Sleep Number Corp (SNBR) 2014 Q2 法說會逐字稿

Welcome to the Select Comfort Q2 2014 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 would like to introduce Dave Schwantes, Senior Director of Investor Relations. Thank you. You may begin.

Thank you. Good afternoon and welcome to the Select Comfort Corporation second-quarter 2014 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 David Callen, our new Senior 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.

Thank you, Dave, and good afternoon, everyone. Our second-quarter results reflect the important role of innovation in our strategy. We are prioritizing investments in benefit-driven innovations, such as SleepIQ technology, which add value to customers' lives. We have begun to gain traction from our growth initiatives, as demonstrated in our second-quarter results. Here are a few financial highlights.

Net sales grew 13% to $235 million. Comps sales increased 7% and EPS declined 11% to $0.16. We remain confident that the combination of proprietary products, exclusive distribution, and end-to-end customer experience will translate to sustained profitable growth and value creation for our shareholders. Results are beginning to reflect the investments we've made in building our competitive advantages these past few years, including the most significant product and marketing introductions in our history. EPS was consistent with our second-quarter expectations and the top-line growth represented more favorable consumer response than planned for the quarter.

Here is the quarterly update on our 2014 growth initiatives, which include product innovation, marketing effectiveness, and local market development. First, I will share highlights from our project innovation initiatives. We had a breakthrough quarter as we deployed our newest product technology and established the foundation for a transformational sleep experience. We expect these innovations to be a catalyst for increasing brand awareness by attracting a broader consumer target.

During the quarter we introduced both the x12 bed and SleepIQ technologies nationwide, following the nine pilot markets launched earlier this year. SleepIQ technology is now available on all Sleep Number beds for an additional $299. This proprietary sensor technology works directly with our DualAir chambers to provide individualized sleep [knowledge]. SleepIQ technology tracks and monitors your sleep without the need for any wearable devices, communicates how you slept via your personal SleepIQ score, and shows what support and comfort adjustments you can make to your Sleep Number setting in your daily routine to improve your sleep.

SleepIQ technology empower increasingly data-driven consumers with the ability to know and act upon their own sleep information in a simple and effective manner. Our customers responded strongly to the innovations we introduced during the first quarter including our exclusive FlexTop mattress design and our new FlexFit Adjustable Base Series, which includes a new opening price point model and benefit-driven technology such as the Partner Snore feature. Like SleepIQ technology, the mattress design and adjustable bases are available across our entire core Sleep Number product line.

While early, sales of all these innovations are exceeding internal expectations and were important contributors to our second-quarter revenue growth. They also resulted in gross profit dollar growth, but rate was pressured by an additional 130 basis points over internal expectations in the quarter. This was primarily the result of higher demand for our new FlexFit Series and related operational inefficiency. Our top-line results highlight the advantage of the combination of benefit-driven products and our relationship-based selling process. Our ability to quickly scale, advertise, and sell new innovations with our vertical model is apparent in the 17% increase in our average revenue per unit sold during the quarter.

Another illustration of this advantage is how responsive our sales team is to benefit-driven products that improve our customers' lives. This is the real power of our model. Our progress is further illustrated by comparing Sleep Number's year-to-date growth to that of the industry. Through May, which is the most current information reported by ISPA, our sales have exceeded the industry for both units and dollar growth. In addition, we had strong growth in adjustable bases and bedding sales, neither of which are included in this comparative ISPA data.

Yet traffic remains an opportunity, and this leads me to an update on our second growth initiative, marketing effectiveness. We remain focused on a three-pronged improvement plan which includes more effective creatives, improving the reach of our media buys, and optimizing our media mix. We have continued to expand our advertising sets and execution of effective outcomes. These actions resulted in 160 basis points of leverage on flat year-over-year media spending with 13% revenue growth in the quarter. These results were consistent with the direction we anticipated but also exceeded our internal expectations. We continued to advance in a methodical manner with the goal of increasing both traffic and leverage as we add media weight.

Specific highlights related to this initiative include: first, advancing our no better sleep campaign. With the launch of SleepIQ technology in June, our creative changes are beginning to attract a broader, younger, and more aspirational consumer. It will take time to build unaided awareness but we are encouraged with the impact of our ads and their correlation to our testing.

Second, improving reach of our media buy to a broader target customer in a more effective manner -- we have advanced our testing and learning each month since January. This initiative is largely focused on how we buy our media.

Third, optimizing our media mix led to a greater media leverage than expected within the quarter. We added analytical tools to better understand the consumer's changing media consumption trends in a more productive manner. We have now been utilizing these tools for 12 months and have increased confidence in their predictability and therefore in our media type and weight decisions.

In addition, we are building our digital capabilities. We launched our new Sleep Number website at the end of April, which has improved organic search. This new site establishes the necessary infrastructure for future digital initiatives as we strengthen our customers' seamless experience with Sleep Number. Overall, we have made great progress in marketing yet we are still not satisfied with the traffic and therefore unit performance. We expect our initiatives to improve these metrics. We have plenty of runway ahead.

Next, I would like to discuss local market development, which is our third growth initiative. We advanced the development of 28 markets in the quarter by repositioning, relocating, and adding Sleep Number stores. Metrics remain steady in our distribution strategies. The six points of revenue growth from new stores in the quarter was consistent with our expectations.

In summary, our customer is responding positively to our initiatives and we have high confidence in our strategy and plans. We expect our product innovation to further contribute to growth including this week's launch of our new Memory Foam Series. It is designed and priced to satisfy a broader range of Memory Foam customers. The new m6, priced at $3000 for a queen set with DualAir adjustability and proprietary Luxfit memory foam and, of course, SleepIQ technology, the FlexTop mattress design, and FlexFit adjustable bases are all optional features on both the m6 and m7.

With our addition of the x12 bed we closed out the m9 Memory Foam bed in the second quarter. While we are encouraged by the early traction from our initiatives, widespread consumer adoption will take time. We also recognize the ongoing cautious and competitive consumer environment, so we remain deliberate in our test and learn approach to advancement and execution while continuing to build for sustainability.

We look forward to updating you next quarter on our progress. And now I am happy to turn the call over to David Callen, who joined Sleep Number in April. David will provide additional details about our quarterly performance and outlook for the balance of the year.

Thank you, Shelly. Good afternoon, everyone. Before I discuss the second-quarter results I would like to take a minute to say how glad I am to be a part of this very impressive business. It's a great time to join such a capable, compassionate team and to be part of the next stage of the Company's transformation. It is especially rewarding to see the team's hard work on the initiatives Shelly discussed really paying off with 13% top-line growth. It's a nice way to begin my first official earnings call. With that, I will get right to it.

Net sales for the second quarter grew 13% to $235 million. The increase was comprised of 7% comparable sales growth and 6% from new and relocated non-comp stores. During the quarter we opened to 16 new stores and relocated within malls another 16 stores, updating them with more productive store designs. We also closed eight stores during the quarter including seven that were relocated from mall to non-mall locations in the same market.

Our trailing 12-month average store sales per comp store in Q2 was $2.1 million, reflecting improved productivity. As expected, we ended the quarter with 451 stores and plan to end the year with 460 to 470 stores.

Another way we look at the composition of sales growth is through our ASP and unit metrics. For us ASP divides our Company-controlled net sales by the number of mattress units we shipped during the period. Others use ASP to refer to changes in average selling price or price increases. To avoid confusion and help underscore the value of this metric to our business without changing the calculation in any way, going forward we will refer to it as average revenue per mattress unit or ARU. ARU for the second quarter was $3709, an increase of 17% over the prior year, reflecting the strength of the combination of our sleep innovations and highly effective selling process. Strong sales of our new FlexFit adjustable bases and the new FlexTop mattress option contributed meaningfully to our ARU growth in the quarter.

Company-controlled mattress units during the quarter were down 3% from the prior year, largely due to our decision to not repeat a Classic special edition bed for the Memorial Day event this year. While we outperformed the industry in unit growth through me, traffic remains an opportunity.

Year-to-date net sales of $511 million are up 10% with comp store growth of 4% driven by our important growth initiatives. We are on track with our transformation and the first-half sales growth was slightly above our expectations.

Gross profit in the quarter grew 8% from $142 million, driven primarily by strong sales of our innovative new products. Gross margin of 60.7% was negatively impacted by a higher-than-expected mix of source products including our new FlexFit Adjustable Base Series, changes to return policies which anniversary fully in the third quarter and supply chain inefficiencies driven largely by higher-than-expected demand.

Product mix will continue to impact gross margin for the balance of the year, offset partly by efficiency gains in volume leverage. We expect second-half gross margins approaching 62%, similar to the second half of the prior year with more balance between Q3 and Q4. Total operating expenses of $129.7 million were leveraged by 90 basis points during the quarter to 55.2% of net sales. Sales and marketing expenses of $106.7 million or 45.5% of net sales improved 190 basis points versus the prior-year quarter.

Media was leveraged more than expected at 160 basis points on flat year-over-year spending. We continue to expect approximately 100 basis points of media leverage in the second half of the year.

Remaining operating expenses for the quarter of $23 million or 9.8% of net sales increased 110 basis points as a percent of net sales compared to the prior year. This reflects investments and spending as planned to strengthen systems infrastructure and capabilities to support our current and future growth.

Our second-quarter fully diluted EPS was $0.16 compared to $0.18 in the prior year. As expected, our first-half EPS of $0.47 was 22% below the prior-year as we transition the business with significant innovations and build our infrastructure. We are reiterating our 2014 full-year outlook for EPS of $1.07, which implies a 25% year-over-year EPS increase for the second half of the year. This outlook is based on expectations for the full year which are largely unchanged from what we shared last quarter.

Our guidance reflects momentum from innovations balanced with tougher second-half sales comparisons, gross margins expected to approach is 62%, flat to the prior year's second half, and investments in growth drivers such as product innovation and operating capabilities to sustainably support our growth. It also reflects our expectations for a continued slow macroeconomic recovery.

Through the second quarter, which is historically our seasonally low cash point, we continued to maintain a strong balance sheet with $121 million of cash and securities, no debt, and $43 million in inventory to support our initiatives. We have generated $50 million in cash from operations year-to-date compared to $36 million the prior year. We have invested $40 million in capital projects year-to-date compared to $37 million the prior year and have returned $20 million in cash to shareholders through steady stock repurchases totaling $90 million since the program started in mid-2012.

We remain committed to our capital allocation priorities, which include: self funding our growth initiatives, as we believe this provides the best return on investment for our shareholders; maintaining a minimum cash and securities balance of approximately $125 million, given our capital and asset structure and to protect against substantial economic downturn; and continuing to return cash to shareholders through our steady share repurchase program.

I am thrilled at the prospects ahead and to be a part of the journey we are taking. We will continue to make disciplined progress while investing to deliver sustainable profitable growth.

With that, I will turn the call back to Shelly for closing comments.

Thank you, David. The consumer excitement with our new innovations is apparent in our top-line results. We are learning quickly, yet recognize it will take time to build demand and optimize operating efficiencies associated with our innovations. To this end, I want to thank the Sleep Number team for their moxie and dedication to improving our customers' lives. We remain cautiously optimistic about our expectations for the balance of the year and are confident that our customer-focused strategy will result in increased shareholder value.

Thank you for your attention. We now welcome your questions. Angie, you can open up the line for questions.

(Operator Instructions) Josh Borstein from Longbow Research.

Hi, Shelly. And welcome, David. Thank you for taking my questions here. Just a point of clarification -- the unit decline of 3% -- was that on the same-store sales comp of 7% that you had mentioned?

Yes, it is.

Okay. Great. And then, the average revenue per mattress unit increased 17% and it looks like in past environments where you saw nice ASP you also saw a nice gross margin. This quarter some of the nice ASP and gross margins came in a little bit later than I had modeled. I think you had mentioned 130 basis points hit in relation to sourcing and some other things. But was there anything else in particular with respect to gross margin this quarter?

Well, the 130 basis point impact was relative to our internal expectation. And about half of that was related to the inefficiencies. Half was related to the greater mix of the source products that we are referring to. Those were really the big impacts other than what I mentioned in my prepared remarks.

Okay. So looking at gross margin for 3Q, what might we expect? What kind of product mix to you anticipate that should either help or hurt gross margin?

Well, we don't particularly get into the details of it. But I can tell you that we expect our ARU to continue to be strong and we continue to expect that our traffic and units will improve.

Okay, great. And then just one more from me -- with respect to the guidance, should we still anticipate $80 million for G&A, sales and marketing to approximate 46% of sales? Sales and marketing looks like it's trending below that, as does R&D.

Okay. So on the sales and marketing side we came in at 45.3% for the half. And I think that that's a good reflection for what we expect in the second half of the year. That is compared to our previous guidance of 46% for the full year, so we are pleased with our ability to be able to provide a little bit of additional leverage in the back half.

Regarding the G&A and R&D expenses, they were de-levered by 110 basis points in the second quarter. But the second-quarter run rate in terms of dollars for the G&A portion can be a good guide for your model for Q3 and Q4 in the back half, while R&D, I would say, look at the back half of last year as your guide for R&D.

Okay, that's very helpful. And then just last, as a piece of that, the ad spend -- I think you had mentioned for the second half expect 100 points of -- 100 basis points lower. Is that year-over-year?

Yes, the 100 basis points leverage from media spending is versus the prior-year and the second half.

Okay, great. I appreciate all the color there. I'll hop back in the queue. Thank you.

Brad Thomas from KeyBanc Capital Markets.

Thanks and congratulations on a good quarter here. I wanted to just ask a little bit more about your expectations for sales. This was the best quarter for sales in well over a year. The comparisons do get a bit tougher the next two quarters. How were trends as you exited 2Q and what sort of trajectory are you all modeling into the back half?

Thank you for your comments and questions. Yes, the sales comparison was certainly easier in the first half and we have a tougher comparison as we look at the second half. We continue to focus on delivering our -- or reiterate our full-year guidance of $1.07. And we are exiting with a little stronger sales related to our new innovations than we had expected. So greater momentum on the top line but increased pressure on the bottom line with some of the operational inefficiencies that we have experienced or probably more related to the sourced product and the increased mix of the FlexFit Series.

We do expect -- we have a 10% sales increase for the first half. And we expect to do a little better than that as we move into the second half including the 53rd week.

Okay, great. And then just with respect to the new creative and the new commercials that you all have, can you talk about how well you [can track if that] is starting to influence the traffic in your stores?

Well, as I stated in my remarks, we really have a three-pronged attack to our marketing efficiency and seeing some good progress in all three areas. Specifically to the creative, the creative messaging is more effective than our prior messaging. And we can see that related to both the testing that we did on the particular campaigns before they went into market compared to the actual results we are seeing as well as various brand metrics and ad awareness and response from the consumer. So, we do have numerous low-level metrics that give us good color around that. But at the same time it's still not a robust consumer environment. And I think you can see that in the industry as well as in our business from the traffic perspective. And we gave you the unit comparison to ISPA, just so you can get a sense of where we are compared to the overall industry. And we do expect to continue to make some progress in units.

But it's going to take more time. In the meantime we are really pleased with the average revenue per unit growth that we are able to deliver with this particular business model.

Okay, great. Congratulations again and good luck in the second half.

Budd Bugatch from Raymond James.

Yes, congratulations on the quarter. Good afternoon, David, and good afternoon, Shelley. I guess my question really goes a little bit to Josh's question. The units were down, I think, 2.6% if my math is right, overall, were down around 10%, which would make sense on the plus 7% -- on a comp basis. So ticket was up about 17% or ARU, as you are calling it, was up 17%.

Can you give us a feel of maybe the mix of ticket and ARU as you go through the second half of the year? How do you think about that? You said it would be more balanced or you would see improvement in traffic and I know that's an opportunity. But what does your crystal ball say to you?

The difference between, Budd, ARU and units as far as the sales competition in that, with that lens?

Yes, ma'am.

We continue to see a strong ARU growth or expect to see a strong ARU growth tied with how the innovations have performed thus far. We do anticipate continuing to make some unit progress, but we are also up against some they close outs from prior-year, particularly around our Performance Series, which is our highest penetrated series in the line. So we know we have a little bit of headwind there plus we have tougher compares. So it will be progress, but slow. So the ARU is really where we see the growth coming from.

And so -- I'm sorry, David. Go ahead.

Yes. I just wanted to correct something I had mentioned earlier that I said, I think to Josh's question. He was asking if it was comps that I was referring to. I was referring to total Company-operated sales channels when I said the 3% decline in units. I just want to --

Yes, sir. If you do have implied units per average stores, it's down around 10%, if our math is right. So, Shelly, to make sure I understand, you had $3700 per ARU in the second quarter. Are you saying sequentially we will see that grow, or year over year we will see that grow, or both?

Year-over-year.

Year-over-year, okay. And to get to your 10% for the second half, if I did that right on the media spend, and media spend looks like it could go up to give you that leverage somewhere close to $80 million in the second half. Is that the right way to think about it?

We do expect a little bit of an additional media spend here in the second half. So in that neighborhood, yes.

Yes; it was $77 million last year in the second half, so it should be up a little bit this year to get to that 100 basis points of leverage?

That's right, Budd.

Okay. And the G&A -- I understand, David, the run rate -- I take it that includes the same accrual for incentive comp that was an issue for me, anyway, last quarter. Is that fair?

Yes, it does, Budd. That's correct.

Okay. Well, great. Congratulations on the quarter. Very nice to see positive numbers and we look forward to chatting with you again.

John Baugh from Stifel. Your line is open.

Thank you. Good afternoon. And welcome, Dave. Hello, Dave and Shelly. My comments or questions -- could we start off with where we are mall versus off-mall currently and then where do you think we might be at the end of the year and then how many relocations are going to occur as well? Thank you.

Right. For off-mall or non-mall, as we reference, 36% at the end of Q2, 164 stores. And then at the end of Q4 -- did you ask Q3 or Q4? Sorry.

Q4.

Q4 will be about 40% done or 183 at that time.

How are you thinking about that number or are you thinking about it three, four, five years from now?

What we've stated in the past is somewhere in that 40 to 50, considering that we are at about 40% here at the end of the year, probably in the 50% area.

And can you give us any more color or updates on the performance of off-mall versus mall? Or are the malls doing better as you have got more and more of them relocated to better locations within the mall or you've gotten out of a lot of the bad mall locations so the malls that are left are better performing?

Yes. We are pleased with what we have going on in the local market development in both formats, both mall and non-mall. So we continue to be pleased there with a similar average revenue by format. Absolutely, when we relocate out of more challenged malls into a strong physical location for our non-mall, we are very happy with the lift that we are getting in that particular case. But we also have many examples and very pleased with the mall relocation within the mall. Improving the location and moving to a slightly larger store design, especially with the advancement we've made in the experiential store design, has been very strong for us. So we are pleased with the whole portfolio. We do see a little bit of seasonality difference in the non-mall. So we are learning about that, particularly a little lower sales in Q4 and a little stronger in Q1 and some slight improvement as well in Q2 in the non-mall. But again, net-net we are seeing total similar revenue. You still have an upside in occupancy over time in the non-mall, so that gives it an extra edge.

Right, thanks for that. And then could you maybe delve into the inefficiencies you are talking about? What precisely are they? Is it air freighting stuff or you may have had production problems? And when does that sort of get behind us?

Thanks for the question. It's associated with our sourced product and the early demand, a bigger demand than we expected out of the gates. And so you are absolutely right; it resulted in air freighting some of the products. We have moved some of the manufacturing of our sourced product in-house. And we have some complications just working through that with the level of demand. And we will work through; we are making great progress. It's going to take us a few more months before we are up to our full efficiency. It also speaks to our manual processes, so it's a little cumbersome right now. But it's nothing we are overly concerned about. It's growing pains. This is a good kind of problem to have.

It is. Actually, if you could help us as we think about Labor Day and just maybe tell us -- you mentioned you didn't do the Classic Series here on Memorial Day. Just help us. You mentioned the clearing out of P Series happened -- that won't happen. Any of the apples-to-oranges comparisons as we reconvene three months from now and talk about Labor Day that we should be aware of? Thank you.

John, Labor Day -- and we won't get into a lot of specificity. But we will execute our formula that we've been very consistent on, particularly during the Labor Day events. So no real surprises or changes there. We did not do the Classic special edition in Memorial Day, mostly because we had just launched a new Classic Series. And our overall focus is on driving growth -- revenue and profit growth. That's our number-one priority. And our strategy is consumer focused. We are focused on how to deliver more benefits to our consumer. That is not unit focused, but I'm also not saying units aren't important to us. But really we are focused on what's important to our customer.

Great. Thank you. Good luck.

Todd Schwartzman from Sidoti & Company.

Welcome, Mr. Callen. A couple of things -- was there any evidence that perhaps some sales were pushed into Q2 from the first quarter due to the weather?

Yes. We had strong performance throughout Q2. And when we look at weather going back to Q1, it was primarily in February with some spillover into March, which still fell in the first quarter. So as far as April goes, hard to say about March. But for this particular quarter I would say no.

Okay. I know it's early still in terms of the rollout of the x12. But initially I wonder if you could share some insight as far as consumers who came into stores with the intention of looking at or perhaps purchasing the x12. What portion of them bought any mattress at all and what portion of them ultimately bought the x12?

Well, I'll speak to that in a general term just from a competitive perspective. But the x12 is playing the role so far that we anticipated and desired in our strategy, displaying a halo for the brand. It certainly has gained a tremendous amount of PR and earned media that we really like. It's a great way for our customers to experience our integrated technology in one bed. And then they can decide from there what are the most important features and benefits that makes sense for each customer, depending on what their sleep needs are.

So we have found it very effective to have in our stores. Our expectations -- or performance compared to expectations on the x12 are slightly ahead of where we thought our sales would be. And overall we see it playing the role we expected. So, we are happy.

Sounds good. And on the supply chain issue, what components or materials or maybe it's accessories -- what is actually at the heart of the matter in the near-term?

What's at the heart of it just would be that it's a more complicated product. It's sourced and it's a more complicated product. And we have brought some of the manufacturing in-house, which for the short term created a change and a bit more complication. We are certainly working through our processes and simplifying and making great progress. And again, it's not a significant issue, but it did create some pressure on our gross margin rates here in the quarter, as we've mentioned.

And did that pertain to the specific product or products?

Yes. It was primarily related with our sourced product, the FlexFit. And that margin rate pressure had a lot to do with the mix and the demand of the sourced product and then also tied in with some operational inefficiencies that we just hadn't anticipated in the quarter. So it -- learnings and advancements of our innovations.

Okay. And lastly, is there any long-term goal for ARU that you would care to share with us?

No. What I believe is important to take away is the power of the combination of product innovation and the selling process. And what that means with the customer-focused strategy -- as long as we are delivering products with meaningful benefits, and in the case of innovations that we are introducing right now they all surround our core product. So, they are not taking away from the core, they are adding to the core. And they are actually stimulating the core product.

So if you think about it that way, that's where the tremendous growth comes from for our business model and ARU, which is just very different than if you have a strategy that's focused on unit growth in order to get your revenue growth. Neither one is right or wrong, but this is our strategy and what we view as very powerful overall. In the end we want and expect ourselves to deliver on both ARU growth and unit growth. And over a longer period of time, as we have delivered in the past, seeing a good balance with units and ARU is important to us.

Okay, great. Thanks a lot.

Jessica Schoen from Nomura.

Congrats on a good quarter and let me add my welcome to David as well.

Thanks, Jessica. I appreciate that.

My first question is about the Classic special edition that you mentioned discontinuing the promotion in Memorial Day. And I was wondering if there's any kind of idea you can give us about the unit trends in the quarter excluding that kind of unusual impact or maybe on a sequential basis how it compared to some of the trends you saw in the first quarter.

Absolutely. The Classic special edition, as we calculated it and looked at what the normalization would have been with the unit trends, we accounted for 3 to 4 points of units decline in the quarter due to not having the Classic special edition.

Okay, got it.

And, Jessica, I would also say that important to note the overall revenue and profit growth, again focusing on what we view as important for our customer.

Absolutely. My second question is a follow-up on the mall relocations that took place in the quarter. I was wondering if there's any other information you can give us on that general remodeling program, maybe how many you've done or if you have seen an impact, how many more stores are slated for that type of relocation rather than off-mall and maybe some of the expense, too.

Sure. I'm just taking a look at that right now for 2014, our mall repositions. Jessica, let me follow up with you on that here in the -- it looks like we have three in the third quarter and one in the fourth quarter for the mall repositions and we had two in the first half.

Okay. And then I guess just one other question on the expectations for the remainder of the year on the top line that you have already touched on a little bit, even though some of your performance this quarter exceeded some of your internal expectations on revenue growth. As you look to the back half of the year, is there anything from a consumer or macro perspective that you think gives you the most caution in bringing that expectation up?

Yes. I think if you just look at the overall retail environment in total, you continue to see quite low results. And you saw that in April, May, and June with low single-digit comps across the board. And it continued. It's difficult or slow recovery in the macro environment with less inflation than was intended by the federal direction here. So until we see some stronger macro signs we continue to be cautious in this environment.

Understood. Thank you so much for taking the questions.

Peter Keith from Piper Jaffray.

It's actually Jon Berg on for Peter tonight. Just a question on the use of interest-free financing in the quarter for you guys -- how impactful do you think that was on maybe some of these attachments of your new products? And do you think it's a dynamic that can continue?

Yes. We utilize finance offers and promo offers fairly interchangeably. We view our dollars off and our financing as conversion tools in our particular business model. So at times we will utilize a finance offer or a cash offer or some combination of the two. We will always test in advance our thinking around finance and what are the terms that are most important to our customers, where our customer is most responsive. And that changes over time. We have had a very consistent strategy here for many years in how we execute our promotions, but we continue to test into finance offers a year later on because the environment changes and the consumer changes. And so, overall our net-net is very similar year-over-year. We are financing right on par with where we were a year ago. And so our discount dollar -- (inaudible).

Thank you, Shelly. That's helpful. And then looking at your prepayments at the end of Q2, I guess they are up quite a bit. I know that's probably an early indicator on the quarter. But wouldn't you think that would be indicative of comp acceleration here early in Q3?

Yes. Jon, I think that what you are seeing there is the power of small numbers. It's over a small number from the prior-year. So it only reflects a small portion of the business that hasn't been delivered yet. So I wouldn't read too much into that.

Okay. And then I know you gave just a little bit of high level attachment commentary last year when you guys launched the DualTemp. But just curious if you guys would be willing to give anything high level as far as attachment goes with the SleepIQ product you just launched and how successful that has been as far as how many people have purchased the bed and the SleepIQ product.

Yes. It's early; obviously, we just rolled out here in June. But we are really happy with the initial results. It's exceeding our expectations. And we will not share specifics about this.

Okay, great. Good luck on the second half.

Joan Storms from Wedbush Securities.

So I might have missed part of this, and I apologize. So directionally on the gross margin for the second half compared to the second quarter we would look for an improvement due to the -- some improvement in the operations which you had talked about. And then on the sales and marketing you continue to see about 100 basis points of leverage overall in the second half.

And then in the G&A -- I think I missed that portion. Why was that little bit higher -- I don't know; it was higher than my model.

Okay. So it's where we planned in G&A, first of all. And it reflects the digital website we launched in the quarter. And we talked about that on the last quarter as well. And you recall from the last quarter we also mentioned in the first quarter had a -- benefited from a $1.2 million stock comp benefit. But what I said regarding using -- trying to build your model for the back half, you could use the G&A dollars from Q2 as an indicator for Q3 and Q4.

Okay, so be pretty similar?

Right.

So pretty flat dollar wise?

Correct.

And then on the gross margin -- so the FlexFit has been pretty successful. So that's a mix shift that might still be because you haven't anniversaried that, still a little bit of a headwind. But then you have probably some better operational efficiencies to offset that.

Right. And you are speaking about gross margin rates in the back half and potentially some increased sales as well. So if you think about it, a little more pressure on margin rate than we had anticipated at the beginning of the year with the product mix as it is materializing and at the same time maybe giving us more growth on the top line.

And then when you anticipate on the units versus the average ticket or whatever, the A -- average --

ARU.

Yes. So -- and I know it's still tough out there and retail trends are still sort of choppy. But would we think about still having just higher to get a little bit lower units for the rest of the year and then hope for some improvement in 2015?

What he said was we expect ARU to continue to be strong and units, traffic, to -- we continue to expect that we will make progress with traffic and units in the back half.

Okay, great. Thank you very much for taking my questions.

Keith Hughes from SunTrust.

A couple questions -- number one, you talked about bringing these new successful products in-house in terms of production. I think I heard that correctly. Specifically which ones are you referring to?

Keith, I was referring to a part of our FlexFit.

Okay. So one of the components or --?

Yes. Yes, that's it. We are not going to go into a lot of details there, but that's added to some of our challenges in the quarter with a significant initial demand as well.

Okay. And the second question -- we've seen these same-store unit declines for six, seven quarters now. And based on your earlier comments it sounds like ticket is where we are going to see the gains for Select Comfort for the foreseeable future. At what point do you consider slowing the store openings? You are doing an excellent job with customers as you get them in the store, but the units just continues to be a troubling trend.

Yes. Well, two things that are important -- we did slow the number of openings for this year from where our original projection was at. And as we move forward with our local market development, we are already in the majority of the markets that we are entering. So it does not include a startup cost. There is not -- we don't incur incremental marketing expenses with opening the store. We also continue to experience less than 15% cannibalization in the total market when we open a new store in the existing market where we are entering.

And we are right now continuing to improve our productivity and our average revenue per store. This quarter we ended at over $2.1 million average revenue per store. And our first year, of course, is quite strong when we open a new store as well. And our return is less than 18 to 24 months on our new store cost. So strong ROI's, strong performance of both the new store and the existing stores in the market without having incremental marketing costs associated with it.

So the net-net in developing out the markets and increasing our availability for our customer, making it easier for our customer to get to our store, is additive. And we have obviously invested against our strategic initiatives for long-term sustainable, profitable growth. And we are very confident that we have been investing in the right places, mostly innovation and market development and, of course, infrastructure.

Okay, final question -- on product launches, do you anticipate any new mattress unit launches in the second half of the year that you are willing to speak about at this point?

We obviously just launched the Memory Foam Series this week. We do have another launch this month. We are launching a new DualTemp, yes, this month, on July 28. And this DualTemp will not only work as a layer on every mattress brand, but it will also work on any adjustable base.

Okay, thank you.

(Operator Instructions) Josh Borstein from Longbow Research.

Sorry if I missed this, but in terms of the guidance are you still forecasting low single-digit same-store sales growth for the year?

We didn't comment further on the guidance for same-store sales. We just talked about sales in general.

Okay. Are you willing to update that or is that something we should still be using or not?

We are still committed to the $1.07, Josh. That's where our outlook is. And as I mentioned earlier, we are right now at a 10% growth here for the first half as we move into the second quarter. And we do expect -- we expect to do better than we did the first half, including the 53rd week. And we also have performed better on the top line on our new innovations but we also have additional margin pressure.

I see. Okay, that's helpful. And then just on that 7% comp, are you able to break out the metrics of ASP in units?

Again, Josh, we did not provide additional on the comp store side. In total, I said the unit decline was 3% for our Company-controlled sales.

And Josh, just to add maybe to that, too, is we historically don't see a large differential in the ASP growth between the comp and non-comp stores. So you can use that in your thinking as well.

Okay, I appreciate it. Thank you.

I would like to turn the call back over to the Company for closing remarks.

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

Sleep well and dream big.

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