Sleep Number Corp (SNBR) 2014 Q1 法說會逐字稿

Welcome to Select Comfort's Q1 2014 earnings conference call.

(Operator Instructions)

Today's conference call is being recorded. If anyone has any objections, you may disconnect at this time.

And now I'd like to introduce Mr. Dave Schwantes, Senior Director of Investor Relations. Thank you, you may begin.

Thank you. Good afternoon and welcome to the Select Comfort Corporation first-quarter 2014 earnings conference call. Thank you for joining us.

I am Dave Schwantes, Senior Director of Investor Relations. With me today is Shelly Ibach, our President and CEO; and David Callen, our new Senior Vice President and CFO. Since David only joined our Company last week, Shelly will be handling the comments today.

This telephone conference is being recorded and will be available on our website at www.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.

We acknowledge that markets are closed tomorrow and we apologize for any inconvenience that may cause you. Management will be available for investor calls this evening and all day tomorrow.

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, everyone, and thank you for joining our first-quarter earnings call.

First I'd like to welcome our new CFO, David Callen. His financial and leadership experience at a vertically integrated Company like Ethan Allen will be advantageous to us as we advance our strategic plans.

I'm also pleased to announce that Patricia Dirks has joined the Sleep Number team from Target Corporation to lead our human capital efforts. We are excited to have these two experienced business partners round out our strong Senior Management team.

Our first-quarter performance was consistent with our expectations in the outlook provided on our February call. As previously communicated, we expect full-year 2014 EPS to be consistent with the prior year. We also indicated that expenses and investments associated with the most significant new product and marketing advancements in the Company's history would impact earnings in the first half of this year.

These actions combined with our market development initiatives and systems infrastructure investments position the Company for long-term profitable growth as we strengthen our most important competitive advantages, proprietary products, exclusive distribution and end-to-end customer experience.

I'll start with the high level financial overview before providing an update on our business initiatives. Our net sales grew 7% to $276 million with EPS of $0.31. Comparable store sales increased 2% versus prior year. Company-controlled channel sales grew 9%, comprised of an 8% increase of ASP and 1% from mattress unit growth.

On the February call, I highlighted our three strategic growth drivers which include product innovation, marketing effectiveness and local market development. I'll begin with product innovation. As we've discussed over the past year, a critical lynchpin of our strategy has been to invest in product innovation and technology that delivered meaningful sleep benefits to the consumer. We expect these proprietary products to increase demand for our brand, accelerate growth and ultimately create value for all stakeholders.

Our investment in products and advertising in the first half of this year have begun to produce results as seen with our 8% ASP growth this quarter on top of a 14% ASP growth in Q1 of last year. During the quarter we continued to strengthen our value equation with breakthrough technology at both the high end and opening price points of our product portfolio. We expect these actions to increase brand awareness and consideration with a broader consumer base.

An example that provides clear competitive differentiation in the marketplace is our award-winning Sleep Number x12 bed with Sleep IQ technology. We launched this product innovation in February in nine pilot markets after unveiling it in January at the International Consumer Electronic Show.

As a reminder, the x12 bed integrates several technologies, with our core DualAir technology for a simple communication platform that tracks and monitors your sleep without the need for any wearable devices, communicates how you slept via your personal Sleep IQ score, and shows what support and comfort adjustments you can make to your Sleep Number setting in your daily routine to improve your sleep.

The x12 bed also incorporates a partner snore feature that raises your partner's head to temporarily relieve common mild snoring, a universal remote and simple voice commands that offer effortless control, a timer feature that returns you to your favorite massage or sleeping position and turns off the light and under bed lighting that softly illuminates a pathway in the dark. We've already taken the next steps to deploy several of the benefit-driven features across our broader product portfolio.

In March, we introduced our proprietary Sleep IQ technology as an option on all of our Sleep Number beds in nine pilot markets. Sleep IQ technology is a breakthrough evolution of our trademark commitment to improving the lives of our customers by providing individualized comforts. It places us on the leading edge of consumer trends by empowering increasingly data-driven consumers with the ability to know and act upon information about their sleep in a simple and intuitive manner.

In addition to the Sleep IQ advancements during the quarter, we had a number of national product launches in late February, including the all new Classic series with increased comfort and support features to strengthen our opening price points which start at $999, a new FlexFit adjustable base series with features such as the Partner Snore technology. We also added an opening price point FlexFit base with head only adjustability for $1199.

Another proprietary innovation that is strengthening consumer value is our new patented mattress design called the FlexTop which is now available across our entire line. This design enables individuals to independently adjust the top half of their side of the bed while still sleeping together on one mattress. This series of innovations illustrates how we are able to deploy aspects of x12 technologies across our product line to bring increased comfort and value to consumers.

We are seeing increased FlexFit and FlexTop sales, which is reflected in our ASP growth of 8% over prior year. And we are encouraged by the consumer's reaction to the new C series, which we expect to contribute to unit growth.

As we have commented previously, we expect the investments related to these innovations will take time to achieve scale in the current consumer environment. But early results are validating the extensive testing we conducted prior to bringing them to market.

And this leads me to our next initiative, improving marketing effectiveness and traffic. There are three strategies we are pursuing: expanding our Know Better Sleep campaign, which is our largest and most tested creative in our history, optimizing the medium mix including shifting investments into more productive media, and better aligning our media buy with our broader customer target for improved efficiencies.

Our Know Better Sleep campaign is an integrated campaign that features introduction of our product innovations and consists of multiple TV commercials, radio, digital, print and out of home advertising. While still early, key brand metrics showed improvement, and we expect the Know Better Sleep campaign to increase brand awareness, traffic, and unit sales.

Our marketing strategies also involve a series of tests related to overall mix and aligning our media buy with our broader target customer for improved efficiencies. We delivered 50 basis points of year-over-year improvement in media leverage on a slight increase in media spend in the quarter. We will broaden our testing in Q2 as we work toward our goal of leveraging media in the back half by over 100 basis points.

Overall, we are pleased with the progress in the product innovation and marketing initiatives. We achieved our strongest sales in unit growth of the quarter in the month of March.

Our other growth initiative, local market development, also advanced as expected. Exclusive national distribution is an important competitive advantage and allows us to strengthen consumer value as we focus on innovations that deliver individualized sleep benefits. Our comp stores average more than $2.1 million in annual revenue on a trailing 12-month basis. The repositioning of our real estate portfolio during these past few years has been an important component of our growth strategy.

One of our greatest opportunities is to continue to growth average annual sales per store to more than $3 million as we increase brand awareness and gain share in local markets. Today 11% of our comp stores generate more than $3 million in annual revenue compared with 6% of our comp stores just two years ago.

Our store growth over these past 12 months contributed 7 points of sales growth in the quarter, which was consistent with our plan. Store actions over the past 12 months have included 114 new, relocated or remodeled stores. As expected these improvements to our real estate portfolio resulted in approximately $6.6 million of incremental fixed retail store costs for the quarter, or 130 basis points increase in selling expenses.

In addition, variable store compensation increased by $3.5 million, or approximately 100 basis points in the first quarter. These incremental selling expenses were in line with our 2014 plan. We expect selling expenses will begin to leverage once again in 2015.

In summary, we have made good headway on our three strategic growth initiatives and we look forward to updating you on these initiatives again after the second quarter. On the February call, we discussed our expectation that a challenging consumer environment would continue through 2014. This was compounded during the first quarter by severe weather challenges, particularly in February. Most important to us was the impact on our customers, many of whom were disappointed when home delivery commitments could not be met as scheduled.

The impact was primarily in the northeast and midwest which caused us to shorten store hours, close stores and reschedule home deliveries. This in turn pressured our supply chain and drove higher logistics and customer service costs. Our teams have worked tirelessly to ensure that rescheduled customers were taken care of quickly, but nonetheless, we did not meet our expectations regarding our customer experience. Our challenges were instructive and are driving improvement.

Now let me provide some additional detail about the first-quarter financials. Our growth margin rate for the quarter was 62%. The 130 basis point decline compared to the prior year was primarily due to the impact of more generous return policies implemented in the second quarter of last year. As a reminder, we implemented the 100-night sleep guarantee because it was the right thing to do for our customer and it removed the potential barrier to purchase. The impact of the change in return policies will fully anniversary in the third quarter.

Operating expenses were consistent with our plans for the quarter and included the following: Selling and marketing expenses compared to the first quarter of last year were 270 basis points higher as a percent of net sales. This included 230 basis points of incremental selling costs discussed earlier. Marketing costs increased 40 basis points over the prior year primarily due to production costs associated with our new advertising campaign, which were partially offset by 50 basis points of media leverage.

Our remaining operating expenses grew 40 basis points as a percent of net sales compared to the prior year. This increase includes incentive compensation costs that are an important component of annual variable compensation for employees across our organization. G&A in the quarter also included a $1.2 million stock-based compensation benefit related to changes in our estimated forfeiture rates.

As noted in our press release, capital expenditures during the quarter were $16.7 million and depreciation and amortization was $9.2 million. We continue to expect full-year capital expenditures to be $70 million to $80 million. These expenditures are prioritized on our growth strategy with approximately one half related to systems infrastructure, one third on local market development and the remainder in support of product innovation and other projects. Our full-year depreciation and amortization is still expected to be approximately $43 million.

Our balance sheet continues to be healthy and strong enabling us to self-fund our growth. At the end of the quarter our cash and securities balance was $143 million. As you model the second quarter, our seasonally lowest sales period, we ask that you consider some additional granularity including: we plan to launch a new digital platform for our website. It is designed to improve our customers' on line experience with a faster search engine and more efficient navigation. As planned, this will add incremental depreciation expense of approximately $500,000 to the quarter.

Our second-quarter gross profit rate is expected to be similar to the 62% in the first quarter, including the impact of a more generous return policy and costs related to new product introduction. As planned, new product launch costs will add approximately $2 million to Q2 expenses compared to prior year, most of which will be reflected in sales and marketing expenses on our P&L.

Our initiatives and performance are on track with our plans and we are encouraged by the consumer response to our innovations. We remain confident in achieving our mid to high single-digit revenue growth outlook for 2014. We continue to expect positive sales growth each quarter, accelerating in the back half of the year including the benefit of 2 points of sales growth for the 53rd week. We anticipate the mix consumer environment to continue and slower sales growth in the first half.

This combined with incremental costs to support our initiatives will challenge our near-term bottom line. As a result, we expect to -- we continue to expect EPS to be roughly flat this year compared to 2013. We expect our strategic initiatives and related investments to strengthen our competitive advantages while delivering increased profitability and returns for our shareholders in 2015 and beyond.

Thank you for your attention and we now welcome your questions. Jenny, would you please open the line for questions?

(Operator Instructions)

Mr. Peter Keith, Piper Jaffray.

Actually this is Jon Berg on for Peter Keith, thanks a lot for taking our questions. Based on our pricing work it looks like you've taken up prices really across the bedding line, but I guess this is a little bit surprising to us, given that it appears that your comp units appear to be down on a year-over-year basis. Are you comfortable with your units per store continuing to trend down even though you're taking price up?

Pricing is related to our ASP and we had an ASP growth of 8% in the quarter, and that was on top of a 14% growth last year first quarter. The comp units, you're right, we had a 1% unit comp in the quarter, Jon, and so that would translate to comp units being down. Our initiatives, of course, are focussed on improving unit growth, as well as ASP growth, and that's what we expect from our new media and marketing initiatives along with the product innovation.

Okay, that's really helpful, Shelly. And looking at the beds, they look great by the way, too. But thinking about those initiatives and how they play out throughout this year, is there a quarter where you can really maybe point us to where you expect to see some kind of inflection in the comp units?

Well as I stated, we just launched our new product innovations at the end of February and advanced our advertising campaign in early March focused on those product innovations. And we had our strongest month in both sales and units in the month of March. And we look forward to continuing to move forward with these initiatives and giving you an update after the second quarter.

Okay, thank you. And then one last quick one. Just forgetting about the extra week you've got in Q4, how do you view the rest of the year from a comp comparison standpoint? What quarter do you think you may have the most favorable comparison?

From a sales perspective we -- we've been focussed on our 13-week trend. So, one of our learnings from last year with some of the volatility that we've been seeing is that year-over-year compare may not play out exactly as you would expect it to.

And I think the first quarter is probably a great example of that, where none of us expected the tremendous amount of store closings that we had in the month of February, and that would have been our easiest compare. And in fact with all the unexpected weather implications, that became our tougher month of the quarter, we see that heavily tied to the unexpected weather implication. So building off our 13-week trend, we expect the business to progress each quarter as the year unfolds with both the combination of our initiatives and the 53rd week.

Okay, great. Thanks a lot and good luck on the rest of the year.

Thanks, Jon.

Mr. John Baugh, Stifel.

I've got several questions. I wonder if we could start with a couple of balancing items. Inventories, they were up, not a lot invested, I know, in inventories, but they were up significantly year over year. I think I calculated 44% and they were up 10% sequentially. Is there anything going on there, Shelly?

Yes the inventory increase is, of course, the normal actions of our stores, but it's also heavily tied to the products that -- and our turns continue to be very healthy and this is more of a timing issue with the product innovation sets and the backlog.

Okay. And likewise on payables, they were significantly down year over year, almost $17 million. Was that a timing incident, or any changes in terms up there with any customers?

That was related to a timing --

Yes so John, the biggest thing there is really the timing of payments. This is Dave. So nothing really major there. A lot of it's where our payables cycles cuts off at the end of the quarter, so nothing real major difference.

And welcome, Dave, thank you. Customer fee pavements up 15% year over year. That certainly implies that March was particularly strong as you commented. Is that weather, or is that the impact of the new product and marketing, maybe both, any way to decipher?

Great question, John. This is where it's difficult to tease out the individual variables. Some of it could be related to the weather recovery. What I will share with you is we've -- we saw consistency, nice strong performance throughout the month. And we did see a strong correlation with our brand metrics and our new advertising with the product innovations.

Thank you. And then you opened 17 stores and closed 14. That's a lot of action. Is that just timing, or should we think that you're going to get a little more aggressive with the off-mall openings and mall closings.

It was consistent with what our plan was, John, and this is part of our real estate strategy, where we've been improving our real estate and executing many remodels as you can tell by the number of store actions of 114 from the past year, but yet only a net increase of about 30 stores. So we've been relocating many locations, and that would involve a close and an open. Now when we relocate within a mall, that remains a common store. But when we move outside of a mall, it would be a close and open.

Okay. Is there any way to think, Shelly, about a gross number for the year in terms of openings or moving to a different mall would be included, as well as off mall. But is there any way to think about a gross number?

Yes, we expect between 460 and 470 stores by year end.

Okay. But is there any way -- that's a net number of closures. Is there any way to get our head around of how many new ones are included in that net result?

There are 50 to 60 gross.

Great, thank you.

And my final question is I noticed in the 10-K that your sales people and/or support sales in terms of head count was down 3% year over year and your store count was up 7%. I was curious, is there any change in your staffing thoughts and/or any changes in the compensation methodology for sales people?

Thank you.

Hi, John, this is actually Dave Schwantes, it's not Dave Callen, so just for the record. So actually I think, John, the data point that you're speaking to in the 10-K that we disclosed on headcount is actually up 2% in terms of the store personnel and -- versus you mentioned the growth in stores. So it was a little bit lower.

I think we did have a little bit lower on average headcount per store at the end of the year versus the prior year. But it was consistent with our overall plans. It was down an a headcount per store, but it was actually up 2% year over year in terms of the total headcount.

And did you change your compensation methodology at all?

No, it really tied more to being efficient with our dollars as we went into fourth quarter and holding on adding headcount.

Thank you and good luck.

Thank you.

Brad Thomas, KeyBanc Capital.

Wanted to ask a few questions first on some of the line items in the model for this year. I think in the -- at the fourth quarter call there had been guidance for the gross margin for the year to be flat to up. Is that still what you would expect, Shelly?

Yes, hi, Brad. We will have a better read on this certainly after second quarter. But for second quarter we expect 62%, similar to Q1probably in the range of 60%, 62% to 63% for the year. Again, we'll have a better indication of how the new product innovations are mixing as we get through second quarter.

Okay. And then, in terms of G&A I think the guidance before had been $80 million for the year. Is that a number you're still thinking about?

Yes, still consistent with that number.

Okay. And I think you all had quantified about $7 million of incremental expense in the first half. Is that something you're still looking for, and give a sense of how far we are through that $7 million?

Yes, it was 7 -- $6 million in Q1 and $2 million in Q2.

Okay, great. And then the last high-level question, someone else touched on this earlier, but I think in the refresh of the C line you've raised the price on the C3 and the C4, you're -- two of your three lowest priced models. And so in light of the fact that tickets have been so strong for you but the units haven't been as strong, maybe could you talk about what your opportunities are to maybe close more sales at those lower price points? Can you push on a promotional level -- lever a little bit faster despite the fact that the list price is higher? How are you thinking about customers that are a little more sensitive about price?

Right, well I'm glad you brought this question up. This is exactly why we're strengthening our value equation across the entire line while introducing the x12 at the high end and bringing a lot of focus to the brand by a broader consumer base. In fact, the target that we've been striving to reach, we're also opening up the funnel at the low end with a much stronger C series than we've ever had before.

So we're really excited about the increased support and comfort that these new beds provide. And we do see this in combination with our new advertising focus on introducing our all new C series as a method to be able to drive incremental units. And we'll look forward to giving you an update on that at second quarter, but certainly our results so far, although early, are consistent with our testing and with our beliefs.

Good. All right. Well thank you so much and best of luck.

Thanks.

Budd Bugatch, Raymond James.

Hi, this is actually Bobby filling in for Bud. Thank you for taking my questions today. My first question is about the new stores, were they all -- were all the net new stores off-mall stores?

We had 1 mall and 16 non-malls, Bobby.

Okay, thank you. And then can maybe you provide a little bit of color on the performance of the non-mall versus mall performance and whether or not the new off-mall stores are tracking to the efficiency you've seen out of them so far that you expect?

The answer to the latter is yes, and the performance with mall and non-mall. We continue to be pleased with both. Our average revenue on an annual basis is about the same with the two formats. And we do see the occupancy expense favorability in our non-malls, which we expect to be around 15%.

So the profitability for the non-mall stores is probably churning a little bit better than mall performance?

Yes, that's correct.

All right. And then real quick on a modeling question, I couldn't quite get the ad spending for the year. I'm showing roughly around $38 million ad spending in Q1 of last year, about 14.7% of sales. What exactly were you referencing for ad spending in this quarter?

Yes, I did not say the specific ad spend in the quarter. I mentioned that we were up slightly -- our spend was $39 million.

Okay, thank you. I appreciate it. That's it for my questions and best of luck going forward.

Thanks, Bobby.

Mr. Todd Schwartzman, Sidoti.

Wanted to see regarding the x12, what is the time line for gauging the success of x12 and for considering rolling out beyond those initial nine test markets?

Yes, Todd, we're -- so first of all, our pilot is giving us the information that we were looking for and is primarily designed to help us with operational and selling process. And overall we're really happy with what we're experiencing with the x12 and the role it's playing for the brand and certainly the markets it's in. And we will continue to read the performance and respond operationally and be moving forward here in the coming months.

Got it.

And I'll probably avoid answering a very specific timing from competitively.

Sure, sure, makes sense. Haven't heard any mention in a little while of accessory attachment rates. How have the accessory attachment rates historically varied by price point of the bed that was purchased along with these other items? And was there any discernible trend on that front in the first quarter?

Yes, as far as the bedding collection attach rates with the various beds across the line, we continue to see a fair amount of consistency and that's really driven by our selling process. So it's not necessarily attached to the specific model.

But do you track by price point to gauge whether there's a more linear versus exponential increase as you go up the line, the bed line by price point?

Yes, we do. We track by price point, as well as by customer.

Right. So you just -- you just don't disclose those rates by -- (multiple speakers)

No, no, we don't share that granularity.

Okay. And is it -- typically what you would expect?

As far as the specific attaches by model?

Yes, with the higher end, because with the higher end consumer the buyer of the more luxury product, if you will, attaching more to the purchase than the more entry level price points?

Yes, it does vary based on consumer need. I think you probably see the difference a little bit more with the C series compared to the rest of the lines.

Okay. And, Shelly, you had talked about the change in the return policy to anniversary in the third quarter, I want to make sure I'm clear on this. Is the -- was the change put in place last third quarter or second quarter?

It was at the end of second quarter, actually very late in April. But from an accrual perspective, that really took shape as of third quarter. So you really need to -- when you're doing your model look at the full second quarter before we annualize.

Got it. Okay, thank you very much.

Joan Storms, Wedbush Securities.

So Shelly, let me clarify, so the total -- the controlled -- the Company-controlled comp was up 2%.

Yes.

Or were you saying it was up 9%. I was trying to figure out, because ASPs were up 8%, unit growth or units up 1%.

Yes hi, Joan, this is Dave. So what Shelly mentioned is the -- our total net sales growth was actually up 7% for the quarter. That's the total number. But if you look just at our Company-owned channels, they were up 9% and that 9% was made up of 8% from ASP and 1% from unit growth.

Oh, I see what you're saying, okay so that wholesale part was negative, so that's what brought the total down.

It was dilutive to the overall growth rate.

Okay, got it. What's going on with that channel? It was down a little bit. And is it just a shift in the QVC stuff or --

Yes, first of all, it's small, it's less than -- it's about 4% of our total and we do have fluctuations between quarters and that's what transpired here.

Okay. And then I don't know if you can comment at all any update on dual temp, it seems like there still should be the customer brand awareness for that product is still very low.

Yes, and you're right it's still a significant opportunity. And in this quarter, Joan, we were very focused on our new advertising campaign and did not focus on the dual temp. And so it was a smaller contributing factor because of the lack of advertising for it in the quarter. But we continue to be really pleased with the product, and our customers are absolutely thrilled on this product. So it is a great opportunity for us as we move forward.

Can that be incorporated into the new ad campaign in any form or fashion or --?

Yes, absolutely.

Okay. So, as far as new products there's a lot going on in the first quarter and that's -- I'm assuming that's the bulk of what you're going to be seeing and then focusing on for the rest of the year.

Right.

Okay. And on the marketing effectiveness could you -- I don't know if you've talked about it the last quarter or two, but your marketing, your 13 markets that you had targeted, where are we in that process, and are those markets still making progress towards your goals?

Yes, the 13 market aggressive growth strategy, so where we are is the first original four markets have now moved into their fourth year. So, they've surpassed their three-year aggressive growth strategy, and we experienced a doubling of profit in those markets. Just a little less than doubling the market share, which was one of our targeted goals. And also surpassed our revenue expectations.

We're very pleased with the strategy. Beyond those four, we have five other markets in various stages of the strategy. We did launch one new market this year.

Okay. So that's 10, so by next year you'll be launching the rest of it?

Nine are in play and then we have the four left.

Okay.

Over the next few years, yes. And we're certainly dealing with some big markets right now.

Okay. And then one quick last question. On the media mix that you talked about, what did you do different year over year? I know last year the first quarter was really tough because you would switch to the single agency and things were really out of the line, but what are the new things that you're seeing good response to?

So right now in the first quarter we're in testing with -- so we have our core basic formula that we're executing and outside of the formula then we have a numerous tests going on to be able to more efficiently reach our broader target. And also moving media to more productive media. And so testing and then in the second quarter we'll advance those tests.

Now, we had obviously February was a difficult month for us to read with all the weather impact and that was when we had the bulk of our media spend, so that did not help our specificity on the test. But, we also did not expect the 50 basis-point media leverage in the quarter. So combination of the tests along with the new creative and then you think about the fact that February was the month we spent the most of our media, and it really wasn't able to come to fruition, it's encouraging, encouraging to see where our tests are at.

I guess that's it for now. Thank you very much.

Josh Borstein, Longbow Research.

A few questions for you. On the -- you had mentioned that March was one of your better months, or the best month in the quarter. You also mentioned on the last call that January you were back up to mid-single digits. Was the March same-store comp stronger than the January comp that you had mentioned was up mid-single digits?

That's right, Josh.

Okay so that just implies that February, which I think you mentioned was actually an easy comp. Just because of the weather issues though it turned out to be a sour month because of that?

Yes, that's correct, although we were still up in February.

Oh, I see. Okay, all right that's helpful. Thank you for that. And then on the Sleep IQ that you're currently testing in nine markets and now offering separately from the x12, any early reads on how that's performing, what the list price is and when you may choose to roll that out to a larger audience?

Yes, the list price, Josh, is $300 with a Sleep Number bed. So that's an attached item for us and it's in the same nine pilot markets as the x12 and same learnings going on around our selling process and operational. And again very pleased with the technology and the consumer response.

And is that something that a person with an existing Sleep Number bed can get, or is that something that they buy with a new bed?

Well I tell you, Josh, my Sleep IQ score was at 78 last night, and my bed's a few years old.

And were you happy with that 78 score or did you make --

I was. Yes, I like those 70s, and 80s are really good.

And then the last one for me back to the dual temp, do you think there's a seasonality to that product where people who buy it prefer more for the cooling part or for the heating part?

Yes, we do believe there is, and that's with everything we had going on the first quarter it's part of the reason why we wanted to be able to read our other advertising more clearly. And so we backed off a little bit while we drove some of the other advertising. But it's also still very early for us with this product and we really like what we see overall.

Okay, great. And actually just one more on the extra costs due to scheduling that you had mentioned because of the weather issues, can you quantify that at all?

Yes, it was about $425,000 in the quarter.

Terrific. I appreciate it. Thanks and good luck.

Mr. Keith Hughes, SunTrust.

You had mentioned earlier, given your store plans you'll be about 460 stores by the end of the year. You're getting close to the roughly 475, 480 peak you had in 2007 before the recession. Are you planning to go above that number? Is that a ceiling number? What are your views longer term there?

Yes, longer term our views are probably somewhere around 500 to 550, 550 range.

And can you give me an update on terms of non-mall stores where we were at the end of the quarter?

At the end of Q1 for non-malls we were at 152.

In that you had said you added 16 to the quarter, is that correct?

Yes and so it's about 34%.

34%, okay. Given how as one questioner earlier in the call talked about the weak same-store unit numbers that you've seen. Would you consider a strategy where you top out on the stores that just accelerate the move out of the mall, it seems to be really doing wonders for the ticket and we might change -- see a change of how a unit performed for a store?

Yes, when we compare our non-malls and malls we have a similar revenue performance overall, which is highly correlated with our unit performance. So we're very pleased with many of our mall store performance. Clearly our number one opportunity is brand awareness and also driving traffic. And with brand awareness comes traffic and market share, and that's what we're focused on is improving that marketing effectiveness to be able to drive traffic and increase the brand awareness. And we're confident that unit increases will come with it.

We like the flexibility that having both the successful mall and non-mall store delivers, and also the average revenue. We see the continued growth in average revenue in both mall and non-mall. We're not seeing ceiling there. And we're seeing some strong expressions in both formats and it gives us good confidence in continuing to progress with both.

I'm sorry, in your answer you see a lot more revenue per store on the non-mall than the mall, is that correct?

No, no, Keith, it's about the same. So very -- yes, it's the same. The average revenue on an annual basis is the same. Leads and conversion are different by format, but times out to be the same average revenue.

Oh, okay. Thank you.

Jenny, are there additional calls or questions?

Jessica Schoen, (inaudible) Securities.

My question is on the 8% ASP increase, I was wondering if you could talk about how each of mix shift pricing increases and the attach rates of both adjustable basis or the bedding collection were all driving that 8% growth?

Yes, the growth was primarily two things. It would be pricing associated with the product innovations and the other half would be primarily associated with attach for the quarter of the FlexFit and FlexTop.

Okay. And then would you say there's anything to call out as far as the mix and the velocity of sales at the different pricing segments within your line?

Yes, too early with the product innovation with just a few weeks. And I think we'll have a lot more clarity on that this next quarter. And then February, of course, played in a way that would be unexpected because we had so many store closures, et cetera, that it -- I'm sure it probably impacted our ability to drive through additional units with our close outs. So probably some suppression there.

Makes sense. And then you said, I think, 34% of your store base was off-mall. Can you give us, remind us or give us an update as far as where you are in the full repositioning of the real estate portfolio? How much is there to go both on relocations and remodelings?

Sure, great question. By the end of the year we expect to be probably around 40% with our non-mall. And from a remodel and reposition I think we're at 75% by the end of the year? 80%, a good strong 80%. So the majority of the portfolio will be complete.

Great. Thank you so much for taking my question.

(Operator Instructions)

Mr. Rob Longnecker, Jovetree.

I wanted to ask you guys about the balance sheet. You guys have been cash flow positive for at least four years now and you've been sitting on this $100 million plus balance of cash ever since and I'm wondering at some point are you guys going to start returning some of that capital to shareholders?

Yes, our cash strategy is focused on first and foremost managing the business to remain above our stated $125 million and we --

Right, but could you justify that $125 million? Because it seems like that's designed for the sky to be falling for current conditions.

Yes, the $125 million is based off our learnings over a multiple number of years with the Company with -- it's a business that leverages tremendously, and can also work the other way. So the $125 million has been our threshold from an operating perspective, and the cash strategy second priority is focused on prioritizing investments to support our long-term growth strategy, which we expect to deliver a strong return to our shareholders. And finally a share repurchase program, and we continue to execute that share repurchase.

When I look back and look at your historical cash flows, it looks like the worst quarter you've ever had was a negative $10 million or $15 million quarter and that was back in 2007. So it seems like you guys are way, way too conservative with what you think your minimum cash balance should be.

Thank you for your feedback on that, and we went through some very challenging cash years in 2008 and 2009, and we today remain debt free and that's how we have been operating these last few years. And the $125 million is also -- puts us in a position that we're able to continue to invest in our business when we have a suppressed top line.

I think last year would be a great example of that where we did not deliver the sales we had expected, but we were working on such important initiatives to be able to support our long-term growth strategy, and it allowed us to be able to continue to invest in our product innovation and our local market development in a way that is positioning us today to be able to outpace growth expectations in the future.

And that's the strategy behind the cash balance. We're also positioned for opportunities and we seized a couple of those last year, one small acquisition, and we appreciate the position to be able in this time of building our long-term growth to be able to seize those opportunities.

You might want to think a little bit more about your shareholders, because a dividend or material buy-back would really be appreciated.

And we are very focussed on our shareholders, and that is why we've brought forth the innovations that we just did to be able to support the long-term viability of the business and increase shareholder value over time. But we do appreciate your feedback, and thank you very much for sharing your thoughts on this.

Thank you.

Mr. Josh Borstein, Longbow Research.

A quick follow up on one of the questions I had earlier on the January comp, trying to get a feel for the cadence again in the quarter. If January was up mid-single digits, March you said was better than that and February was still positive, how you get to that 2% comp? Is it that Presidents Day is so meaningful that it boosts the importance of February in the quarter?

Yes, February was the Presidents event, the majority of the month is definitely very meaningful. The other consideration on this, Josh, is the backlog and the timing of the backlog versus orders.

And -- okay. Could you explain how the backlog affects the comp?

It would be timing of where the revenue is recognized by quarter. So the numbers that I'm sharing or we shared about January, the mid single-digit comp refers to actual orders placed, as well as March. So there's always a little timing difference between the months, and it's more apparent, obviously, with February being such a big month tied to Presidents. But you -- the specificity of understanding the orders and the comps will give you the shape of the quarter.

Okay. Great, thank you.

And there are no further questions on the phone at this time.

Great. Thank you.

Thank you, again, for joining us today. We look forward to discussing our second-quarter 2014 performance with you in mid-July.

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