Sleep Number Corp (SNBR) 2013 Q3 法說會逐字稿

Good afternoon. Welcome to Select Comfort's third-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, Senior Director of Investor Relations. Thank you. You may begin.

Thank you, Angie. Good afternoon, and welcome to the Select Comfort Corporation third 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 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 Shelly for her comments.

Thanks, Dave. Good afternoon, and thank you for joining today's call. Financial performance for the quarter was below expectations, even though our execution was solid. We experienced favorable operational and customer-focused metrics such as brand consideration, online search, and record levels of in-store conversion rates. And we competed well, as evidenced by industry market share gains in each of the last four months reported by ISPA. However, we believe our execution was muted by progressively more challenged macroeconomic and consumer environment than anticipated.

As we previously communicated, our media formula was back on track in the second quarter. Therefore, we increased media by 27% in the third quarter to drive awareness and traffic. Marketing efforts focused on supporting product innovations, local market development, and the Labor Day market share event. Consumers showed strong interest by visiting our website at record levels. And we executed well in our retail stores, leading to both record conversion and a 6 point step up in sales growth from second quarter.

However, total store traffic was light, which impacted the quarter. Net sales grew 7% to $264 million. Company comparable sales were down 1%, and earnings per share declined 22%. While we believe we are in a more challenged environment, we are well positioned to compete effectively. We have a strong balance sheet, a commitment to cost containment, and competitive advantages that differentiate us, including proprietary, benefit-driven products and a unique retail experience associated with exclusive distribution.

I'll now provide additional details about third-quarter performance and fourth-quarter initiatives, which we believe will both strengthen our near-term performance and further position us for sustainable, long-term, profitable growth. With regard to our proprietary product competitive advantage, at the end of July, we launched the new Memory Foam and Innovation Series with Advanced DualAir technologies. Our research indicated these new products would provide increased comfort benefits for our customers, and our metrics are validating this.

Consumers also responded positively to the advertising of these new products, as indicated by a 34% increase in search volume and a 17% growth in sales during the three-week launch period. At the end of September, we placed advertising emphasis on our new DualTemp layer, which can be used with any mattress brand. Our innovation message again drove significant traffic to sleepnumber.com, with search volume increasing by 76%. Purchase intent for Sleep Number has continued to climb since we began to introduce our series of product innovations in June.

In fact, we exited the quarter with leading indicators of sales, such as product consideration and purchase intent, at 52-week highs. Yesterday we introduced our new Performance Series with advanced DualAir technology at prices ranging from $2299 to $2799. This technology platform will become core to our entire product line. In this series, we've also incorporated proprietary PlushFit foam with ergonomic, contouring support and soft, cushioning comfort for pressure relief.

We feel so strongly about the customer benefits that we've created an entire line of PlushFit products, including a pillow, a bed layer, and the bed itself. We're supporting this introduction with national advertising.

Looking ahead, we will continue to support advancements in product innovation. In the first quarter of 2014, we will start to introduce new and transformational products. These products begin to leverage earlier investments made in an R&D partner, as well as the acquisition of Comfortaire.

Now I'll speak to our competitive advantage of exclusive distribution. Developing existing markets and relocating or expanding existing stores continues to be a priority for us as we improve availability for our customer. We made progress in the third quarter, and will continue to advance this high-return initiative in the fourth quarter. Highlights include -- in the third quarter, we've strengthened our national presence by further developing 23 markets with new stores, relocations, and expansions.

Our aggressive growth market development strategy remains on track. The goal is to double market share within three years of launch in each of the identified 13 large, underdeveloped markets. We believe this strategy will continue to yield strong comp growth in the near-term, and future margin expansion. Our unique retail experience, which focuses on our customers' individual sleep needs, continues to result in increased repeat and referral sales, especially when combined with new product innovations. These metrics have kept pace with our growth and are healthy indicators of customer satisfaction and future sales potential.

We are operating with a strong cost control discipline in this challenged consumer environment. We are committed to short-term profitability, and are pulling back on discretionary expenses for the fourth quarter while continuing to leverage our supply chain for operational efficiency.

In summary, we expect improved performance in the fourth quarter due to increased awareness related to product innovation, cost containment, and easier year-over-year comparisons.

Wendy will now provide additional details about our quarterly performance and outlook for the year.

Thanks, Shelly. Good afternoon, everyone. There are three key topics I'll cover today. First, while our third-quarter performance was below our expectations, related to a more challenged economic and consumer environment, it represented improved trends from second quarter with a return to market share growth. Second, given the current environment, we are lowering our outlook for the fourth quarter. We will update you on our 2014 and longer-term outlook during our year-end call in late January.

And third, our balance sheet remains strong, with $164 million of cash and securities, and no debt at quarter end, as we continue to progress our consumer growth strategies while maintaining a frugal, cost-conscious focus throughout the Company.

Third-quarter EPS of $0.36 was 22% below prior year, which represented a step up from the second quarter. Results were below our expectations primarily due to lower-than-planned sales. Total net sales in the quarter increased 7% to $264 million, which represented a 6 point step up from 1% sales growth in the second quarter. Comparable sales within Company-controlled channels were down 1%. On a two-year stacked basis, comps were up 20%.

Product innovation continues to be a contributor to our growth in the short-term, with even greater potential for the long-term, with our current R&D pipeline. The 6% growth in Company-controlled channel sales during the quarter included a 3% increase in ASP, driven by innovation; specifically, the introduction of DualTemp, as well as pricing actions over the past 12 months. On a two-year stacked basis, ASP was up 20%.

Mattress units also grew by 3%, a 5 point sequential improvement from Q2. On a two-year stacked basis, mattress units were up 9%. Our local market development strategy remains on track, with store actions delivering an average payback of 12 to 18 months. New stores are averaging approximately $2 million of sales in their first year, with cannibalization that remains below 15%. And they are outperforming the balance of chain in year two.

Relocations from mall to non-mall locations are producing particularly strong results, with double-digit topline lift versus balance of chain, and greater than 30% increase in average four-wall profit.

Net new store additions over the past 12 months contributed 7 points of sales growth during the third quarter, and we remain on track to end 2013 with 435 to 445 stores. In the quarter, we added 16 new stores and closed six, which included the relocation of six mall stores to new, non-mall locations within the same trade area. We also remodeled nine mall stores with our new store design, including improved locations and expansions.

As Shelly stated, we increased market share during each of the last four months reported by ISPA, as our growth rate in both the sales and mattress units exceeded the industry average in May through August. Operating margin in the third quarter was 11.6% compared to 16.3% in the prior year. This year-over-year decline included a 370 basis point increase in sales and marketing expenses; a 200 basis point decrease in gross margin; and a 20 basis point increase in R&D, partially offset by a 120 basis point decrease in G&A.

Sales and marketing included 280 basis points of marketing deleverage, with 240 basis points driven by media and 90 basis points of selling expense deleverage; with 60 basis points driven by incremental depreciation associated with new, relocated, and remodeled stores.

Gross margin in the quarter of 63.1% was slightly below the 63.3% rate in the first half of the year. During our current-year Labor Day event, we offered a limited edition bed model that had a lower gross margin rate than last year's limited edition model. As planned, third-quarter gross margin rate was impacted by the inclusion of lower-margin DualTemp sales.

Gross margin was also negatively impacted by higher product returns, primarily due to a larger-than-expected impact from the customer-focused decision to increase our 30-night trial policy to 100 nights. These factors were partially offset by supply chain efficiencies.

G&A leverage reflected discretionary cost containment and lower performance-based compensation, partially offset by incremental depreciation associated with growth-related capital spending. As part of our cost reduction efforts in the quarter, we've cut over $2 million of planned discretionary spending out of G&A.

Moving to our 2013 guidance, we have updated our full-year GAAP EPS outlook to between $1.14 and $1.22. Our outlook for the fourth quarter of between $0.18 and $0.26 assumes, at the midpoint, low-double-digit growth in total net sales and mid-single-digit comps against a backdrop of an easier comparison to prior year.

We are providing a wider guidance range for the fourth quarter than in prior years, given the current level of uncertainty around the consumer environment.

Regarding the balance sheet, we ended the quarter with $164 million of cash and securities, down $13 million from year-end. The change included year-to-date operating cash flow of $90 million, which was offset by year-to-date CapEx of $58 million; strategic investments of $19 million; and stock repurchases of $30 million.

Our capital allocation strategy continues to prioritize investments that further strengthen our competitive advantages, including proprietary product innovation, local market development, and technology infrastructure. We continue to repurchase shares in the current quarter. And we expect to end the year with a cash and securities balance well above our minimum target of $125 million. We also expect our balance sheet to remain debt-free, as our internally generated cash flow is sufficient to fund investments in growth.

In closing, we remain confident in our long-term strategy, focused on further differentiating ourselves with our customer. Our updated full-year outlook reflects performance trends in this more challenged consumer environment. It also includes additional cost reductions we have executed, aimed at driving year-over-year growth in EPS. We look forward to updating you on our 2014 and long-term outlooks during our year-end call in late January.

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

Thanks, Wendy. During the quarter, our metrics and market share gains demonstrated the importance of product innovation and local market development associated with our exclusive retail experience. We firmly believe that our dedication to the customer, along with continued strengthening of our competitive advantages, will lead to sustainable, long-term growth.

In particular, we are excited about our 2014 introductions of transformational sleep innovations, and the role they'll play in driving growth. As we invest for the long-term, we are committed to delivering increased shareholder value in the short-term. We have made adjustments in our spending and forecast for the balance of the year to better reflect the current environment. These adjustments continue to prioritize product innovation.

Thank you to our employees and partners for your commitment to our mission of improving lives. And thank you to our investors and analysts for your interest in our Company and its prospects for long-term shareholder value creation.

Wendy and I now welcome your comments. Angie, you can open up the line.

(Operator Instructions). Peter Keith.

Hello. It's Piper Jaffray. Good afternoon, everyone. I guess I was a little bit confused on the cadence of the sales trends. You talked about the month of June was positive. You mentioned that three months ago. Sounds like when the new products launched in late July, I think you said that the sales for those weeks were running up 17%. You had DualTemp, probably a bigger impact in Q3. And then as we shake out, you came in, on a comp basis, at a negative 1%.

So I guess I'm curious if -- was the quarter choppy throughout? Or was there some type of deterioration in the second half of the quarter that caught you by surprise?

Yes. Peter, this is Shelly. Overall, our pace of sales is lower, and it became clear as the quarter progressed. We, overall, saw the consumer more reserved and particularly during the Labor Day event. The early part of the Labor Day event and the later part of the Labor Day event. The Labor Day weekend itself, we had robust performance and exceeded our expectations. Normally we don't give this kind of color about the monthly trends and some of the [in-period]. But we felt it was important to bring forth the clarity of what this has been looking like. Because it did surprise us coming out of the second quarter, when we had our media formula back on track, and began to put our media weight against the formula and saw the corresponding performance.

And then as we moved through the quarter, we did see a progressively more challenged consumer environment. And at the same time, our metrics were very strong; the interest in the brand. We exited the month of September with high points in purchase intent and consideration that we haven't seen for over 52 weeks. And those are leading indicators to sales, but the traffic was more muted than we expected.

And your point about DualTemp, when we did begin advertising DualTemp, we did see that big spike in search again, and the activity on our website with great interest. And that was of course very late in the quarter, at the very end of September.

Okay. And I guess given where things shook out for the third quarter, and it sounds like things got a little choppier towards the end, as you contemplate some of that consumer weakness with the Q4 guidance of mid-single-digit -- because it, at least from our perspective, it seems like you are sort of holding some 2- and 3-year run rates for the full quarter when things may have lightened up in the last few weeks.

Yes, so, with respect to our fourth-quarter guidance, we did adjust it to reflect the more challenged environment that we are in. You're right -- it does reflect -- actually, at the midpoint, reflects a small decline in the 2-year. But, again, to your point, we are up against an easier comparison in Q4, as you will recall, from prior-year.

Okay. And last question that I have then, with these increase in advertising -- and I'm going to check my notes here, but I think you said it was up 20% to 30%. In the way that the sales shook out -- yes, it was up 27%, excuse me. The way that the sales shook out for the quarter being, at least on a comp basis, negative, does that cause you to rethink your advertising spend overall; that maybe it's not driving the purchase behavior that it has in the past?

Yes, when we put the strength behind the media spend for the quarter, we did support our product innovation; the Labor Day event; and also the local market development, inclusive of aggressive growth. And we're always iterating on our media formula with specific tests against the current consumer environment. And of course we did so in Q3. And so we do have insights from, for instance, the Labor Day period, on how we would adjust our spending as we move forward to drive performance in the Columbus Day event, as well as the upcoming Vets event as well.

Okay. Thank you for the feedback. I appreciate it.

John Baugh.

Good afternoon. John Baugh with Stifel. We've heard reports around Columbus Day that are pretty soft, Shelly. And you just made a comment about marketing and adjusting. I don't know if you can provide anymore color, what you're seeing right now. And of course I believe it was the last couple of weeks of the fourth quarter last year where you really tailed off, so just curious what the pace was like year-over-year for the first few weeks here.

John, we'll probably hold pretty tight here about not commenting on the quarter we are in, with just a few weeks into the quarter in particular. But what I will reiterate is our fundamentals are strong across the business. Our operating metrics, our consumer-focused metrics -- and you're right, we're up against some softness from prior year. So when we look at our overall business, we have very strong confidence about how we're running it; how the consumer is responding.

It is a more muted environment overall. And we're aggressively going after cost-containment while continuing to progress forward, as we intend with product innovation and the other growth aspects of our business.

And you provided some color around Labor Day. But I don't know -- maybe it's just me, I'm more confused than clear about -- was Labor Day good? Was Labor Day bad? Was August below expectation? Or was it really September that was way off? I need some help.

The Labor Day event, it spans -- it's a fairly long event, and it spans with the last couple of weeks of August, as well as the first few weeks of September. And the weight of course is in September, and that's really when we saw the progressive, more challenged environment from a traffic perspective. The weekend itself, when the urgency needed to be there on the consumer's behalf, she came in and the traffic was there. And that speaks to the overall environment of the consumer being more reserved.

And (multiple speakers) I assume, based on the numbers you gave, I think you said you guys were positive; but, of course, you grew store count. So I'll assume unit sales per store were negative in the quarter. Is that correct?

Yes, so, comp units were negative, correct.

Thank you.

Budd Bugatch.

Good afternoon. Budd Bugatch with Raymond James. Let me go over a couple of things, if I could. If I tried to get the endpoints of sales to match the guidance, I get to like a negative single-digit, mid-single digit comp, to up at the low point. And maybe just that double-digit comp for the upper end. Is that about right, Wendy?

You're in the ballpark. You're talking about Q4 and the fact that we have the mid-single-digit comp guidance, and you're putting the range around it?

Yes, ma'am.

Yes.

Okay. And can you tell me a little bit about the new stores, how they performed? I think units per store look like they were down about 5% year-over-year. And how are the new stores doing?

The new stores, as I said in my remarks, the new stores continue to consistently perform well, at an average of $2 million per store. What's particularly encouraging for us is how they are performing in their second year, where we are seeing some really nice lift versus the balance of chain in their second year. And then I also talked about, with some of our relocations from malt to non-mall, are also doing quite well, both from a topline standpoint as well as profit improvement in those relocated stores.

Okay. Media spend in the fourth quarter -- did you make a comment on that? Did I miss that? I don't think I heard it, if --

Yes, Budd, hi, this is Shelly. No, I did not mention and it. However, I will mention that we are looking at a media spend right now similar to percent of sales as here in Q3. And obviously we'll be iterating to strive for a greater efficiency. But from a challenged traffic environment, we're going to continue to drive for market share through the quarter.

So, in Q3, was it like -- if I calculated it right, it was 15.4% of sales. Is that right?

Yes, that's --

15.3%.

Okay. And so that's what you look like for the fourth quarter as well, in that --?

Approximately.

So, where is the discretionary savings going to come from? G&A? Or is it going to come out of people and other -- occupancy and other? How are we getting that?

Well, we are being aggressive on the cost containment side, Budd. There are opportunities on the G&A side. We talked about this with respect to Q3, where we pulled $2 million of planned spending out of G&A; overhead expenses. We also have opportunities, for example, in our fixed marketing and selling. But it is a corporate-wide initiative that really is being stepped up here in the fourth quarter; and as we plan for next year, given the current consumer environment.

Okay, but the G&A in the third quarter actually matched that of the second quarter. It was $15.2 million versus $15.4 million. So is that about where it's going to be for the fourth quarter? It's going to be about flat with the third?

Well, I'm speaking to it from a leverage standpoint. And we did see some small decrease there. It's been pretty steady quarter-to-quarter. And so, for Q4, we don't see significant increase.

(Laughter) Is that a yes or a no? Help me. I need John's help now. I'm not sure I understood the answer. So it's about $15 million or so? Is that about the right number, Wendy?

Yes. It will be in line with what we've seen this year. And it's been in that $15 million to $16 million range. And we will continue to see leverage as we've seen throughout the year.

Okay. A couple of other quick points. Gross profit obviously was down from what we were estimating. And I take it that that might have had some impact for the clearance of Performance Series, waiting the new merchandise. Can you quantify that?

So, let me talk about the drivers there, Budd. The one large one -- couple that with planned here. One is the limited edition bed with the lower gross margin rate than the prior year's limited-edition model, as well as the inclusion of lower-margin DualTemp.

Now, the one that I did call out in addition to that is the fact that gross margin was also impacted by higher returns, primarily due to this larger-than-expected impact from our decision to increase our trial policy from 30 nights to 100 nights. And as I said, these factors were offset by efficiencies in our supply chain.

I understand that. And that shows up under crude sales returns, does it not, on the balance sheet? And I noticed that had a bump up, at least versus year end.

Yes. That's correct, Budd.

Okay. And does that number look like it's going to be -- is it a change? When did you make that change during the quarter? Are we at the ending run rate now for the future?

We made the change in late April, Budd.

Okay. So then that should have affected -- okay. All right. Thank you very much.

Brad Thomas.

Yes. KeyBanc Capital Markets. Just wanted to ask about the competitive landscape. One of the big foam players has a product that obviously has some adjustable features. It's been rolling out throughout the year. It's been a little bit regional in its rollout. Can you tell how much of an impact that may have had here in the quarter?

Yes, Brad, we do not see impact from any competitors' adjustable air product, nor do we see significant features that would demonstrate that the product has any superior features over ours, or benefits.

So, as you look at the trends of the quarter, it was really broad-based; not anything you would correlate it from a competition standpoint?

That's exactly right.

Yes, okay. And then with respect to the DualTemp, everything that we hear is that it's a very well received product. Could you just speak little bit more to maybe how much it is contributing to the overall business, and what sort of a dynamic it has with the core business from maybe a cannibalization standpoint?

Sure, Brad. So, with respect to DualTemp, we are pleased with the performance, especially this consistent role that it plays bringing new customers to the brand. And with half of purchasers that are new to the brand, and then over one-third of these then buy a bed the same day.

And let me answer your quantification question from an ASP perspective. I spoke to our 3% growth in ASP. And DualTemp was a significant contributor to that 3% growth in ASP. We're not seeing much in the way of cannibalization, to your final question, Brad.

Okay. And then maybe just lastly, as we think about the third quarter, there were a number of closeout events on the m and the i line, and I think the p line fell into the quarter as well. Obviously we don't know, at this point, what you're going to do in the coming months. But usually those have given you a lift on the unit front. Anything you could speak to in terms of maybe the lift you might have gotten from doing those closeout events?

Yes, Brad, I think it speaks to, overall, particularly in September, when we were closing out of the p series, which is our most popular series. This more muted reserved environment that we are in, and it underscores exactly what we've been speaking to, just not the overall lift. The shape and all the metrics are there, but it's the level, that traffic level.

All right. Thank you, and good luck.

Thank you.

Josh Borstein.

Hi. Longbow Research. Thank you for taking my questions here. I appreciate giving some color on the cadence of the quarter. I was wondering if you could just tell me, with respect to September specifically was -- was the second half of September better or worse than the first half of September for you?

Well, Josh, I spoke to what transpired in the Labor Day event. And the Labor Day event obviously is the bigger revenue of the quarter -- or bigger revenue of the month.

Okay. So is it your sense, then, just exiting the quarter, how it ended -- did it end on weaker tone than the beginning of September?

Yes. And the Labor Day weekend was at the beginning of September, and that was a strong weekend for us.

Okay, okay, thank you. And then during the Christmas holidays here coming up in 4Q, I know typically there's an influx of people into mall locations. And considering most of your stores are still mall located right now, I was hoping you could just tell me how the holiday season typically plays out for you; if you tend to see a spike in sales around the holiday due to the increase in mall traffic. And if so, if it applies more to accessories rather than mattresses.

Yes. We have a robust fourth-quarter business, and play well in the holiday shopping. We're really excited about having the product innovations that we do this year, which is a plus over prior year. And they will be the centerpiece for us in the gift-giving initiatives. So this is something we know how to do well, and we've been executing against the holiday season for many years.

When we started moving to the non-mall locations, we wondered how they would fare in the fourth quarter. And we've been able to generate a very similar level of performance in our non-malls, as well, with our products and some of our specific marketing tactics that we employ.

Great, thank you. And just on the gross margin (technical difficulty) that Budd had, it sounds like the closeout of the p series -- did it have an impact on gross margins at all?

Now, it was minimal. So, no, nothing material.

Okay. And is the new -- the refresh of the p series, does that carry with it a higher ASP, like the i and the m that you recently introduced?

Yes. So, on the new p5 and p6, which we just launched this week, we did take a $200 price increase on both models.

Okay. And considering the added functionality of those refreshes with the i, the m, and now the p, do those -- do they carry the same gross margin profile as their predecessors?

Yes, it's similar, Josh.

Similar, okay. And then just last one for me, on the mid-single-digit comp guidance, is there any color you can give with respect to ASP versus units?

Yes. We do expect growth in both units and ASP in Q4.

Thank you very much.

Keith Hughes.

Keith Hughes from SunTrust. Couple questions -- it looks like you're going to grow about 30 net stores by the end of 2013. Do you have any view of 2014, what kind of store growth we would see then?

Yes, so what we've showed in the past is about a 6% to 9% annual increase in stores, Keith. We'll provide more specifics, obviously, when we talk about our outlook in January.

Has the trends you've seen this year -- will that change that at all?

The trends we're seeing in sales right now with the consumer environment?

I know you've had a tough year here on same-store sales for (technical difficulty).

Yes.

Does that change (technical difficulty) 2014?

No. As I mentioned, our local market development strategy is delivering strong returns. We're also in a very strong financial position competitively. We've rebuilt our balance sheet over the past few years with a healthy cash balance and no debt, to be able to operate in any kind of environment, including the one we're in now. And at the same time, be able to continue our investments in growth and investments that are delivering the types of returns that our store actions are delivering. So we don't, at this time, plan any change.

My second question, you had mentioned in the growth in AUSP in the quarter was assisted by the DualTemp. I was confused by that, given the price point of the DualTemp. It is a good bit lower than most of the mattresses in the store. Can you clarify that (multiple speakers)?

I sure can. Our ASP calculation is per mattress unit. So any time we sell a DualTemp layer, it is additive to ASP, just because the denominator is mattress units.

Okay. So this is not a -- okay, I see what you're (multiple speakers).

Yes, so anytime we sell additional DualTemp, bedding collection, or our FlexFit Adjustable foundations, those are ASP drivers.

The one-third attachment rate to buying a DualTemp mattress -- is that something you've seen since you introduced? Has it moved up and down? What has been the trend there?

Yes, it's been very consistent to there, Keith. And we've seen consistency with respect to the new customers that we're bringing to the brand with DualTemp -- particularly when we advertise a DualTemp -- as well as the attachment rate for those new customers.

That's all for me. Thank you.

(Operator Instructions). Todd Schwartzman.

Hi. Todd Schwartzman, Sidoti & Company. Good afternoon, everybody. Wendy, I think you had spoken to the SG&A reductions in the third quarter. Could you quantify what the forward-looking cuts look like, and when you could plan to put those in place, if you haven't already done so? And maybe discuss the specific sources of those cuts.

Well, I'll speak to it relative to what we did in the third quarter. In the third quarter, as I mentioned, we had about $2 million of planned G&A spending that we cut. And we are stepping up those efforts now in the fourth quarter, and as we plan for next year. G&A is not the only place, obviously. This is a Company-wide very aggressive move that we're making, and opportunities in fixed marketing and selling as well; as well as additional efficiency opportunities in our supply chain.

Then, on the ad spend, specifically for PlushFit, was that incremental to what you had planned several months back? Is it -- was there an offset there, a reduction in some of the other product advertising?

Todd, are you speaking to the fourth quarter?

I -- yes, yes.

Okay. Yes, as we introduced the p series, these -- we will be supporting it with national advertising. It's planned, and it would be coming from a similar ad spend as prior year, with a different message.

Okay. When you made the shift in the duration of the trial period to 100 nights, was that intended initially to be temporary or permanent? And, irrespective of that, what have you decided to do as far as continuing that or not?

Yes, no, that was not meant to be temporary. And we made the change, Todd, because it was the right thing to do for our customer. And it also removed a potential barrier to purchase, as well. Now, we are taking appropriate actions to mitigate the increase in returns as well.

Just so I don't misunderstand, that 100-night is still in force, and will be so indefinitely?

Yes.

Okay. And in terms of the macro picture, you had mentioned a challenged environment, probably -- oh, I lost count. And I think we now have a sense of how the quarter played out, where September was the culprit. But you're doing a good job on the share gains, certainly. But what would you look to as a leading indicator, perhaps, that those challenges on a macro level have lightened up somewhat?

Well, certainly, leads; we are a lead-based business. We have many metrics in our vertically integrated business model, and leads is a great one to be able to understand where that traffic is at, and how responsive the consumer is. And also the strong correlation with search and leads; and, therefore, as that gap is closer together, it gives us a great indication. As I indicated, coming out of the third quarter we have very high consideration and purchase intent, which is a leading indicator of sales. So, as things evolved from a consumer behavior perspective, we expect that to come to fruition.

And, Todd, if you think about it from a purchase cycle standpoint, we mentioned the fact that search and online traffic were at record levels. So what that means is that the advertising is resonating with our target customer. And we also saw conversion -- once customers get into our store, as Shelly mentioned, we are seeing record levels of conversion. It's that middle step of moving from that interest and lead into a store. And so as to your question, that's what gives us a lot of clarity with respect to what happens with sales in the quarter.

And is that intent to purchase question posed in the form of next 12 months, or is it more open-ended?

The specific metric is a measurement of brand of -- what brand you're most likely to purchase if you are in the consideration for a particular category.

But it's on an open-ended basis, it sounds like.

Open-ended in regard to --?

In regard to immediacy; over the next X number of months, I intend to purchase a mattress. Here's what I'm considering in the next X number of months.

Yes. And this is purchase intent, different than consideration. But they are similar metrics, but one is more decisive, that you've made a decision around a brand, and that's the purchase intent one.

Got it. And also on Web traffic, I know you spoke to it with respect to a couple of different products. But what -- if you have these numbers -- what was the delta in total Web traffic for the Company?

Well, we do not get specific about what the delta or the specific measurement by any certain period on our search. And some of that is available to be able to review, but we are not sharing the specifics around it.

I guess I'll ask it this way -- do you find that the changes in foot traffic, store traffic, is commensurate with Web visits? Or is there more of an inverse relationship, perhaps, because people that are maybe not visiting the stores are doing more of the work online before coming in?

Well, we know that the online work is important, and we continue to see that in a favorable way for our business. When they do the search online, as well as visit our store and have an extraordinary retail experience, that leads to the high conversion. And as I stated, we had a record level of conversion in the month of September. So we see that search is very valuable, and contributing to the overall conversion in our stores.

And for the third quarter, that conversion percentage was -- what?

We have never shared our conversion numbers. And this time I am speaking to where that conversion is at from a level, in order to give the clarity of how the business itself is operating.

Could you possibly give the improvement in terms of number of percentage points, without you telling us what the base was?

I've shared what we're going to on this particular point.

Okay. Sounds good. Thanks a lot.

Ken Cavazzi.

Infinitas Capital. Hi, Shelly. When you joined as CEO, and at your Investor Day in May of 2012, you chose to give a very aggressive set of growth targets and operational performance objectives -- talking about $1.5 billion of sales; operating margin expansion to 15% in 2015; same-store sales comp growth of 10% to 12% in 2013 and thereafter.

My questions are, does this Company have the visibility to make these types of projections? If the answer is yes, what did you fail to see? Where were your projections wrong? And are you still as optimistic about the future as you were in 2012?

Hi. Yes, first of all, in answer to your first question about -- do we have the ability to see our projections and our trajectory? Yes, we do. Second, what went wrong? At the beginning of this year, we had a significant misstep in media, in our media buying, and that did impact the first half of this year to a significant degree. And we identified the issue quickly; we took the appropriate actions; it did not have a lingering impact on our consumer. It did not impact the consumer in a way that would carry beyond the corrected period.

We did state at the time, in first quarter, that it would take us until the end of the second quarter to regain our foothold and have the business back on formula, particularly being a lead-based business. It took a significant amount of time to bring all that back in line. By the end of the second quarter, we were on formula, and we began to put the media weight against the overall formula.

We saw progression in the quarter, and then we moved into this more muted consumer environment, which impacted the tail end of the quarter as we move through, and just more tepid overall. At the same time, we've been seeing the progression forward in all aspects of the operating metrics that really speak to the future.

And one other, I think, important point to make is -- although this happened, and it was an internal misstep in the first quarter, and it affected the first half of the year -- we continue to move forward on our longer-term initiatives, particularly prioritizing product innovation and infrastructure with local market development and technology.

Because of the confidence we have in the future of this business, and the potential we have by strengthening our three big competitive advantages -- a proprietary product, exclusive distribution, and control of that end-to-end brand experience. So while the year has not played out as we wanted it to, as we expected it to, we had a significant issue; we dealt with it. We kept the rest of the business on track to be able to progress, so that we can come out of the year and move forward with transformational product beginning in the first quarter of 2014.

And this is all with the intent of long-term, sustainable, profitable growth. And that's our focus of our strategy, and it was the focus of our Investor Day in May of last year.

Okay. What worries me is that your stock is at the same price it was in 2003. And this is despite the fact that your business has good underlying economics. And in my opinion, this is because management over-optimism has hurt select shareholders in the past, whether it be an aggressive expansion into wholesale, too rapid square footage growth, aggressive share repurchase into a financial calamity. What gives you guys the confidence that store expansion is the right move, when your store productivity is pretty much collapsing?

Well, our store productivity at the end of 2012, which is consistent with our investor debt, was $2.2 million. And that was double where we were just a few years before. And in fact, we ended up with the sixth largest, most productive dollars per square foot of any retail brand in the US at the end of 2012. We've been very careful about our store growth. And, in fact, we first and foremost focus on doubling that average revenue per store before we begin to add net new stores.

Our actions around real estate have been far more about our existing store portfolio than it has been to add net new stores. So we've been repositioning to relocate many stores from malls to non-mall, or reposition in the mall for a more superior location. And we're seeing a high return on investment on those actions, and that is inclusive of some larger footprints. However, the return on investment and the growth is double-digit from where those stores were.

Where they impacted by our first-quarter missteps? Absolutely. But they are on track from a metric perspective as we move forward. And this is one that we are not going to get in front of our -- ahead of ourself on store growth. Yes, we had a different retail buildout in the past, and that's not where we are today. We exited retail partners in 2009 in favor of embracing the big competitive advantage of exclusive distribution. And that's where we're focused right now as we move forward.

Thank you. I'd like to hand the call back to the Company for closing comments.

As there are no further questions at this time, we will conclude the call. Thank you again for joining us today. We look forward to discussing our fourth-quarter results and full-year 2013 performance with you in late January.

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