profitable growth. Congratulations, Shelly. Now I'll turn the call over to Shelly and Wendy, who will provide more detail about our Company's solid performance and exciting future.

Thank you, Bill. Good afternoon to everyone on the call. During the past few months I've enjoyed meeting many of you and look forward to continuing our discussions at the Company's upcoming Investor Day in Chicago on May 8. We hope you'll be able to join us.

Let me begin my remarks today by thanking our Sleep Number team for their execution excellence against our customer-focused strategies, which delivered record top and bottom line results, and improved the lives of thousands of customers. In the first quarter we achieved a 36% increase in sales, a record 34% comparable sales growth, and a record 15.2% adjusted operating margin. These results further validated our growth formula and demonstrated the progress we've made in raising brand awareness and in driving increased store productivity. We are leveraging our unique ownership of all customer touch points by consistently innovating across marketing, products, distribution, and customer experience. While delivering a record first quarter performance, we also continued to allocate resources to fund longer-term initiatives to further differentiate and build demand for the Sleep Number brand.

Let me provide you with some detail and insight about the strategy that drove our performance in the first quarter and how we will progress these initiatives for second quarter and beyond. The Company's integrated growth formula is comprised of four key components. One, broadening awareness of the Sleep Number brand; two, building consideration with our differentiated products; three, advancing exclusive market-based distribution; and four, providing a unique customer-centric brand experience.

Our number one priority is broadening awareness as we accelerate our strategy to ensure everyone will know Sleep Number and how it will improve their life. To that end, we continue to evolve and invest in our marketing strategy, an optimized approach to media that combines the reach and frequency of national broadcast TV with additional targeted national and local initiatives. This execution is especially effective during significant consumer mattress shopping periods, such as the Presidents Day event. In order to raise awareness and reach our redefined broader target customer, we increased our media spend by 48% over the previous year. This supported additional weeks of national broad reach TV with improved reach and frequency, resulting in increased traffic over previous quarters. During the quarter we also increased local media spend as part of our local market development plan, which includes the aggressive growth strategy for large metro markets. While executing our planned increase in media spend, we leveraged overall sales and marketing expenses by 110 basis points, which contributed to operating margin expansion.

The second component of our growth formula is building consideration for Sleep Number with differentiated products. In January, we launched our new memory from bed, the M7. Utilizing important consumer insights, we combined our proprietary gel-infused CoolFit foam with exclusive Sleep Number DualAir technology. Our strategy was twofold, to increase traffic by broadening our addressable market and to increase conversion by exceeding customers' expectations with a unique memory foam product that cools, contours, and adjusts.

Customers and our Sleep Professionals have responded positively to the introduction of the M7, which resulted in a mix increase of nearly 600 basis points over the prior year memory foam offering. This launch, as well as the launch of the Sleep Number AirFit adjustable pillow in the fourth quarter, are good examples of how differentiated benefit-driven products broaden consideration of the Sleep Number brand and drive incremental sales. During the quarter we also re-launched the Classic Sleep Number Series, unifying the entire line with our new signature brand standard. Our customer responded well to both the closeout and the introduction of the Classic Series, which contributed to Company-controlled unit growth of 25% over prior year in the quarter.

Third, we continued to advance our exclusive market-based distribution model. In the quarter we expanded the aggressive growth strategy in multi-year initiatives designed to more than double market share in 13 of our large underdeveloped markets. When we introduced the strategy in 2011, these markets represented approximately one-third of the total US mattress sales, but only 24% of Sleep Number sales. We launched two additional markets in January, and entered Year Two in four markets, which means we have 6 of the 13 markets in development. This aggressive growth strategy continues to exceed expectations in sales, profit, and market share growth.

The fourth component of our sustainable growth formula is providing a unique brand experience. This is best represented by our relationship-based store experience, which focuses on individualized sleep through the Sleep Number family of products. Our customer continues to respond positively, resulting in record average sales per store of $1.9 million for the trailing 12 months. This positions us to exceed the previously communicated average sales per store of $2 million in 2012. As we move into second quarter, we will apply our growth formula in a similar yet modified manner. Second quarter is our seasonal low period. It's always more challenging because the quarter lacks a robust consumer mattress shopping event. However, we've advanced our learnings, both in and outside of these events, and have applied the formula accordingly.

Our focus remains on executing against our integrated strategy, including marketing, product distribution, and customer experience, to drive performance in the quarter and the year, while advancing initiatives and investments for our long-term profitable growth. We will continue to broaden awareness for our brand and stores with the proven media initiatives previously discussed. To that end, we plan to invest in media at a similar percent of sales to first quarter. In the second quarter we will remain focused on increasing consideration with our differentiated products. We are introducing a Sleep Number Silver Edition bed to commemorate our 25 years of innovation and individualized comfort. This special Innovation Series bed is available for a limited time at a great value for our customers.

As we have previously communicated, we expect our growth to come from both existing and new stores, as we grow to greater than $1.5 billion by the end of 2015. Our approach is to optimize local market development while leveraging our national exclusive distribution. This positions us to achieve higher average sales per store. Over the past 12 months we've increased average sales by about $500,000 per comp store, adding an incremental $175 million in profitable sales growth. Most mattress retailers would need to add 150 to 180 stores to grow sales by this amount. Driving increased store productivity, or same-store comps, is an important part of our strategy. We continue to experience positive results from our new store designs, repositions and remodels.

In second quarter we will reposition seven locations and remodel approximately 25 stores with our new design. In addition, we will add five net new stores as we begin to fill in existing markets to further develop local market share. Our new stores continue to perform equal to or greater than company average in the first year, and we remain on track to increase our total store count by 5% to 8% by the end of the year, clearly an exciting second half. Lastly, we've increased our investments to support strategies to advance our customers' total experience, including customer research, R&D, distribution systems, and infrastructure.

In closing, we have made significant advancements in the Sleep Number brand experience, resulting in sequential growth in sales, profit, and earnings during the past three years, yet we are early in our growth journey, with less than 2% of the unit market share in the industry. This is an exciting time for the Company. We have the growth formula in place that leverages our competitive advantages for the benefit of our customers. We have the resources and financial flexibility to continue to invest behind our formula, and we have a talented, experienced, mission-driven team to advance our strategies. For these reasons we have confidence in our ability to achieve our short and long-term goals and realize the full potential of the Sleep Number brand. Thank you, and now Wendy will share the details of our financials and 2012 outlook.

Thanks Shelly, and good afternoon. The first quarter of 2012 illustrated once again the predictability and sustainability of our profitable growth formula. During the quarter we achieved earnings per share of $0.39 on a GAAP basis, which includes the $5.6 million nonrecurring, non-cash charge associated with the upcoming CEO transition. Excluding this charge, first quarter earnings per share was $0.45, which was up 50% versus last year, and exceeded our three-year goal of at least 20% earnings per share growth per year. I will share today how we further strengthened Sleep Number's investment propositions, including delivering top tier rates of sales growth as we improve more lives, expanding our operating margin as we drive leverage to the bottom line, and generating significant cash flow to fund our continued long-term growth.

Starting with sales growth, our three-year goal is to achieve annual comp growth of at least 10% to 12%, even as we grow store count by at least 5% to 8% per year, and our outlook for 2012 is for comp growth of at least 15%. During the first quarter, the success of our growth strategies drove company-controlled comp growth of 34% and net sales of $262 million, both quarterly records for Sleep Number. Total sales grew 36%, both on a total company basis and in our company-controlled channels, including retail stores, our direct call center, and e-commerce. Importantly, this increase was driven by a 25% mattress unit growth in our company-controlled channels, another quarterly record for Sleep Number, and about twice the mattress unit growth rate we experienced in 2011. We also continued to grow average selling price during the quarter, with company-controlled channel ASP up 9% year-over-year. Our ASP increase was driven by a variety of pricing actions we've taken since the beginning of 2011 representing five points of the growth, as well as a higher mix of adjustable foundations.

As Shelly stated, we continued to advance the performance of our store portfolio during the quarter, with 97% of our comp stores now generating over $1 million of sales, and 36% of our comp stores generating over $2 million of sales on a trailing 12-month basis. The second element of our investment proposition is margin expansion. We have a stated goal of achieving at least 15% operating margins by 2015, and our outlook for 2012 is for year-over-year operating margin expansion of at least 100 basis points. During the first quarter, we made continued progress in this area with an increase in operating margin of 150 basis points, after excluding the impact of the $5.6 million nonrecurring charge.

As a vertically integrated company, we are focused on maximizing overall operating margins, and this can be achieved in a number of different ways. Execution of our growth model during the first quarter resulted in a total of 440 basis points of leverage across both selling and G&A expenses, demonstrating the power of our business model. Selling expenses fell below 20% of sales, an important milestone for our Company, and G&A expenses of 6.5% of sales also represented our disciplined approach to cost control as we grow. This leverage was partially offset by a 170 basis point planned deleverage of marketing expenses in the quarter, as we invest in expanding awareness to drive long-term growth.

Media spend of $35 million was up 48%, and media as a percent of sales increased to 13.4%. Gross margin of 62.6% also contributed some deleverage, with a year-over-year decrease of 120 basis points, due to strong consumer response during our key promotional events and changes in product mix as we re-launched our entry level Classic Series. This was partially offset by price increases taken since the beginning of 2011. The third component of Sleep Number's investment proposition is strong cash generation to fund continued long-term growth. During the quarter we generated $45 million of operating cash flow, which was 38% higher than last year, and EBITDA was up 48% during the quarter.

Cash and marketable securities totaled $181 million at the end of the quarter, a $35 million increase from the beginning of the year, and we have no borrowings under our line of credit. As previously communicated, we intend to maintain a minimum cash balance of $125 million. Beyond that, our number one priority for cash continues to be to invest in our profitable growth in light of the returns we are achieving in store and other investments. During the quarter, we had total CapEx spending of $9 million. Lastly, we have not yet initiated our 2012 share repurchase, but plans remain in place to use share repurchases this year as a tool to maintain share count.

Regarding our outlook, we anticipate our full year 2012 GAAP EPS to be within the previously communicated range of between $1.32 and $1.40, including the $0.06 impact of the nonrecurring charge in the quarter. Excluding the charge, this guidance represents a 29% to 36% increase in EPS versus prior year. While we do not provide quarterly guidance, I remind investors that second quarter is our seasonally lowest and often most challenging quarter, and last year's second quarter benefited from a $1.1 million nonrecurring contingent liability reduction. Our earnings guidance assumes company-controlled comp of at least 15% for the remainder of 2012, and an increase in store count from 380 at quarter end to between 400 and 410 by year end, with most of the store growth expected to occur during the second half of the year. It also continues to assume full year operating margin improvement of at least 100 basis points, driven primarily by selling and G&A leverage. Marketing, and media in particular, will remain an area of investment, and growth margin is expected to be roughly flat for the full year.

We also expect our operating profit flow-through rate on incremental sales for full year 2012 to be approximately 20%, similar to the as adjusted rate we reported in the first quarter. The decrease from 2011's flow-through rate of 28% is driven by investments we are making in distribution and other growth drivers. In summary, first quarter was a terrific start to the year, which gives us confidence that our current strategies are the right ones to drive profitable growth, both short and long-term, and as I said in February, the exciting part is that we are just getting started on our journey, as we continue to increase sales, earnings per share, and cash. I'll now turn it back over to Shelly for final comments.

Thanks, Wendy. In summary, we are focused on delivering an unparalleled customer experience in sleep. Our proven growth formula continues to deliver sustainable profitable growth, while leveraging our integrated vertical model. We will continue to invest in areas to further differentiate and bring value to our customer through an enhanced Sleep Number experience, which is the key to our long-term success.

On behalf of the entire Sleep Number team I'd like to thank Bill for his leadership and unwavering commitment to build an unshakable foundation for our Company. Early on it was Bill who understood what made this Company so unique, our product, our business model, and our people. During his time at the Company, he not only led the development of the Sleep Number brand, he devoted himself to cultivating all aspects of the business, including creating a mission-based culture that has improved the lives of more than 7 million customers. Thank you, Bill. I look forward to continuing to work with the Sleep Number team, suppliers, and partners to improve the lives of millions of additional customers and build increased value for our investors and shareholders. Thank you, and again I hope to see many of you in a few weeks at our Company's Investor Day. Tamara, we'd now like to open the call to comments and questions.

Thank you.

(Operator Instructions)

Budd Bugatch.

Budd Bugatch with Raymond James. Congratulations on the quarter, and Bill, let me add my thanks for your leadership and your friendship over the years.

Thanks, Budd.

Shelly, and good luck to you as you take over the full helm of the Company. Let me just go back. Wendy, you talked a little bit about gross margin and you did note the 120 basis point reduction, and yet you think the year will come flat to the $63.3 million that you delivered, I think, last year. Can you kind of give us a little bit more color on the gross margin, and what caused that? And how that flowed through during the quarter?

Sure. Sure, Budd. Gross margin for us, as you know, will fluctuate on a quarter-to-quarter basis, based in part on how we design our promotional strategy to maximize sales and also operating profit. During the quarter, you're right, we were down 120, down sequentially by 30 basis points from the last quarter. As Shelly shared during her remarks, we had a strong consumer response during our key promotional events. So not only Presidents' Day but also the closeout of our former Classic Series, as well as the rollout of our new Classic Series, which drove record top and bottom line results during the quarter. You are right, for 2012 we expect gross margin to be roughly flat year-over-year, and I'll just add, as I discussed in our February call, our broader financial strategy is to maximize overall operating margin. So we feel really good about the 150 basis point growth in the first quarter, and as I said on track for our goals for the year.

We've been hearing that there have been some cost increases, particularly in foam, announced fairly recently. Does that have any impact on the quarter, and what kind of impact do you see on that for the rest of the year?

In the first quarter, as we've done in the past, we've managed any increases in commodities with supply chain efficiencies, and also working with our suppliers to mitigate the impact. As we look to the balance of the year, Budd, we expect low single-digit raw material cost increases with, as you mentioned, with most notable pressure in foam, driven by its raw material components, but again we intend to manage any of those increases with efficiencies in our operations, and again working with our suppliers to mitigate the impact.

Finally, recently we've been hearing of some moderation in sales, particularly in the last two weeks of March and early into April. It varies by geography, and it's just basically anecdotal by now, and you did note you're going into the toughest period of the year. Can you kind of give us a read of what you're seeing even more recently, or how the quarter developed?

Yes. We really don't get specific on a month-by-month basis or give quarterly guidance. As you mentioned, second quarter is our seasonally lowest quarter, and as always we've built the current trends into our full year guidance.

Well, the ramp-down in comps has got to be fairly significant to get you to a 15% year-over-year, or at least a 15% comp for the year. So do you see that more gradual, or how should we, as the investment community, model that?

Well a couple of things there, Budd. One is, we do say at least 15%, but secondly, with respect to comps, as you know, as we look to the back half, that is when we begin to have net store growth. So I'd keep that in mind as you're modeling the year.

Leah Villalobos.

It's Longbow Research, and let me also extend my congratulations on the quarter. Just, I was wondering about the four markets that you targeted last year, what you're seeing in terms of the comp performance as we start to lap some of those investments this year?

Hi, Leah, this is Shelly. We continue to have performance that's exceeding our expectations in our aggressive growth pilot markets. So as we move into Year Two, we're pleased with our continuation of success with these markets. We don't speak to the specific comp by market.

It would at least be sort of in the average?

Pardon?

It would be fair to assume that it's at least kind of the average rate that you're seeing across the corporation?

Fair to assume.

Yes, okay. Then I think you mentioned that you had initiated the two additional markets here on the first quarter, and I think you had talked about doing three markets this year. I was just wondering if you're still planning to do three, and when you would pick up that additional market?

Yes, we do plan on moving forward with at least one more market yet this year, and I mentioned in my remarks that we're developing -- we have six markets in development. We will add at least one more this year, and we're on track to have all 13 in development by 2015.

Todd Schwartzman.

Sidoti and Company. Good evening, all. Were you able to quantify the effect of the mild winter weather on sales for the quarter?

Todd, hi. This is Shelly. We are very focused on our profitable growth strategy and raising awareness, utilizing our exclusive distribution and product to drive performance. So we've carefully built that to not be weather or macro dependent. So we don't track weather.

Okay. You'd mentioned that in the quarter, unless I heard wrong, you doubled share in 13 of your markets, is that correct, or at least doubled share?

No, I'm sorry, the aggressive growth strategy. The comment that you heard was the strategy is designed to double the share in the 13 large metro markets that we've identified for the strategy, designed to double share over three years.

Okay, thanks for that correction. On the m7, it's early, but what early lessons have you learned thus far from that launch?

Well, our product innovation is driven by Consumer Insights, and we had some great insight going into the product launch with our CoolFit. It's a proprietary foam that we've had in one of our pillows for the past 18 months, and it has been a bestseller. So our learnings were early and in the form of insights as we developed this product and our Sleep Professionals have been very strong leaders of this item. So we're pleased and progressing with innovations that are meaningful for our customers.

Regarding pillows, I wonder if you could speak a little bit about the line up, how you see that, how you plan to tweak that with what frequency going forward? And also maybe some color on the percentage of existing or pre-existing Sleep Number bed owners that bought just pillows of late?

Well, Todd, we have a full bedding collection line, a full exclusive Sleep Number bedding collection line, inclusive of pillows, and sheets, and comforters, and many, many products to enhance this overall sleep experience. Our product is problem solution-based, and is a key part of our overall sleep experience in the stores. We have not spoken to specific breakout on pillows, but pillows are a robust part of our strategy, and we offer pillow fitting in our stores, and it's a strong attract in our mall stores.

I would think it would be an important indicator of reinforcing brand awareness. Obviously, creating new brand awareness for new consumers is of the utmost importance, but I think it also would be telling to know to what extent you've stayed in front of satisfied consumers who already own the bed, and now like the brand and are now purchasing accessories, if you will. But I guess you don't have those numbers to throw out?

Yes, but you're right, Todd. It is an important part of our overall strategy for ongoing relationships with our customers, who are very dedicated to our brand.

John Baugh.

John Baugh, Stifel Nicolaus. Thank you, and congratulations Bill, and good luck in your future endeavors.

Thanks, John.

And, Shelly, Wendy, Edwin, hello. I guess my first question is around just the understanding, the mix deterioration in light of the 9% average selling price. So 5% of the 9% was pricing, and then you sold more adjustables. Then am I right in assuming that in the clearance of the Classic, that's what drove the average unit selling price of a mattress down?

Well, keep in mind, as you mentioned, that there are, John, some factors that can drive ASP up that will not have the same impact on gross margin, and can, in fact, have an opposite impact on gross margin, which would be adjustable foundations and the bedding collections. As I said, the mix, especially as we re-launched our Classic Series, that did have an impact on our gross margin in the quarter.

Okay, and as we think about the future, the next nine months here, you mentioned the introduction here in Q2, but I guess there will be a less disruptive impact, relative to the first quarter at least, from changing out the Classic. I guess it is hard to know how much is going to be sold on promotion and Memorial Day or Labor Day, but to get gross margins up, I assume that the factors driving first quarter will mitigate to some degree, fair?

Yes. John, we've built in our promotional structure and where we're calling cost, and that's built into our guidance.

Okay, and then you mentioned the 28% incremental margin last year, closer to 20% this year, and I know you went through a period of time where you were squeezing, and then probably catching up on a lot of things, not to mention making investments for growth. But I'm wondering how to think about that number in either '13 or in a longer-range basis. Do we see that number as early as 2013 getting increasingly levered again above 20%?

So, yes. I mean, as you mentioned, since our turnaround we have kept our fixed cost relatively flat with very little investment in growth, and that drove the flow-through rate of 28% in '11, and we expect in 2012 closer to 20%. A couple of things there. Store growth is clearly a driver, as well as higher CapEx impacts us from a depreciation appreciation standpoint, but we're also really building in some of our growth spending, things like Consumer Insights and R&D, and this is also consistent with our target of at least 15% operating margin by 2015. And with respect to 2013, I would expect it to continue to be in that 20% range, John.

Okay, and then marketing spend, 13.4%, same number second quarter. I may be in error, but I had '13 in my brain for '12. So are we looking at a decline in the second half or no, we're just going to keep spending because it's really working?

So what we said there last time was that we expected to -- that we would likely exceed 13%, and we were talking for the full year and we don't provide quarterly guidance but for the full year we said could exceed 13%.

Okay and then the share count being flat, what are you using as your starting point there? What number, basically, should we be thinking about for the year?

Yes, we ended the year about 57 million.

Peter Keith.

Hi, it's Piper Jaffray, and congratulations from me as well on a nice quarter. I just want to talk about the comp guidance, which I guess the language of it has remained the same, although when you say it's greater than 15%, that could imply a pretty wide range. I know, kind of like when you initially built that up for the year it was based on the ISPA industry forecast of about 4% to 5%. So ISPA's taken up their full year estimate now to a little bit over 7%. I guess are you thinking about that higher estimate from them into your comp guidance, and maybe even more specifically, have you kind of increased your outlook for the rest of year?

So, yes. So really for us in terms of the comp guidance, you're right. We have said at least 15%. Certainly, we look at the same data you do in terms of the ISPA data, but we are focused on what we can control, and again I would just remind you that store growth in the back half of the year is an important factor.

As you stated, Peter, at least 15% comp. It's still early in the year, as we just head into second quarter.

Okay, sure. That's fair enough. One thing, too, that I guess I was hoping, or was surprised wasn't called out for gross margin, would've just been fixed cost leverage off of the mid-30s sales growth rate. Was that a contributor overall to gross margin?

Yes. We did have some improvement from our leverage, yes.

Okay, just not enough to quantify or to call out?

Yes, I really spoke to what were the most significant drivers in the quarter.

Okay, and then lastly, I asked about this on the last conference call, but the metric that I love is the unaided store awareness, and I'm wondering if you have an update on that at the end of the year?

Well, great. Thanks, Peter. Yes, the 15% unaided store awareness that we have previously spoken of certainly underscores our early growth strategy and our focus on awareness as our number one growth opportunity. So you're absolutely right, and we have leading markets that have a 25% to 40% unaided awareness, and we are planning to speak more about this at our upcoming Investor Day with some updates at that time, and just go into it a little bit deeper.

Okay, fair enough. I don't want to steal the thunder on that.

That was the unaided overall brand awareness. The unaided store awareness is actually 6%, not 15%.

Eric Hallowaty.

Hi, Stephens Inc. Thanks for answering the question about awareness. That was one that I had, but another is in thinking about the multi-year to 2015 progression of gross margin, you basically said that in 2012 you're looking at a flat gross margin, which would then leave the next three years to get that gross margin an additional 200 to 300 basis points, and you've called out supply chain leverage and efficiencies, and product innovation, and pricing. Product innovation and pricing, of course, are always ongoing, and are included in 2012 when we're not seeing any gross margin improvement. I guess can you help us think about kind of what changes in the 2013 to '15 timeframe to sort of get that step function in the positive direction?

Great. Hi, this is Shelly. I'll start here and Wendy can add in. I think important to note that pricing for us is an opportunity compared to where the competition is at. For now, our number one growth focus is on building awareness and building demand for the brand. So we have not been aggressive in this area. However, we will continue to take pricing opportunistically, especially with product introductions when we're introducing product with enhanced features and benefits. Our number one focus for margin expansion is building that awareness and demand at this time, and still pricing opportunity to come, along with product innovation.

Yes, and I would just add to that, that we do still see two to three points of upside by 2015, and Shelly spoke to the opportunity on the pricing side, and I would just add that we believe we have continued opportunity with increasing efficiency, both for our manufacturing as well as our logistics functions.

(Operator Instructions)

Brad Thomas.

Yes, KeyBanc Capital Markets. Thanks for taking my question. I apologize, I got cut off earlier so I hope this wasn't asked, but a follow-up on the gross margin questions. Really, that seems to be the only area that we feel like we'd like to know little bit more. You guys seem to be doing a great job with everything else. Just curious, as we think about your guidance for this year, what are your assumptions in terms of the consumer desire to come in when you're having these big sale events and how the mix plays out? I mean, are you assuming that some of the trends that have played out the last two quarters continue to unfold through the balance of the year?

Well, as I mentioned, one of the significant drivers was the re-launch, both the closeout of our old entry level Classic Series as well as the re-launch of our new Classic Series, which that was fairly concentrated in the first quarter. So we built into our guidance our promotional structure that we have planned for the balance of the year, as well as, like I said previously, where we're calling the cost for the balance of the year.

Okay, okay, and then in terms of uses of cash, obviously a very strong quarter here, raising guidance, another quarter of cash build. Would you need to wait until the end of next year to consider being more aggressive with your cash in terms of the buyback program, or are there opportunities for the Board to perhaps consider that at an earlier time in the year?

Brad, we've got a great business model with very high returns on our investment, and so our number one priority is investing in our growth, now that we are above our minimum level, and doubling the size of the company will require continued investment over the next few years, some that's defined and some undefined at this point. So that's why maintaining that cash balance is important. As we've stated, the goal this year is to reinstate the share buyback to keep share count constant, and haven't spoken beyond that at this point.

I'll now turn it back over to Mark Kimball to close the call.

Well, if there are no further questions, we will conclude the call at this time. Thank you all for joining us, and we look forward to reporting further to you following Q2. Thank you, and sleep well.

That concludes today's call. Thank you for participating. You may disconnect at this time.