Sleep Number Corp (SNBR) 2014 Q4 法說會逐字稿

Welcome to the Select Comfort Q4 and full-year 2014 earnings conference call. (Operator Instructions) Today's conference 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.

Good afternoon and welcome to the Select Comfort Corporation fourth-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 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.

Please also note that we have posted an updated investor presentation on our website at sleepnumber.com.

I will now turn the call over to Shelly for her comments.

Good afternoon and thank you for joining us today. My SleepIQ score was a 71 last night. Today we will share highlights of our fourth-quarter and full-year 2014 performance, discuss priorities and key growth initiatives, and provide guidance for both 2015 and long term.

Our fourth-quarter results demonstrate the progress we've made in advancing our consumer-driven innovation strategy and leveraging our business model. Results in the quarter included net sales of $322 million, representing 40% growth versus prior year, with 22% comp sales growth; EPS of $0.35, 192% increase over prior year. These results were well ahead of our internal expectations, driven by a strong consumer response to both our core product lines and new innovations.

We are now well positioned to deliver sustainable profitable growth as we continue to advance our strategic objective.

In the quarter, sleep innovations, like SleepIQ technology and Partner Snore, combined with our core product line and differentiated retail experience, drove 15% growth in ARU, or average revenue per mattress unit.

We also experienced increased traffic from our Know Better Sleep campaign and more efficient media buying. These initiatives drove 23% Company-controlled mattress unit growth, 13% after adjusting for the extra week. The ability to concurrently drive both ARU and unit growth is one of the unique advantages of our integrated strategy.

Full-year results were also ahead of internal expectation. Net sales of $1.16 billion grew 20% versus prior year, with a 12% comp gain. Earnings per share of $1.25 increased 15% versus prior year's $1.08.

Our growth initiatives are driving improved performance and we are taking market share. The opportunity for continued revenue and profit growth is significant, as our strategy and investments mature in the coming years.

Here's a quick review of the three growth initiatives from 2014. Sleep innovation. We strengthened the value of our core adjustability with SleepIQ technology. The knowledge of how to adjust for your best sleep is a key differentiator, especially when combined with more frequent interactions with our brand.

Other innovations, like Partner Snore, are addressing important consumer sleep issues, thus increasing the average transaction size and adding incremental gross profit dollars.

Marketing effectiveness and efficiency. We increased traffic through three primary actions. Our new campaign, called Know Better Sleep, which features proprietary innovations, more efficient media mix and investment levels, and effectively reaching our broader target customers through media placement. We continue to find great value in our test and learn approach as consumer behaviors evolve.

Inclusive distribution. Our real estate strategy continues to drive increased productivity in our stores. Average revenue per comp store is now over $2.3 million, with 16% of our stores delivering greater than $3 million compared to 10% one year ago. Our goal is sustainable, profitable growth and our strategy includes significant testing to guide advancements in our real estate portfolio.

While 2014 represented a transition year for us, we delivered a strong top-line growth, a return on invested capital of 15% on a growing invested capital base, and total shareholder return of 27%. We also recently celebrated the milestone of 9 million lives improved.

Thanks to our mission-driven Sleep Number team for their commitment to delivering an unparalleled sleep experience. Our results confirm that we have the right strategy to deliver strong performance compared to the S&P 500 and our peer group.

Moving to 2015, we expect our liquidity and cash from operations to be sufficient for operating the business, funding our growth initiatives, and executing share buyback at a faster pace than in 2014. Last quarter, we stated that share repurchases would be up to 50% greater going forward. We have removed this constraint and now have the flexibility to execute share repurchases at a faster pace within our overall authorization.

Our 2015 plan delivers increased profits while also funding important, long-term growth enablers, including our ERP initiative. Our 2015 EPS guidance of $1.30 per share includes absorbing $0.13 of ERP launch costs in the year.

One of our top priorities in 2015 is successfully executing the ERP implementation in the fourth quarter. This initiative is critical to our ability to scale strategically, operationally, and profitably.

We are replacing the majority of our core transactional operating system. As a vertically integrated company, the scale, cost, and risk of this implementation also requires a prudent approach to managing our capital in the year ahead.

Increasing consumer demand also remains a priority. In 2015, we expect to drive traffic through the combination of sleep innovations, effective marketing, and our differentiated retail experience.

Here are a few highlights. First, technology, such as SleepIQ and Partner Snore, solve important sleep issues for consumers. We recently evolved our Know Better Sleep marketing campaign, which features these sought after innovations.

Many of you may have seen one of our new ads featuring Partner Snore technology during the Super Bowl pregame. If you missed it, you can view our new ad on YouTube or visit sleepnumber.com's homepage.

Second, we are excited to enter a new market adjacency with the SleepIQ kids' bed. Response to the recent introduction at the International Consumer Electronics Show has certainly validated our research. We look forward to launching later this year the only bed in the world specifically designed for kids' unique sleep needs.

Third, we will improve our digital experience. Last year, we invested in bringing the digital platform in-house, which improves stability and search effectiveness. This year, we'll redesign the experience for simplicity and impact. We expect our advancements to improve consideration and drive traffic to stores.

Fourth, we will advance local market development, launching our aggressive growth market in 2015. Our aggressive growth strategy remains on track, with results doubling market share in a sustainable manner within three to four years post-market launch. As we've previously highlighted, this strategy involves 13 markets, which represent approximately a third of the US mattress sales.

Moving to our long-range outlook. Our goal is to more than double our 2014 EPS to $2.75 over the next 5 years. This EPS target assumes high single digit revenue growth.

Additional assumptions include advancing and investing in sleep innovation, technology, and distribution; retail store growth of 5% to 7% annually; share repurchase accretive to EPS; mid-single digit mattress industry revenue growth; and a stable macroeconomic environment with low growth.

This management team is accountable for delivering total shareholder returns and therefore, all aspects of our financial performance. We will use our growth prospects, income statement leverage, and balance sheet efficiencies to drive profitable growth over time. We are confident that our consumer-driven innovation strategy, advantage business model, and capital discipline will result in strong returns for our shareholders.

David will now provide additional supporting highlights.

Thank you, Shelly. Good afternoon, everyone. We finished fiscal 2014 with record Q4 net sales of $322 million, 40% higher than the prior year, or 29% higher excluding $24 million of net sales for the extra week in the quarter. Our revenues continue to demonstrate the balanced growth of our [strategy enable], as seen in our comparably based sales metric, which excludes the sales in the extra week.

Comp sales grew 22%, while new stores added 9% of our growth. ARU of $3,866 was 15% higher than Q4 last year, while strong traffic led to 13% growth in Company-controlled mattress units. And average sales per store for the year grew 11% to a record $2.3 million.

Our growth initiatives are driving results. Shelly highlighted the impacts of our innovations and marketing. I will cover how our real estate strategy is directly contributing to performance.

Last quarter, I discussed the application of our disciplined market-based site selection process to new stores and decisions on repositions and expansions. Today I will review how we press the boundaries of our assumptions through a test, learn, and apply approach.

We have more than a dozen real estate tests across the country evaluating criteria such as store densification, urban market, smaller market, store size, as well as visibility and co-tenancy parameters. The results of these tests and learnings from the 322 stores opened or remodeled the last four years are informing our real estate decision.

Improving real estate by market contributes to delivering a value-added retail experience, resulting in measurable sales and profit lift. Over the last four years, we have elevated the real estate of more than 70% of our stores, helping to drive an 80% increase in average comp store sales over that period. It also resulted in larger stores giving us significant sales growth capacity.

We took 83 store actions in 2014, including expansions and repositions. We also exited 14 stores as leases expired in suboptimal locations. By the end of fiscal 2014, 83% of our portfolio reflects improved locations and more productive store design, up from just 24% four years ago.

Our strategy to drive average store sales of more than $3 million while growing our store portfolio 5% to 7% annually is fundamental to delivering sustainable profitable growth. This differentiated strategy is compelling, as it delivers four-wall profit flowthrough of 40% to 50% at the store level on incremental sales.

In 2014, 16% of our stores exceeded the $3 million milestone, up from 10% a year ago. We are pleased with the progress against these initiatives so far and also that significant opportunity remains.

Now I will share more about our Q4 results. Strong sales, including higher-than-expected mix of our new Flex adjustable bases, drove a 38% increase in our gross profit to $194 million. As a result, gross margin of 60.4% was 50 basis points below the prior year and slightly below internal expectations.

Our G&A and R&D expenses, excluding the $3.5 million legal settlement benefit, were in line with internal expectations. Selling and marketing expenses of $142 million, or 44.2% of net sales, were levered 460 basis points versus the prior year, including 190 basis points of media leverage in the quarter. Q4 earnings per diluted share of $0.35 were 192% over the prior year or 108% higher, excluding the extra week and legal settlement.

For the full year, net sales increased 20% to $1.16 billion and earnings per diluted share were $1.25 compared to $1.08 in 2013. Inventories at year end of $54 million were in line with plan and our cash and securities, net of customer prepayments, totaled $137 million. We generated $144 million in cash from operations in 2014 compared with $88 million in 2013.

We invested $77 million to advance capital projects and returned $45 million of cash to shareholders through share repurchases in 2014. Since the inception of our stock repurchase program in Q2 of 2012, we have returned $115 million of cash to shareholders, 24% more than the free cash flow generated during that period.

Our balance sheet and capital deployment priorities consider our 2015 initiatives and their risk for the business. We create the strongest return for our shareholders over time by investing in the business, retaining sufficient liquidity to support our initiatives while considering near-term risk, and returning cash to shareholders through share repurchases. We are committed to a balanced and disciplined approach, deploying capital against the priorities we believe will generate the highest return.

As Shelly stated, a top priority in 2015 is our ERP implementation. We will roll out our new systems in the fourth quarter, with additional supply chain modules following in 2016. One-time launch costs largely in the second half of 2015, primarily for data conversion and training, are estimated to be $11 million pre-tax or $0.13 per share.

The new platform will support our vertically integrated business with efficiency, stability, and scalability. While these investments are primarily enablers of growth, we expect to realize significant cost savings and cost avoidances in the years following the complete implementation. These savings are largely through improvements in our supply chain and are incorporated in our long-range outlook.

We plan to more than double our earnings per share to $2.75 in 5 years, with returns on invested capital in the midteens. This target assumes a high single digit sales CAGR with nearly double the rate of growth in EPS. While the path there may not be a straight line, we expect to leverage our 2015 growth to deliver $1.30 of EPS after absorbing the ERP launch costs. This guidance implies 20% EPS growth, excluding the 53rd week of 2014 and the 2015 ERP launch costs.

When thinking about 2015, we expect stronger sales and earnings growth in the first half. The second-half growth will be impacted by more challenging comparisons, including the extra week of 2014.

We are planning capital projects of approximately $80 million, including 40% for our ERP projects, a third to continue advancing our retail stores, and the balance on other infrastructure projects.

Depreciation and amortization will be approximately $48 million. About $5 million of the increase from 2014 relates to our IP investments reported in D&A expense and $3 million relates to stores reported in sales and marketing costs. And we expect the US economy will continue to grow slowly.

We expect to build on the successes from 2014, as we continue to have significant opportunities ahead.

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

In summary, our initiatives are on track for delivering growth and profitability goals in 2015 and long term. As discussed, we have a demanding year in front of us as we execute our ERP systems implementation, while driving growth and leveraging the business.

It is nonetheless an exciting time for us as we are making significant progress for long-term value creation. Thank you to our passionate Sleep Number team for your dedication to delivering our goals and improving more lives.

That concludes our prepared remarks and now we'd be happy to respond to questions. Jenny, please open the line for questions.

(Operator Instructions) Butch Bugatch, Raymond James.

I've been butched (laughter). Congratulations on the year and the quarter. A couple of questions. Maybe you've gone over them and I've missed them because of my ears.

Media spend in the quarter and the year? And how did the outlook for 2015 -- can you help elucidate us on that?

Yes, Budd, thanks. For the media spend in the year, we were -- or in the quarter was $46 million, Budd, and we leveraged 190 basis points in the quarter. And as we look ahead to 2015, we expect media as a percent of sales to be very similar to 2014, which came in around -- came in at 13.7%.

Okay. And as you look at gross margin going forward, that's the one area where I think you had some deleverage because of mix? How does that look going forward? I know that you don't focus on it, but unfortunately, some of us in the investment community do. Help us understand what your thinking is for 2015.

Yes. Well, thanks, Budd. We actually do focus on it a lot and it's really important to us as well. But I -- we're expecting -- we don't lap the introduction of our new flexible adjustable bases. And so -- of the end of the first quarter, so we'll continue to have some pressure from higher mix of those products in the first quarter.

We do expect for the full year to have modest gross margin rate improvement, but are happy to continue to have gross margin dollar expansion.

Okay. And this year, the 14th week or the 53rd week was really the last week of the year, if I did my calendar right. And you have that same week in next year. What's the week that is a comparison week that you all think is the week that you're losing? What do you think is the drawdown in comparison to this year, the sales comparison?

Yes, Budd, it gets a little complicated because our orders are different than when we are shipping product. And so we modeled it out a lot of different ways and focusing in on one specific week isn't that productive.

So just calling out the $24 million in sales delivered for that week as the one-off item and the $0.06 of EPS is the guidance that we're providing.

Okay. I'm glad I'm not the only one that was challenged with that kind of thought process. And lastly for me, the store count for next year looks like it's up 28 stores. And if I did my math right, is the Company-controlled comparable somewhere around mid single-digit to get to your guidance?

Yes, that's correct.

Okay. Thank you. I'll cede the floor to others. Thank you very much; good luck on the year.

John Baugh, Stifel.

Thank you, good afternoon. It's a pleasure to follow Butch here. Let's see -- gross margins, Q4 you mentioned the Flexible Fit. Was there anything else going on or was that 100% of the impact?

You know, that's the largest driver in the quarter. We continue to have high demand. You know, the pressure on our supply chain continues.

Yes. And on that, I think there was a reference in the press release to that. I think you decided that around the Labor Day event. Were the sales more evenly spread out this quarter and yet you still had logistics issues? Will we have the same kind of headwinds around Presidents' Day or help me understand that issue in more clarity. Thank you.

John, relative to the gross margin rate pressure, as David stated, it correlates with the high demand of our FlexFit bases. And you saw the profit growth in the quarter and the rate pressure is associated with that.

Having said that, in answer to your question about the shape of the quarter, it was a 40% growth in the quarter, with strong growth to the entire quarter. And we went into the quarter confident with our initiatives and how we're driving consumer demand, as we stated on our third-quarter call.

And we're anxious to understand how the innovations and the media effectiveness and our retail strategy would work during the holiday consumer period, which is always a little less predictable. We were obviously very pleased with how our initiatives progressed during that time frame with a very strong quarter.

Yes, congratulations on a great quarter. I was not clear on the unit number of mattresses in 4Q, X the extra week. What was that number?

Yes, the unit growth was 13%. 23% was the 53rd week or the extra week.

So is there a mix change within bedding or was it fairly stable?

With the actual bed line, John?

Yes, in terms of the unit mix. You had a 13% unit growth. Did you sell as many high-end beds as low-end beds or was there some kind of mix influence to lower price points or not?

We had a strong ARU as well as units. And as we've stated before, we correlate units with traffic and we saw a strong traffic throughout the quarter that we associate back to our marketing, featuring the product innovations and driving traffic into our stores with strong conversion.

It's really the integration of those three big initiatives and how they work together. And the ARU reflects both a strong attach as well as actually a mix up. So we had a mix up the lines plus the 13% unit growth in the quarter.

Great. And my final question is just on ERP, which can be a four-letter word sometimes. How do you handle the risk? Do you flip the switch all at once, gradually, by regions, districts? Just sort of explain how we are going to work through this? Are we going to run dual systems, etc.? Thank you.

So the ERP is, as I stated, a critical initiative for us. And as a vertically integrated company, this involves the majority of our core transactional systems. Therefore, it is a flip the switch at once, with our structure being both the manufacturer, supply chain, and retailer. So all the way through the organization.

Obviously, with an implementation of this scale and magnitude, the testing and the preparation and the benchmarking and the rigor, the involvement of our entire organization and ownership for the execution and implementation is a paramount nature for us and is clearly one of our very top priorities as we move into the year.

You know, we're well prepared now and we will be well prepared when we move into the actual implementation.

Well, congrats on a great quarter and I wish on a great year. Good luck. (laughter)

Thank you very much.

Peter Keith, Piper Jaffray.

Thanks, everyone, and great results. Shelly, you had commented that one of the initiatives that seem to be working is broadening your target customer. I think in the past, you've commented that you think you can move maybe down the age spectrum, but up the income spectrum.

I was wondering if you have any quantification of that, that some of the data you might be collecting around the store purchase might be able to help us understand if you're widening that overall customer funnel?

Yes, we are widening it. Obviously, with such a large base overall, if you look at the portion of young more affluent, it's small in total. But the fact is they're coming and they are responsive to both the creative and the media buying. And of course, our creative features are innovation and in particular, we see the purchase cycle pulling through with the SleepIQ technology.

Okay, very good. One little nuance I just want to be clear on. You had a reported comp of 22%, but that would not include the extra week. I believe when you provided comp guidance originally, it did have the extra week included. Is that correct?

No, when we provide comp guidance or numbers, it's on a comparable basis. So it wouldn't include an extra week.

Okay.

The 22% does not.

Correct.

22% does not, right. Okay. And so then I think obviously, you're setting guidance for the coming year that is relatively close to the longer-term guide, but you have some very good momentum heading into the new year, with the 22% comp and now guiding the full year at 5%.

Is there anything that you're seeing near term that would cause this step down or is it just -- you want to set an appropriate goal and then we'll see how the year shakes out.

First of all, we do expect that the Q1 to be very strong. So we're moving into the year with confidence of the initiatives that we can do to advance throughout 2014.

And we expect a very strong double-digit sales growth here in the first half. It has a lot to do with the back half and the back half, we have a few moving parts. We have the 53rd week from prior year as well as our ERP implementation. And then of course, we'll be comping our 31% growth from 2014.

We also, in the first quarter -- late in the first quarter of 2014 is when we introduced our FlexFit and Partner Snore technology. So we started introducing all of the innovations late in the first quarter and on through the second quarter. So we are, again, comping those introductions as we move through the year.

Okay, that's great color. Thank you very much and good luck with the coming year.

Brad Thomas, KeyBanc Capital.

Thanks. Good afternoon and let me add my congratulations as well.

Thanks, Brad.

I wanted to follow-up on some of the questions about the ERP. And I guess at a higher level, can you give us a sense of maybe what the total rollout costs will be? This is obviously a multiyear initiative. If you have $11 million this year, what is the total rollout cost and when would that be complete?

Thanks, Brad. The rollout -- the launch costs that you're referring to are the 2015 launch costs of $11 million. We expect about 80% of those in the second half of the year, probably equally balanced between third and fourth quarter.

In terms of the capital, we, as I highlighted in my opening remarks, our total CapEx for next year is $80 million. And about $30 million of that is earmarked for this project.

Great. So just if I try to think about whether we should be thinking of these as sort of continuing operations or one-time in nature, as we move into 2016 -- I know that's looking out further, of course -- but as we look out to 2016, would we have to duplicate that $11 million of expense that year? Or is that sort of thing that you will anniversary as we continue to move down the road?

Yes, Brad, these are one-time costs. We will have some about one-third, maybe, in 2016, but those are really supply chain modules that we'd be launching. And we will provide you more details on 2016 as we get closer to 2016.

Perfect, very helpful. And then if I could just follow up quickly on the sales side of things. I think the kids' bed looks very differentiated from what's in the market. And I was wondering, Shelly, if you could provide us any more color on perhaps when the launch might be and what kind of benefit you all might be expecting this year from this new product?

Yes, we are excited about the kids' bed too. And certainly really pleased with the response from both media and consumers after the show in January. We'll be launching later this year and this should be a great store, so additional traffic and unit growth for us.

Thank you and congrats again.

Thanks again, Brad.

Josh Borstein, Longbow Research.

Congrats on the quarter. Just a few questions. One a follow-up on Budd's question on the gross margin. That you expect little bit of gross margin improvement here in 2015, does that imply at all that you expect attach rates for adjustable bases to level off this year?

You know, as I was saying, Josh, I think there's going to be pressure still in Q1. However, we are working hard to continuously improve our operations in the supply chain area.

Largely, we expect the margin benefit to come after our final deployment of our ERP systems, but we still believe that there's an opportunity to get some improvement here in 2015, modest though it may be.

And we continue to be very pleased with our attach rates on the FlexFit. And we'll report out on how they're doing compared to our internal expectations on our calls, but we are not anticipating a regression in that area.

Okay. Do you still -- in terms of what inning you think you are in the attach rate, where would you say you are right now?

Well, we are obviously very pleased. We had a strong ARU growth this last year. The majority of that, if you look at the fourth quarter, only 3% of the ARU growth was associated with pricing and the rest -- the majority of the rest was associated with the FlexFit attach and some mix, but mostly the FlexFit attach. So we're pretty happy about the growth and the progression through the year on this one.

Okay, great. And just in terms of the mid-single digit comp guidance for 2015, how should we think about that in terms of units versus ARU?

Yes, you know, we expected growth from both ARU and units. We've been able to achieve that these last two quarters and we expect that again when we look out over the course of the year. Obviously, the strength again will be in the first quarter and therefore the first half. I do think that ARU will probably be a little stronger than units.

Okay and just last one for me. Could you give us an update where we are for mall versus off-mall? And of the new store growth, how much do you expect to be off-mall? Any metrics you could share would be helpful. Thank you.

Sure. The mall is 60% of our portfolio and non-mall 40%. And we will continue to advance both formats, though the non-mall will take on a little higher penetration here in this -- in the coming few years.

Great. I appreciate the color. Thanks and good luck on the year.

Thank you.

Operator, do we have other callers?

Jessica Mace, Nomura Securities.

Hi, good afternoon and congratulations.

Thanks, Jessica.

My first question is a follow-up on the opportunity for the kids' bed. And I was wondering if there's anything you could share with us about that market or perhaps parents' behavior when purchasing beds for their children, maybe that you could glean from any of your current business that might be to that demographic or any insights into what may be quantifying the opportunity that you think this new product gives to you?

Jessica, this is a new market adjacency for us and it is a new market in general. So we're paving the way into this market. What we do know and can help quantify is that at any one point, approximately 2.5 million parents are shopping for a mattress for their child here in the US.

Understood. Thank you. And then my other question was a clarification just on the gross margin dynamics and some of the supply chain pressure you had this quarter. I think you said modest improvement as far as your outlook for that in the next year.

I'm just wondering if you could help us break down -- other than the ERP implementation at the end of the year, what other kind of near-term updates or improvements there might be on the side of meeting demand. Or if that's more of an assumption of where you are expecting your comps for the next year.

Yes, Jessica, so I think we've covered that a little bit today with expecting some pressure to continue in the first quarter, largely from the FlexFit attach rates while we continue to work to improve our supply chain, but the legacy systems that we have in place really are kind of keeping us from getting past some of the improvements that we will certainly be able to achieve once those new ERP platforms are in place.

Great. Thanks much for taking the questions.

Jessica, the other thing that I would add as you think about the year ahead is we'll provide updates on a quarterly basis around the FlexFit attach. That's a great source, as David stated, of profit growth.

And we're expecting modest growth in that area once we get beyond Q1. And therefore, we do expect some rate improvement, a slight rate improvement in the year with some of the efficiencies we are working on internally.

At the same time, demand continues to grow in that area. That could adjust the rate. That's really what's been happening these last few quarters with our gross margin rate; we expect it to be slightly higher in the fourth quarter than we were. But it had everything to do with our incremental sales, which helped drive the 40% increase and the great gross profit growth in the quarter. So we'll keep you updated on a quarterly basis on this one.

Great. Thanks very much.

Keith Hughes, SunTrust.

A couple questions. Number one, I think you had mentioned -- and I'm not sure if I heard this correctly. The potential in the longer-term guidance, the 2019 guidance, were different store formats, bigger or smaller. Is there anything you're willing to share with us on that? Thank you.

We talked about the testing that we're doing with -- for ideas on aspects of our real estate strategy. We've had that testing rigor for a number of years now. So we are always pressing against a variety of assumptions and our strategy as the consumer continues to evolve.

We are really pleased with our two very productive formats that we have right now, both the mall and the non-mall. And at the same time, in 2014, we did advance our store design, incorporating more technology into the customer's experience. And we're happy with that. We'll continue to evolve that with our format.

But generally, right now, as we look out to 2019, it includes the advancement of the real estate strategy with the two formats of mall and non-mall in approximately a similar square footage as we have today.

Okay. And are you anticipating a new mattress launch here in 2015?

We'll be launching the SleepIQ kids' bed here in 2015.

Okay. Nothing in the main line is going to change, though. Is that correct?

We've communicated about the kids' and that's our focus this year.

Okay. And then final question on the CapEx guidance for the year. How much of that is ERP and how much of that is investment in other parts of the business?

Yes, so about $30 million of the $80 million is related to the ERP implementation. About a third is related to our stores and the rest is for other infrastructure projects.

Thank you very much.

Todd Schwartzman, Sidoti Company.

First off on the kids' entry, what have you -- in terms of your planning to enter that market, what have you identified as particular challenges from a sales and marketing perspective that's unique, vis-a-vis the adult line?

Well, it is a different -- I'm glad you're asking the question. It's a very different product, different market. You have opportunity to, of course, market to the parent or the children or some combination. We have been testing and advancing our product and our go-to-market planning based on a number of factors.

And we introduced much of this at the International Consumer Electronics Show, specifically speaking to the various features and benefits of the actual product and how these smart features will adjust as the child grows. And that this is a bed not only for the 4 year old to 6 year old or the 7 year old to 9 year old or the 10 year old to 12 year old. It is one bed that will adjust with them as they grow.

It's a very different product and market than we currently have. And we're obviously not going to share a lot of detail about how we are going to approach the market, but we're certainly considering all those opportunities in front of us.

Okay. And what about the weather effect thus far in Q1? I realize it's early, but have there been any closings of note, whether it be the Midwest or the Northeast stores?

Yes, obviously, the Northeast has been fairly challenged with weather. We hear about it more in Minnesota than we do our own snow issues. So it's been a little unusual for them.

But I would say it's pretty typical of a normal winter. And one of the advantages for us is that we are national, so we continue to do business in all markets. And therefore, you're either usually encountering or dodging weather somewhere and it somewhat evens out.

Got it. Shelly, I'm curious about the timing of your decision to put forth a five-year EPS kind of plan at a time when you're starting a year where you're about to embark on the ERP upgrade. As John mentioned earlier, I know that ideally, it all goes well, but frequently that's not necessarily the case. There are glitches along the way; things get pushed out potentially.

What has changed versus a year ago? Why give this five-year kind of back-of-the-envelope guideline now? What's changed for the better in terms of your visibility or your confidence in the supply chain? Any other factors that you want to call out as the rationale for talking about $2.75 in EPS?

Well, first of all, when we spoke about our long term a year ago, we stated that we intended to update it sometime in the near future and may have even indicated at this particular time.

In 2014, we initiated a number of initiatives that we had been working on throughout 2013. And this is -- now we're approaching our second year of advancing these initiatives around our growth strategy, specifically the combination of proprietary sleep innovations, effective marketing, and differentiated retail experience.

It's been very steady in the advancements each quarter of these initiatives and how they are working together. And the consumer has responded quite positively with increased traffic and purchasing. And you've been able to see that progress through the quarters.

During that time, we had also been in 2013 and 2014 investing in these same areas in R&D as well as our distribution strategy and our infrastructure. And we continue to advance those investments with a great deal of clarity about our strategy and how we can see our ability and the possibility for us to be able to not only leverage the business model, but also have efficient capital deployment with share counts leveraged and how all of those -- these three areas of growth, our income statement, and our balance sheet can work together to deliver a very powerful EPS by more than doubling it over the next five years.

The ERP is critical to our ability to scale with agility and to be able to expand our profitability and our evolution of our product innovation in the coming years. And yes, we are anxious to get beyond the ERP implementation.

At the same time, it's part of our responsibility to think long term and deliver increased shareholder value for all of our shareholders over time. And so it's necessary for us to embark on this and we are accountable and responsible to get beyond it and continue to advance our EPS growth.

Yes, got that. And lastly, on the share count, it looks like you bought back a little less than $17 million in Q4. What's the assumption that's baked into your EPS guidance?

Todd, we bought $15 million in stock in the fourth quarter. We -- you can assume relatively a similar kind of reduction in shares in 2015 as you saw in 2014.

And then long term, as I stated, one of our assumptions is that share count will be accretive to EPS.

Are you using about 53.7 million, 53.5 million or so diluted shares for the year?

In 2015?

In 2015, it's about --

In 2015.

Yes, it's about 53 million.

Okay. Thanks a lot.

Joan Storms, Wedbush.

Congratulations. So I was wondering and I know someone asked the question earlier, but I know your focus is the kids' this year and it is going to be later in the year. Last year, you introduced a number of products sort of midyear. Can we expect some new product announcements around that?

Joan, we continue to be really pleased with the innovations that we introduced in late first quarter and in second quarter last year and continue to advance all those innovations: the FlexTop, the FlexFit series, the SleepIQ. So we have a lot of runway left there that we'll continue to build on this year.

Got it. Thank you. And then also on the aggressive growth market -- or the aggressive growth plan. I know you introduced your 10th market this year. I think there's 13 markets total. Has that been expanded as far as the rate of introductions over a number of years?

The 13 markets are the -- we identified 13 markets originally when we kicked off the strategy in 2011 and have been advancing it since that time.

Okay. So we would look over maybe in the next couple of years for you to do the other three?

That's right. Our plan is to launch the 10th market this year. And obviously, things are paced and the investments in the spending of media and the optimization of stores all comes to play in our pace for the aggressive growth rollout.

Okay. And then lastly on the ERP, how -- David, how are you going to report this? Because obviously, the $1.30 includes the $0.13 and that's on a GAAP basis. Are you going to report adjusted non-GAAP EPS? Is that what Thomson is going to report or how does that work? I mean, is it $1.30 or $1.43?

That's a good question, Joan, and we own all of our results. And as Shelly was talking about, the $0.13 is incorporated in our $1.30 guidance. We will be talking about each quarter how we are doing on the initiative. It's a very important one. And we'll give you updates each quarter.

Okay. And then you may have said this and I might have missed it. What buckets does that $0.13 come out of as far, as gross margin or sales and marketing or G&A?

It's all in D&A.

It's all G&A, okay. Okay, that's all I have. Thank you very much.

And there are no further questions over the phone. I'll turn the call back over for closing comments.

Thank you for joining us today. We look forward to discussing our first-quarter 2015 performance with you in a couple of months. Sleep well and dream big.

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