Sleep Number Corp (SNBR) 2013 Q2 法說會逐字稿

Good afternoon. Welcome to Select Comfort second quarter 2013 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 anyone has any objections, you may disconnect at this time.

I'd like to introduce Dave Schwantes. Thank you. The Senior Director of Investor Relations. You may begin.

Thank you, Angie. Good afternoon and welcome to the Select Comfort Corporation's second quarter 2013 earnings conference call. Thank you for joining us. I am Dave Schwantes, Senior Director of Investor Relations. With me today are Shelly Ibach, our 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. Please refer to the details in our news release to access the replay. 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 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 Shelly for her comments.

Good afternoon, and thank you for joining our call. Today we will discuss our second-quarter financial results as well as the advancements we have made on our customer-focused growth initiatives, which strengthened our three most significant competitive advantages -- proprietary products, exclusive distribution, and the end to end customer experience.

I'll begin with second-quarter results. Net sales were $207 million, up 1% versus prior-year, with a 6% Company-controlled comparable sales decline. Earnings per share were $0.18 versus $0.30 in second quarter of 2012.

Results reflect a gradual and steady progress associated with reestablishing our media buying formula combined with continued investment in our growth priorities during our seasonally lowest sales quarter. Our media buying formula was back on track in April.

In May, we returned to prior-year media spend levels and began to increase spending midmonth and into June. Therefore, for the quarter, our media spend was up just 6% to prior-year and was 14.1% of sales.

As expected, results in June were consistent with this progress, including positive lead growth from TV, radio, and digital investments, positive sales and comp growth, and positive mattress unit and ASP growth. During the quarter, we made significant advancement in product innovation, an important initiative and investment priority for long-term growth.

In June, we launched our DualTemp layer, an exclusive product with proprietary ActiveAir technology that evenly distributes each sleeper's desired temperature. This benefit driven layer can be used on all mattress brands.

This innovation addresses one of consumers' most consider significant sleep issues -- sleeping too hot or sleeping too cold. 75% of consumers say temperature is a problem. In fact, feedback via our retail stores validated by additional research led to the development of the DualTemp layer.

In support of this launch, we executed a national marketing strategy across all media types between the Memorial Day and July 4 events. While early, results are promising. They included 120% increase in web traffic during this period, a balance of sales from both new and existing customers, indicating the role our DualTemp layer can play in driving traffic and re-engaging existing Sleep Number customers.

A high bed attach rate, more than a third of new customers who purchased our DualTemp layer also bought a Sleep Number bed the same day, which means this innovation contributed to both ASP and mattress units. Equally important, our DualTemp layer demonstrates how we are benefiting from and strengthening our three big competitive advantages -- proprietary products, which I just reviewed, and exclusive distribution in the end-to-end customer experience.

Our exclusive distribution of this unique product makes us -- our stores a destination for customers. In our relationship-based retail experience that focuses on our customers' needs, results in high rates of conversion and increased average transaction size.

Our vertical model, which includes the end-to-end customer experience, allows us to seamlessly introduce a proprietary product like the DualTemp layer nationwide in a single day, fully supported by national marketing and customer service.

The next in our series of product innovation also combines high function and design with a simple intuitive remote. On July 29, we will introduce the new m and i series Sleep Number beds that feature our advanced DualAir technology with a sleek, modern, wireless remote, which has an interactive display that will guide our customers to their ideal comfort and support -- their Sleep Number setting.

This remote also will communicate each individual's name. It is literally a simple touch of a button for an individualized experience. Developed during the past 18 months, these research intensive products are designed to provide a customer's optimum comfort.

Our technology is combined with proprietary foam and layer combinations that have proven comfort benefits. You can view this new DualAir technology that is inside the Memory Foam and Innovation Series beds by going to the investor relations section of sleepnumber.com. To fully experience all of our new products, I hope you will visit a Sleep Number store in August.

As an important part of our growth formula, we also continue to prioritize investment in local market development. While we have national distribution with stores in 45 states, we have significant opportunities to optimize our real estate portfolio and fill in gaps in our existing markets.

To that end, year to date, we have executed 55 store actions, including adding, relocating, remodeling, and expanding stores. And we have over 60 store actions planned for the balance of the year, which will result in over 70% of our stores in our new productive design by year end.

New stores continue to generate approximately $2 million in their first year with less than 15% cannibalization. Relocations continue to deliver double-digit growth over balance of chain in year one, and new stores and relocations performed consistently with balance of chain in year two.

To summarize the quarter, we made important progress to position ourselves for strong short- and long-term growth. With our media formula back on track, the introduction of meaningful new products and local market development advancement, we are increasing our media spend in the back half to build continued awareness for Sleep Number and to support our planned growth.

Therefore, we are maintaining our 2013 full-year EPS guidance of $1.30 to $1.45, which assumes a high teens growth in total net sales and high single-digit comps for the second half. Wendy will now provide additional details about our quarterly performance and outlook for the year.

Thanks, Shelly. Good afternoon, everyone. I'll review the financial details of our second-quarter performance, followed by the assumptions behind our 2013 outlook, and close with an update on cash.

Second quarter EPS of $0.18 was roughly in line with our expectations and consistent with prior communications that second-quarter year-over-year profit performance would be lower relative to other quarters this year. As planned, to support our long-term growth initiatives, we continued investing in our top priorities, product innovation and infrastructure, during our seasonally lowest quarter.

Total net sales in the quarter increased 1% to $207 million. Comparable sales within Company-controlled channels were down 6%. The recovery from our first quarter media situation was apparent in the steady, sequential improvement in monthly sales since March.

On a two-year stacked basis, comps were up 19% during the quarter.

Net new store additions over the past 12 months contributed 7 points of sales growth during the second quarter, and our local market development strategy continued to drive favorable returns on investment. We remain on track to end 2013 with 435 to 445 stores, with distribution growth heavily weighted, as planned, in the back half of the year. In the quarter, we added 17 new stores and closed 15, which included the relocation of 11 mall stores to new, non-mall locations within the same trade area.

We remodeled 20 mall stores with our new store design and most of these were also improved locations and expansions. The 1% growth in Company-controlled channel sales during the quarter included a 3% increase in ASP, driven by product innovation -- specifically, prior year pricing actions and the introduction of DualTemp. As planned, this was lower sequentially from the 14% ASP increase in Q1, primarily due to lower growth in adjustable base attach rates as we lapped an adjustable base closeout in the prior year.

On a two-year stacked basis, ASP was up 16%.

Mattress units during the quarter declined 2%, a 13-point sequential improvement from Q1. On a two-year stacked basis, mattress units were up 11%.

As discussed previously, both mattress units and ASP are important contributors to our long-term growth. Through our vertical model, we drive growth with new product introductions and closeouts, which means we will experience quarterly fluctuations between mattress units and ASP.

The Memorial Day event is a good example. Last year we promoted the Silver Limited Edition bed at the high end of our line, and this year we closed out of the Classic Special Edition bed at the low end. This resulted in sequential improvement in mattress units versus Q1, while ASP growth declined versus Q1. Importantly, over the longer term, we expect growth from both units and ASP.

Operating margin in the second quarter was 7.3% compared to 12.6% in the prior year. This year-over-year decline included a 440-basis-point increase in sales and marketing expenses, a 70-basis-point decrease in gross margin, and a 60-basis-point increase in R&D, partially offset by a 50-basis-point decrease in G&A.

Sales and marketing expense de-levered to primarily due to a 320-basis-point increase in selling expenses, 80 basis points of which was incremental depreciation associated with new, relocated, and remodeled stores. The remaining 120-basis-point increase was in marketing.

The decrease in gross margin to [63.4%] was driven by the lower margin Special Edition product offering during the Memorial event and a higher penetration of lower margin bedding collection sales, partially offset by supply chain efficiencies. The increase in R&D reflected our sustained focus on product innovation, consistent with our strategy. And the leverage and G&A reflected lower performance-based compensation, partially offset by investments in infrastructure, including 30 basis points of incremental depreciation associated with growth-related capital spending.

As part of our cost reduction efforts, we cut over $2 million of planned discretionary spending out of G&A.

Moving to our 2013 outlook, we continue to expect full-year EPS in the range of $1.30 to $1.45 versus 2012's adjusted EPS of $1.43. Our outlook for the second half assumes high teens growth in total net sales and high single-digit comps. Specific to the quarter, we expect EPS growth to resume in Q4.

As we communicated in January, we expect higher sales growth in Q4 versus Q3 in light of prior years' Q4 performance. For full-year 2013, we expect operating margin deleverage primarily associated with our first-half sales decline. We expect sales and marketing expense to be approximately 45% of sales, as we communicated last quarter.

Our 2013 outlook also assumes a tax rate of 35%.

Regarding the balance sheet, we ended the quarter as planned with $140 million of cash and securities, down $37 million from year-end. This reflected year to date operating cash flow of $36 million, which was more than offset by year-to-date CapEx of $37 million, strategic investments of $19 million, and stock repurchases of $20 million.

Note that second quarter is typically our low point for cash, due to working capital seasonality. And we expect to end the year with a cash and securities balance well above our minimum target of $125 million.

Our capital allocation strategy in 2013 continues to prioritize investments in growth. We expect 2013 CapEx of $70 million to $80 million, including new stores, relocations and remodels; technology, as we continue to enhance our customer information system, and infrastructure needs associated with product innovation.

We also continue to repurchase shares with the objective of maintaining share count at or below current levels. And we expect our balance sheet to remain debt-free in 2013.

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

Thanks, Wendy. We remain focused on delivering an exceptional experience for our customers by advancing our growth formula. Therefore, we are well-positioned to grow in the back half of the year and further strengthen our competitive advantages.

In the quarter, we returned to our media buying formula, which sequentially improved traffic and sales. We executed the first in a series of product launches that are designed to improve the lives of our customers.

Here is what just one customer had to say about our DualTemp layer. My wife has suffered from hot flashes for years. We had to sleep with a fan and the room temperature had to be around 70 degrees. I had on an electric blanket and she would be covered in just a sheet.

So when we saw the DualTemp topper, we bought it. No more hot flashes. It has been great. Also, no electric blanket and no fan. So needless to say, we love your Company. My wife thinks you are cool and I think you are hot and we are both right.

With this kind of customer response, we are excited about the role of product innovation relative to experience, traffic, and sales. And we remain on track with local market development initiatives improving Sleep Number availability for our customers. We will drive growth in the back half through increased media to build awareness and consideration, new product innovation, and advancement of our local market development.

Our long-term goals, growth formula, and competitive advantages all support Sleep Number experience that improves our customers' lives. I am confident this dedication to our customer will enable continued growth and increased shareholder value.

Thank you to our employees and partners for your commitment to our customer-focused strategy. And thank you to our investors and analysts for your continued interest and support. Wendy and I now welcome your questions.

(Operator Instructions) Peter Keith.

It is Piper Jaffray and good afternoon, everyone. There is, I guess, a lot of puts and takes with the guidance with regard to some of your margin targets and the high single-digit comp guidance for Q3, Q4.

I guess it sounds similar to what you said in the last quarter call. But I guess what we would like to know is, did your back half of the year outlook change at all relative to how things trended in Q2?

Yes. Hi, Peter. It's Wendy. So as I said, Q2 was roughly in line with our expectations. And we have incorporated into the back half our current run rate of DualTemp sales, and we are maintaining our full-year guidance of $1.30 to $1.45. So to answer your question, it's very similar to the prior quarter.

Okay. On the DualTemp, and I guess it relation to that high single-digit come guidance, there does seem to be some investor concern on building back up to that. Is that -- before it was only, I guess, incrementally factored in. Are you factoring that in more now?

And with DualTemp I would think -- I think with the timing of deliveries, maybe even a couple of weeks it missed on some of the Q2 sales, is there sort of a catch-up period in Q3 from some of that initial demand?

Yes. Hi, Peter. This is Shelley. You know, we have early results on DualTemp. As I stated, we are very pleased with the results that are promising.

Our ship time on this product has ranged from 2 to 4 weeks and since we launched, and we will be at two weeks here by August. That will not affect any financials as we carry into the third quarter because of when we recognize our revenue. So we do have a short period of time with selling in DualTemp, then we have taken that short period of time and incorporated it -- this run rate into our guidance.

Okay. And then, lastly, I guess I'm curious on the lead generation aspect of the DualTemp as you are getting, it sounds like, a fair amount of new customers into the store. Has your lead generation picked up, do you think, as a direct result of DualTemp? Or is it the DualTemp and the marketing? I guess, could you give us an idea of how that lead generation is looking for June and July relative to maybe last year?

Yes, particularly for June -- and I will speak to the period of time where we had the national launch. We had the national launch at DualTemp in June post the Memorial Day event. And we did experience a healthy, as I stated, 123% increase in our web traffic during this period and the corresponding appropriate lead generation to our store.

So we did experience increased leads from both DualTemp and the media. Hard to tease apart one from the other, but certainly it was a noticeable increase in our performance.

Okay. Thanks for answering the questions and good luck in the back half.

Thank you.

John Baugh.

John Baugh, with Stifel Nicolaus. Thank you. I wanted to follow up. Shelley, you made some comments in the prepared remarks on June specifically. Could you just run through those again?

Sure. The June relative to the DualTemp or in general? Probably (multiple speakers)

Well, both.

Okay. Great. Well, first of all, June results were consistent with the progress of the media recovery in spend. And so in June we experienced positive lead growth from the TV, radio, and digital investments, and positive sales in comp growth, and positive mattress unit and ASP growth.

Okay.

And then, specifically to the DualTemp, which was also in June in between the Memorial Day and the July 4 event, we shared the results of 120% increase in our web traffic during this period and then a balance of sales from both new and existing customers. And also, a high bed attach rate to those new customers purchasing the DualTemp; over a third of those customers purchased a Sleep Number bed.

So the results, which were presumably a lot better than April or May, were driven somewhat equally, hard to tell, between being where you need to be with media and DualTemp?

Yes.

Okay. Terrific. And I think, Wendy, you mentioned the working capital seasonality. I think I calculated a use of $15 million in the first six months. Where do you think that goes with the latter six months?

Yes. So I will just repeat that. In Q2 it is this typical low point due to this working capital seasonality. And I want to walk through the Q1 to Q2 first, John.

And the reduction this year in cash was from Q1 to Q2 $41 million. Last year it was $26 million. And when you look at that difference, most of that is due to higher CapEx year-over-year. And so we should expect to see similar types of trends as you look out at the back half, reflecting the same type of seasonality that you have seen in prior years.

Okay and then my last question I guess relates to the second half. What are we -- you mentioned -- I mean, it seems to be such myopic focus on quarters and units and margins and all these things. So is there any kind of help you can give us as we look either at Q3 into Q4, or maybe the second half in general in terms of what you are lapping a year ago in terms of clear out, or -- and how that is going to influence units and gross margins going forward? Thank you.

Sure. Well, I will start with EPS, and I want to just repeat that. As we look at the quarters, we expect EPS growth to resume in Q4. And as we look at the comparison to prior year, we do expect a higher sales growth in Q4 versus Q3 because, recall, that our performance -- or in light of our performance in Q4 of last year.

When we look at a couple of the different drivers, John, you mentioned units and ASP; you mentioned margin. As we look at units and ASP, which are important contributors to our growth, our increased media investment and product innovation should drive growth in both units and ASP.

Great. Thank you. Good luck.

Thank you.

Budd Bugatch.

Raymond James. Good afternoon, Shelley. Good afternoon, Wendy and Dave. I guess -- I'm making sure I do understand this. June comps were positive in the stores. Is that -- I heard that correctly? Just want to make sure I got that.

Yes, that is correct, Budd. (multiple speakers)

Is there any flavor on June comps without DualTemp, then, because it was there pretty much in the quarter, at least as an order basis I know, but.

Yes. We are not breaking it down further. However, it is a small sample. It is early for DualTemp and we just launched it nationally post from Memorial Day to really a couple of weeks there in June.

Okay. A couple of other modeling questions, then, if I could, Shelly or Wendy. You say growth of 22 to 32 stores net between the third and fourth quarter. Is there any way to break that out quarter by quarter? You said the balance in the second half, but everything left is the second half.

Right. Yes. So as we break that out by quarter, we do expect a greater proportion of that growth to be in Q4 versus Q3. So it will be -- expect it to be back-loaded within the quarter.

Okay. And how should we think about media spend going forward now? Where is that going to be?

Well, we are increasing our media. Yes, I think a good representation would be year to date we have just a 7% increase in media versus 2012's 39% increase in media. And we are increasing media in the second half to build awareness, support the local market development, and certainly support the product innovation.

So where will it come in for the year? Where will media spend versus last year be for the year? Where do you think it will be?

Well, again, I go back to the fact -- or I go back to Shelley's point that last year we were up 39%. So the 7% was well below that level and we plan to increase that in the back half. We are not providing specific numbers, but certainly a sizable increase from the 7% that we saw in the first half.

Okay. And that is included in the 45% selling and marketing expense, right?

Yes, it is.

Okay. I think on the last call, you said gross margin should be modestly up for the year. Is that still in the guidance or is that something that is different?

For gross margins, and you are asking about the year, we could be down slightly for the year. And I will speak to the back half.

First of all, I always want to start with the fact that a gross margin rate will fluctuate on a quarterly basis based on our product innovation efforts. As we look at the back half, we expect it to be modestly lower year-over-year due to the higher penetration of bedding collections, including DualTemp, and given that we have incorporated our current run rate of DualTemp into our forecast.

Okay. And you did talk, Shelly, I think, about the new remote. What other new product could you tell us about that is coming out? Is there any? And does that new remote go to all -- I started to look at it on the website, but don't have the time right now. Does it go to everything you have already or how does that work for customers?

The new advanced DualAir technology is in the m and the i series only, Budd, as we launch it here on July 29.

So the new m and i launch is July 29. I see. Okay.

Yes. And that will be supported with a national product launch.

Okay. And are there going to be two models like what you have before -- the m7 and 9 or?

Yes. It will be a new m7, m9, as well as the i8 and i10.

Okay. Anything new on ComfortAir or what you're going to do with that or how that is proceeding?

Well, regarding ComfortAir, we are at -- we purchased it -- acquired it for the IP and we continue to be pleased with the IP of this acquisition. And you have not seen product innovation associated with this investment or the R&D investment that we spoke of in January.

Okay. All right. Good luck on the balance of the year and I look forward to talking with you soon.

Okay. Thank you, Budd.

Brad Thomas

Brad Thomas with KeyBanc. Good afternoon. Just a couple other follow-up questions here on topics that have already been touched on. Just with respect to gross margin in the second quarter, we do have the closeout of the m and the i lines occurring. Last year in the second quarter gross margin was up over 200 basis points.

Should we be modeling in a similar level of decline of what we saw this quarter? Or are there other factors that might keep the margin more consistent?

Well, as you know, Brad, we manage the business based on operating margin. But just looking at gross margin in and of itself for the back half, as I mentioned, we expect it to be modestly lower year-over-year due to a higher penetration of bedding collections. We have included our current one rate of DualTemp, as an example.

Got you.

Let me also add that Q3 of 2012, as you noticed, had a 65.1% gross margin, so a bit more of a difficult comp there. That quarter was favorably impacted by mix associated with some product introductions at that time.

Right. Right. And then just, again, as we look at the model, in the first half of the year the difference between your revenue growth and your comp was about 7%. It sounds like it is implied to be more like 10% in the back half of the year.

Is there something that has changed in terms of the store actions, maybe, that are adding more to total sales growth relative to what the comp is? Or is there some seasonality between 3Q and 4Q that we are not breaking down? Just wanted to make sure I understand why that difference would get a little bit bigger.

I mean, for the second half we do expect to have that high single digits contribution from new stores as we did previously. And our real estate program is very much on track and we expect to end the year, as I stated, with between 435 and 445 stores.

And, Brad, this is consistent with our prior communication around some of our growth now coming from the -- more significantly from the net new stores.

Got you. Okay. And then just lastly, in terms of competition, it has been a couple months now that you guys have seen more competition on the airbed front from another public company that I won't name on this call. But anything you can speak to in terms of how maybe your stores are doing in markets where you are overlapping with that competition. Are you seeing it negatively impact you or are you actually picking up incremental traffic? How are things looking at these early stages?

Yes, as you stated, early stages we do not have evidence of impact or any unexpected behavior going on here. We have anticipated and planned for the entrance of adjustable air competition in our strategy and, of course, have had many years advancing our product quality. As you know, air is difficult.

And for us, our strategy is focused on our customer's sleep experience and our vertical business model supports this strategy. And, importantly, we are not standing still. We are actively, aggressively utilizing our consumer feedback to develop breakthrough product innovations like the one we introduced in second quarter and will introduce here in a couple of weeks.

We are very excited about where we are going with product innovation and how meaningful it will be to our growth from a unit and ASP perspective as we move forward.

That's great. Thanks, Shelly. Thanks, Wendy.

Jessica Schoen.

Good afternoon. The company is Barclays. One of the questions I had was on what we should expect as far as buckets of SG&A that could impact the third and fourth quarters. I know you said in the second quarter increased depreciation was one of the dynamics, and expecting that to likely increase with more store openings in the back half. What else should we think about quarter to quarter?

Yes, that is a significant one, Jessica, and as we stated, depreciation year-over-year will contribute about 100 basis points of increase. The other change is the one that Shelly talked about, is we will be increasing our investment in media now that we have got back on formula with our media buying and planning.

Okay. And then, the other question I had was about the industry as a whole. I was wondering if there were any callouts on general consumer behavior as you look to the higher end or the entry-level beds, how you felt the industry acted as a whole of the second quarter, maybe compared to the first quarter?

No real surprises, to the latter part of your question. You know, we continue to see consumer confidence that ebbs and flows. And I would say at this point it's a pretty constant dynamic of the industry.

Quality sleep continues to gain importance, relevancy to our customer. And consumers are value oriented, but value is more than price. Customers are looking for benefit driven products. And, for us, we offer a broad range of good, better, best within that premium and it positions us well to serve a broad customer range.

Great. Thank you very much for taking my question.

Josh Borstein.

Longbow Research. Thanks for taking my question, Shelly, Wendy, and Dave. Just on the guidance, you had guided to high single-digit comp growth in the second half of the year. Do you expect the comp to be roughly equal in 3Q and 4Q or weighted more towards a particular quarter?

As I mentioned, we do expect higher sales growth in Q4 versus Q3, Josh, in light of our performance in Q4 of last year.

Okay. Thank you. That's helpful. And then, also on the second half of the year, in the last quarter you guided to mid-single-digit ASP growth. And now looking here in the third quarter, it looks like you are going to anniversary the introduction of the m9, the FlexFit, the $100 increase in the m7.

How might we get comfortable with how we get to mid-single-digit ASP growth either in the third quarter or the back half of the year?

Yes, so as I mentioned, media as well as the product innovation should drive growth in both units and ASP. Specific to ASP in the back half, a couple of things there, Josh. One is that we will be taking pricing on July 29, so $200 price increase on the m7 and the i8 when we launch the new m and i series. And also, you will have -- we will have a full quarter of DualTemp as we move into the third quarter.

Okay. Great. And then, just on the -- the last quarter you had mentioned that the national broad reach TV was about 30% lower than your typical formula. And I was just curious as to whether that advertising level is now what you deem appropriate or whether that might continue to increase here in the back half of the year.

Yes. Relative to the media, we are back on our core formula which rectified at the fluctuation that you just cited. And we are moving forward with increasing the media with that baseline formula as we move into the second half of the year.

Okay. Great. And then just one last one for me. Could you update us on your unaided brand and awareness?

Yes, we have not updated the unaided brand awareness yet this year.

Okay. I appreciate it. Thank you for taking my questions.

Thank you.

(Operator Instructions) Keith Hughes.

Yes. Keith Hughes from SunTrust. A couple questions on the new beds; I am looking at them online here. There is a lot of discussion of temperature control and the write-ups on the four beds. But I just want to be clear; you are not using the DualTemp technology in the beds. Is that correct?

That is correct.

Okay. And is this more about airflow or how do these work?

It's a combination of factors within the actual comfort layer as well as the material of the bed that is contributing to the temperature balancing.

Okay. And, also, they have the controllers on here. Is the controller the big difference between what you are closing out, or what other big changes would there be?

You know, it is one of the big differences. You know, also, as you highlighted, with the imbalance -- temp balance materials. But the actual remote -- and you can see it there very different from our current remote and it is interactive. This is the first significant advancement in our core technology and it really positions us for the future.

Okay. Thank you.

Joan Storms.

Wedbush Securities. Good afternoon, everybody. Okay. So a couple of things. So on the marketing, your goal is sort of to take it back and take it back under control of the Company.

How do you feel -- like obviously, you have made progress month by month. How do you feel like where you need to get to compared to where you are now? Are you sort of in the third inning or the fifth inning? Or how much more opportunities do you have to continue to improve the media buy to improve the brand awareness?

Yes. Well, I will speak to that relative to where we were when we went into this at the beginning of the year. And we have confidence of being back to executing our formula, clearing and achieving the level of efficiencies that we would have expected with the business.

So we are there regarding the execution of that media formula. And now it is putting the weight against the media buys to support the advancement in our local market development and our product innovation. And, most importantly, our awareness continues to be our greatest opportunity.

Okay. And so you still have opportunity as far as -- are you still -- are you back to using multiple agencies now again? And then my understanding, too, from your comments is that your media spend is back up to where you would like it to -- well, it has increased from the first quarter. And then the increase in the second half will get you back to where you want to be there.

Yes. A couple of things. First of all, regarding the media buying agencies that we work with, while at the beginning of first quarter we transitioned multiple buys to one agency along with our planning -- we are dual packing our planning, but we have progressed together tremendously since that time.

We did move back to a prior agency for our national buying, which is a significant portion of the buy over 30%. And that has been progressing and progressed to the level of efficiency that we are looking for. So all of that is on track, and we are very confident about how we are working together and proceeding relative to the media buy.

The second quarter was actually up 6% in media and the first quarter was up 8%. So for the first half, we were up 7%. So we were actually slightly lower sequentially on the media increase.

And we did step up our media investment throughout the quarter, so May we came to last year's level of media spend, and then late in May and into June, we began increasing the media. So for the quarter, then, we ended up being up 6%. And as we move into the back half of the year, we will increase the media to support our strategy, more similar to how we originally planned the year.

Okay. And then on that new products, you are sort of around the corner now for Labor Day. So you will have that DualTemp and then the new m and i series. Can you comment at all about any other new product introductions for the remainder of the year, when that might occur?

For now, we have shared what we are going to share. We have communicated in the past, I guess last quarter we communicated that DualTemp was the first in a series. And the m and i series would be the second in a series, and I will leave it there.

And I noted earlier that we have not yet introduced products related to the ComfortAir acquisition or the additional investment that we made with one of our R&D partners.

And then on the new m and i, my understanding is that sort of the newer features are more advanced technology on the dual chamber technology, and also on the remote.

Yes, and also, the combination of the comfort and support with the layers. So we have a new proprietary foam that is in combination with other comfort layers, where we have done a tremendous amount of research and have proven out the increase in comfort and pressure relief attached to this combination of layers that we have in these beds.

Is the remote change something that you can extend to your other products as well down the road?

You know, we do see this as a significant advancement for our overall core Sleep Number line. And we will build from here.

Okay. Great. Thank you very much.

Thank you.

Todd Schwartzman.

Sidoti and Company. Good afternoon, all. A couple of points of clarification on the guidance, if I may. Wendy, I know that you spoke of the store openings with respect to accelerated openings in Q4 versus Q3. But since June 29, since quarter end, have you opened or, for that matter, closed any stores?

Well, I won't speak to the current quarter. We don't typically do that, Todd. But I will just reiterate that we are on track with our real estate actions and on track to end the year per the guidance we have laid out. So as I said, somewhat back-loaded Q4 versus Q3.

Okay. And just so I am clear, it's the sales delta, not the absolute level of sales, is that correct, that will be greater in Q4 than Q3? You're not looking for a reversal of any historical seasonal patterns, in other words.

I was speaking to the sales growth Q4 versus Q3.

Got it. Okay. And on the guidance regarding sales and marketing expense as a percentage of sales, is that 45% for the full year or for the back half?

That was for the full year, Todd.

Okay. And on that new wireless remote for the m and i series, are there any other differentiating features or benefits other than the addition of the Sleepers name?

Yes, it is an interactive remote. That is probably the most differentiated feature on this remote, where our current remotes and most will respond to the exact button you are pressing. This one is intuitive and interactive, so you can, in fact, interact with it and it will be responsive around finding your individualized comfort as well as, of course, including your name.

So if you are reaching for it, it will greet you. So it will say, hi, Wendy. And you will know that that's your side of the bed.

Got you. Lastly, could you speak to -- could you break out the comps for the quarter by mall versus non-mall stores?

Well, we don't break that out, Todd. What I will say is that their performance was similar in the quarter, and would also add that the relocations themselves have continued to deliver very strongly with double-digit percent sales lift over the balance of chains.

Sounds good. Thanks, folks.

Michael Novak.

Frontier Capital. I know you don't like to talk about the current quarter, but could you give us some sense of how much you are expecting sales to accelerate from the current pace to meet your third quarter targets?

Yes, Mike, you are right. We don't talk about the current quarter and we also don't provide quarterly guidance. But, as we said, we expect for the back half high teens total growth and high single-digit comps as a result of the increase in our media investments as well as our product innovation initiatives.

I'm not asking for the number. I'm just asking for relative to what you are seeing now, does it need to accelerate materially?

Yes, again, I won't get into some of the monthly progression. We did, as we said, experience positive sales and positive comps in June and we expect the growth that we have laid out for the back half.

Okay. Another subject. Could you tell me about the patent protection on the dual temperature side as well as the remote?

On the new product that we are just introducing?

Correct, as well as the dual temperature product.

Okay. Well, I will stay very high level, obviously, for competitive reasons. But we do have patent applications pending on this new product that we are introducing. And relative to DualTemp, we also have exclusivity in patent and trademark protection on that product as well.

Okay. Is there a wireless remote patent gone through?

The wireless remote, along with a few other tight kind of family of patents around that one will expire at the end of 2014. And important to note that we are not standing still, Mike. We have been quite aggressive on our product innovation and we know that this is one of our big three competitive advantages.

And as recent as this year, we have filed many advancements in our patent family. So we have a lot of actions going on here as we indicated, with the DualTemp as the first in a series of product innovations. And this new m and i series is a significant advancement in our core line that we will build up for years to come.

And then, that leads into my new next question. Your new product development pipeline -- how many years out does it extend?

Yes, we haven't been very specific because, again, of competitive, but it is greater than five.

Okay. And then last question. I'll maybe try this a different way. On a scale of 1 to 10, what is your confidence level in same-store sales accelerating to the high single digits?

Well, that is our best estimate at this time. It is based on our current trends as well as the programs that we have planned, like I said, including our significant increase in media investment in the second half as well as the product innovation, which is starting to ramp up here as we move into the back half of the year.

And then last question. How many of the DualAir bed coverings -- the temperature bed coverings are you selling per store per week right now?

We have not shared that specificity on the DualTemp. Again, I did share that we are seeing a balance -- a good balance between both new customers and existing customers. And we are seeing a healthy attach of the Sleep Number bed to a new DualTemp customer.

So we are really bullish about this product that it is a product that solves a significant sleep issue -- a common sleep issue. And this layer can be used with all mattress brands. So that is a great source of driving traffic to Sleep Number and contribute to our awareness.

Okay. And just to clarify, you're only assuming the current run rate, what you are experiencing right now, persists through the back half of the year and in your sales guidance.

For the DualTemp, that is correct.

Okay. Thank you.

Yes, thank you.

At this time, I'd like to turn the call back over to the Company.

As there are no further questions at this time, we will now conclude the call. Thank you again for joining us today. We look forward to discussing our third quarter 2013 performance with you in mid-October. Good afternoon.

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