Sleep Number Corp (SNBR) 2015 Q3 法說會逐字稿

Welcome to Select Comfort's Q3 2015 earnings conference call.

(Operator Instructions)

Today's call is being recorded. If anyone has any objections you may disconnect at this time. I would like to introduce Dave Schwantes, Vice President of Finance. Thank you, you may begin.

Good afternoon and welcome to the Select Comfort Corporation's third quarter 2015 earnings conference call. Thank you for joining us. I am Dave Schwantes, Vice President of Finance and 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 and supplemental financial information 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.

Good afternoon and thank you for joining our call. My SleepIQ score was 84 last night. I will highlight our results, provide an update on the ERP implementation, discuss the progress we have made against the plans we have laid out at the start of the year, and close with our growth prospects heading into 2016.

We planned for an ambitious year of advancing our consumer innovation strategy while also delivering strong financial results. In addition to achieving our goal we have strengthened our competitive position by acquiring BAM Labs, accelerated our innovation pipeline, and improved our financial flexibility by establishing a new $100 million revolver.

Year-to-date net sales grew 20% to $999 million including a 15% comp gain with earnings per share of 51%. Our operating profit increase of 43% shows the leverage we are realizing from our business model even as we take on large transformational investments. We are very pleased with the trajectory of our business and the steadiness of our results.

We are delivering growth from both units and ARU which for the first nine months were up 9% and 11% respectively. And we continue to deliver record average sales per store which is now at $2.56 million for the trailing 12 months, up 16% from the prior year while also adding net new stores. And we are gaining market share in both dollars and units in a healthy mattress industry when comparing to ISPA's reported results through August.

We planned for and delivered a strong third quarter. Net sales grew 16% to $374 million including an 11% comp gain while our earnings per share grew 41% to $0.62 per share. We again posted stellar Labor Day results which was meaningful as we annualized the 16% comp gain from the prior-year's third quarter. The underlying fundamentals of demand, margin, cash flow, and capital efficiency were all strong contributors to our quarterly results and on track with our internal plans.

In addition the third quarter benefited from the movement of $10 million in shipments from the fourth quarter in preparation for our ERP implementation and a $0.04 EPS gain from the BAM Labs acquisition. Our new ERP system went live the second week of October on time and on budget. Ultimately the new processes will result in greater agility, speed, and efficiency while simplifying our customers' service experience.

I want to thank our employees and partners for their incredible contributions and preparation for and in the implementation of our new system. Almost every employee has needed to learn how to do his or her job differently. It takes a high level of engagement, capability, coordination, and perseverance to accomplish an ERP implementation of this magnitude and complexity.

Three weeks after our go live, the system is stable, the design is effective, and we are operating the new system across the Company. Stores are processing all their transactions, plants are manufacturing and shipping products, customer service is scheduling and routing, and home delivery teams are delivering.

As we knew it would be, the implementation has been disruptive to our customers' experience, specifically in the areas of extended delivery, delayed service, and wait time on calls. In our customer focus culture, this has been especially challenging because we never want to disappoint our customers.

Thankfully we will positively impact many more customers in the future with our more efficient system. Our teams have been working 24/7 to address issues and we are making meaningful progress. We still have much work to do, but we have narrowed the remaining issues.

Our lead times are currently 21 days for most of our products versus our typical 14 days. We expect to be operating efficiently with normal customer service levels within the quarter. We appropriately forecasted for the implementation challenges and we remain on track to deliver full year earnings per share of $1.35 consistent with our previous guidance.

Since our last call we acquired BAM Labs, the Silicon Valley pioneer of biometric sensor and sleep monitoring. This acquisition strengthens our competitive position with unprecedented data and connected product capability. We know them well as we have partnered with them since 2012 to develop and commercialize SleepIQ technology. BAM is now operating as an independent business unit called SleepIQ Labs.

The deeper collaboration of our teams has already resulted in acceleration of our innovation pipeline, which will be visible at the International Consumer Electronics Show in January. The plans we laid out at the beginning of the year are delivering the results we expected. Let me update you on our 2015 priorities.

First, we are increasing demand for our differentiated products. We continue to deliver year-over-year sales growth from benefit-driven products like SleepIQ technology, FlexFit adjustable bases, and our FlexTop mattresses. In addition we entered a new market adjacency with SleepIQ Kids and we are excited about the potential to connect with the entire family. We expect this new category to build over time.

Second, we have evolved our marketing and advertising in 2015 which has delivered increased traffic from a broader base. Our new customer growth reflects younger, more affluent customers in addition to our historical core customer base. We introduced a new suite of TV commercials this year including the memorable and engaging Lion Sleeps Tonight ad featuring Partner Snore Technology. We continue to align our media mix and advertising spend with our target customer moving into more productive TV, digital, and social media, resulting in our seventh consecutive quarter of media ROI improvement.

Third, we have improved our digital experience. This includes launching a modern responsive design with easy mobile navigation. These improvements along with relevant digital content help consumers learn about our brand and proprietary products, easily find our stores, and shop online. In the third quarter unique visitors to sleepnumber.com were up 53%. We continued to see a strong correlation between this metric and our store traffic.

Fourth, we continued to successfully advance our market development initiatives. We have opened, remodeled, or repositioned 36 stores since the beginning of the year. This is in line with our intention to improve existing locations, and grow our net store portfolio 5% to 7% annually. We now have a quarter of our store base, more than 100 stores, delivering more than $3 million in annual revenue. We launched another aggressive growth market in the third quarter, the 10th of the 13 markets we planned when we began this effort in 2011.

And finally, in support of our many consumer facing initiatives, we are deeply focused on increasing our manufacturing efficiency and sourcing opportunities. This is year three of lean Six Sigma initiatives in our plan. We have increased our productivity and plan to extend our current capacity into 2020 with minimal capital investment. In addition, our demand and supply planning capability is informing our hybrid, make to stock program. We benefited from this effort at the end of third quarter when we accelerated deliveries in advance of our ERP implementation.

Now let me turn to 2016. We are confident about our growth prospects heading into next year and here is why.

Our proprietary innovations are attracting new customers to our brand while re-engaging our existing customers. We expect this combination to continue to result in ARU and unit growth in 2016. We will introduce our next innovation at CES in January and we expect this product will be a mattress unit driver.

We are growing our share in a healthy industry that has average dollar growth rates of nearly 6% over the past five years. By comparison, our sales CAGR over the same five year period has been 16%. Our innovation and a consumer who is increasingly focused on health and wellness have resulted in consistent share gains, and we expect this trend to continue.

We have a differentiated retail experience that has resulted in retail leading sales productivity with room to grow our footprint. Our sales per square foot is in the top 10 US specialty retailers and in 2016 we expect to launch at least one more aggressive growth market, continue our overall store growth of at least 5% to 7%, and further increase our average revenue per store. We are also advancing our digital customer experience in the seamless integration between stores and mobile.

We are benefiting from the efficiency of national broad reach television advertising that supports our national store footprint. This efficiency funds local advertising for our aggressive growth and our other high potential markets, attracting new customers to our brand, mobile site, and national store base is a key part of our growth strategy and market share gains.

We have a loyal customer base that drives our repeat and referral business which makes up more than a third of our sales. Innovative offerings like SleepIQ technology increases the frequency of our customer interaction and strengthens our ongoing customer relationships.

We are evolving to a more agile supply chain which will further reduce complexity, expedite deliveries to customers, and increase efficiencies. We expect this initiative to drive 50 to 100 basis points of margin improvement beginning in the second half of 2016.

We deploy capital efficiently. Our return on invested capital remains consistent with our mid-teen, long-term target and above our 10% weighted average cost of capital. Our share repurchase program continues with repurchases totaling $68.6 million year-to-date compared with $30 million from the same period last year. Over the next couple of quarters we expect to be assertive in our repurchases given that our shares are currently of good value. Our cash priorities in 2016 includes funding, organic growth, maintaining financial flexibility, and share repurchases.

And finally we have what we call Sleep Number DNA, a dedicated team of employees that are passionate about our customers and our product. They are highly engaged and highly confident about our Company and our future with a bias for getting things done. Today our employees' level of engagement is on par with extraordinary company norms that drive superior organizational performance. We are one of just a few US companies to achieve this level of engagement.

All of these attributes are contributing to our sustainable profitable growth. We continue to be on track to deliver our long-term commitment of earnings per share of $2.75 by 2019. I will now turn the call over to David who will provide more detail on the quarter and the remainder of the year.

Thank you Shelly. Good afternoon. Before I get to my prepared remarks I understand we may have had some webcast challenges at the beginning, and I apologize to those of you who are affected. We will make sure we pick up on your questions at the end of the call. But the webcast will also be on our website for replay later.

Our teams continue to build demand, leverage the business model, and deploy capital efficiently to deliver industry-leading results while significantly advancing our growth initiatives. So far in 2015 we have delivered year-to-date net sales up 20% versus the prior year including a 15% comp gain. Gross profit is up 21% including 70 basis points of rate improvement to 62.1%. Operating income is up 43% or 170 basis points to 10.6% of net sales, and year-to-date EPS is up 51% over the prior year, or 2.5 times the growth of the top line.

Our strategy is working and our initiatives continue to deliver healthy returns on investment, while completing a complex ERP system and implementation. Before walking you through our financial outlook details, let's review our Q3 performance. Net sales of $374 million were up 16% over the prior year on top of 23% growth for Q3 last year.

Comp growth in Q3 was 11% and net new stores added 4% to our sales growth. ARU and Company controlled mattress units each grew 7% over the prior year third quarter on top of double-digit growth in both metrics to prior year third quarter, up 13% and 10% respectively. Benefit driven pricing contributed 3% to our growth for the quarter, consistent with our five year historical average.

And our comp stores reached another record with $2.56 million in average trailing 12 month sales up 16% versus the prior year. We delivered a 20% incremental operating flow-through rate on record Q3 net sales while also funding strategic projects. While the timing of our initiatives will cause quarterly rate fluctuations, we continue to expect mid-teen flow-through rates over longer periods of time.

Q3 gross profit dollars grew 18% year-over-year with a gross margin rate of 62.5% of net sales, 110 basis points higher than Q3 last year and our highest quarterly gross margin rate in two years. Lower discounts, higher year-over-year sales volume, favorable product mix, and benefits from our lean manufacturing initiatives all contributed to the gross margin improvement in Q3. Operating income grew 28% to $45 million with operating expenses up 15% over the prior year.

Several important initiatives bear calling out for the quarter. As planned we spent $5 million during the quarter to launch our SleepIQ Kids and our tenth aggressive growth market, both long-term growth initiatives that resulted in 70 basis points of media deleverage in Q3. G&A expense included $7 million of planned ERP implementation costs for data conversion and training.

Our G&A line also included a $3.5 million gain from the BAM Labs acquisition. This gain was partially offset by $500,000 of Lab R&D costs netting to a $0.04 benefit in Q3. Incremental Lab R&D costs in Q4 of approximately $3 million to $4 million, or $0.04, are expected to offset the Q3 gain, resulting in a net neutral impact in 2015.

For 2016 we expect the acquisition to be dilutive by $0.10 to $0.12. Product cost reductions resulting from the acquisition are expected to start late in 2016, turning the acquisition accretive in 2017 and beyond. Q3 EPS grew 41% to $0.62 including $0.03 each from lower share count and a lower annual effective tax rate projection of 32.5% resulting largely from tax planning benefits on the BAM Labs acquisition gain.

During the quarter we paid approximately $57 million to acquire BAM Labs and used $18.5 million to repurchase shares. Trading rules prevented us from being more aggressive with our share repurchases prior to announcement of the BAM acquisition. As expected, inventories of $78 million were $9 million higher than Q2 to support demand ahead of our ERP launch.

We ended the quarter with $89 million in cash and securities net of customer prepayments. Both our cash and inventory levels are seasonally high at the end of Q3 and we expect both to be lower by year end. As we exit 2015 having completed the most complex aspect of our transformation, we intend to operate the Business with meaningfully lower cash balances than the previous average of $100 million of cash net of customer prepayments.

The new $100 million credit facility established during the third quarter provides a highly accessible liquidity and greater financial flexibility. Our capital deployment plans continue to prioritize investments in the Business first followed closely by our intention to maintain sufficient liquidity to support our plans and to return cash to shareholders through share repurchases.

We are confirming our 2015 full year guidance for EPS of $1.35. This outlook implies EPS growth of 27% excluding this $0.06 from the 53rd week benefit in 2014 and $0.16 of estimated ERP launch costs in 2015. Our outlook continues to assume mid- to high single-digit second half sales growth adjusted for the extra week last year, an estimated $10 million to $12 million sales drag in Q4 from ERP implementation inefficiencies, or $0.09 of EPS impact, and full year ROIC of approximately 14% in line with our long-term expectations.

I will review several other noteworthy items expected to affect our year-over-year comparisons for the fourth quarter. Please also refer to the supplemental financial table on the last page of the press release.

First, recall that the fourth quarter of 2014 included $25 million of net sales or $0.06 of EPS for the extra week and $0.04 for a favorable legal settlement. This year we accelerated approximately $10 million of shipments from Q4 into Q3 which shifted approximately $0.04 of EPS into Q3. Because of these shifts in volume and Q4 ERP implementation inefficiencies, we expect the gross margin rate in Q4 to be lower than Q4 of last year.

We continue to expect full year sales and marketing expenses approaching 44% of net sales. We expect G&A expenses in Q4 to be similar to the $28 million in Q3 including approximately $3 million each of ERP launch costs plus incremental IT depreciation. Capital projects for the full year 2015 will be approximately $85 million with depreciation and amortization of approximately $48 million.

R&D spending in Q4 is expected to be approximately $5 million higher than last year, primarily from the inclusion of SleepIQ Lab costs. We project an annualized income tax rate of 32.5% in 2015. This does not include the extension of the R&D tax credit nor the bonus depreciation provision. If Congress acts before our fiscal year end, our full year rate would be approximately 34%, negatively impacting Q4 EPS by approximately $0.03.

Looking ahead, our 2016 sales and EPS growth expectations are in line with our long-term commitments to deliver at least $2.75 of EPS by 2019. This implies mid- to high-teen EPS growth on high single-digit sales growth from 2014. We expect to deliver that growth in 2016 while absorbing approximately $9 million or $0.12 additional R&D costs from the BAM Labs acquisition.

About $12 million, or $0.16 incremental depreciation, largely from the ERP system and new stores, and approximately $4 million, or $0.05 of supply chain module implementation costs in the first half of 2016. We continue to expect the additional logistics capabilities to enable 50 to 100 basis points of supply chain efficiencies beginning in the second half of 2016.

We will provide more specific guidance for 2016 on our next earnings call in February. We expect to enter 2016 with four of our five major transformations behind us that establish our foundation for sustainable profitable growth, including highly productive retail operations including our stores and digital, effective marketing strategy and tools, differentiating customer driven innovations including our SleepIQ technology platform, and most recently the ERP platform that will support our growth and agility for years to come.

In 2016 we will execute our supply chain transformation. This initiative has been dependent on implementing the new ERP system along with a system modules planned for the first half of next year. Transforming these fundamental elements of our Business as it's well-positioned for sustainable profitable growth for the long term.

I would also like to share my sincere thanks to our Sleep Number teams for the heavy lifting they have done and continue to do for this Business, our customers, and our shareholders. We are now happy to take questions. Please open the line.

(Operator Instructions)

Peter Keith, Piper Jaffray.

Hi, thank you very much everyone. Congratulations on good Q3 results. I guess there is a lot of moving parts here with the quarter.

Could you help us understand the $10 million of sales shift out of Q4 and into Q3? The calculation is probably pretty simple but could you give us what the impact was on your same-store sales growth and perhaps was that solely then impactful on your unit growth as well?

Sure, Peter. The impact on our same-store sales growth was about 3 percentage points in the quarter. It was the right thing to do for our customers ahead of the ERP implementation. We wanted to make sure that we gave them a very good experience ahead of the ERP which we knew was going to be disruptive and it was our best estimate of what that sales impact that we pulled into Q3 from Q4 would be.

And that would just be isolated to unit growth and not impactful to the ARU?

That's right.

Okay. Good. Looking to Q4 when you look at the online social media there are obviously some upset customers and they'll probably settle out over the coming weeks but have you contemplated the possibility of canceled orders at this point, maybe things that haven't already been booked at the store but might get cancelled before delivery? How should we think about that?

Absolutely. And that's contemplated in the $10 million to $12 million of sales impact that we highlighted in the last page of the press release table.

We included that table because there are so many moving parts we wanted to make sure everybody had a clear line of sight to all the parts that we are thinking about. In their -- cancellations are definitely a part of what we considered in establishing that estimate for the $10 million to $12 million.

Okay and that's the $0.09 drag for Q4?

Right. Which also includes anticipated inefficiencies.

Okay lastly for me, David, that's probably good for you. The first step here you're going to do the supply chain modules? Could you just walk us through the planning and implementation process and give us an understanding if that's equally or perhaps less complex than the system you just implemented this past quarter, this current quarter?

Yes. Thankfully it's significantly less complicated. The module is -- it's kind of in line with the expected implementation costs, comparisons about a third of the implementation costs that we're incurring. It doesn't require the kind of multi-year planning that we have had for the current ERP system implementation which is for a vertically integrated company extremely complex.

Okay. Thank you very much and good luck with the rest of the year.

Budd Bugatch, Raymond James.

Hi, it's Bobby Griffin filling in for Budd. Thank you for taking my questions. First for me I was wondering if you could maybe comment a little on what you saw from SleepIQ Kids, the new bed line, if that customer is new incremental customer or somebody -- a household that already has a bed that's coming back to get a second bed?

Great. Hi Bobby. This is Shelly. With the Kids absolutely is a new customer for us. A younger, more affluent customer and it is also a slow ramp up as we expected. This is a new market adjacency. It is a long-term play.

But we really love the engagement from this customer, from the kids, and how it connects the entire family. So what we have seen in our small sample size from just a few months is that it's a new customer and often times it will be a multiple bed purchase.

Okay. I understood that the kids were the new customer, but it is at times a new family to Select Comfort, or call it a new household to Select Comfort all in total. Is that--?

Yes. That's exactly what I meant. So yes, it's a new customer coming to our business.

Thank you. I appreciate that color. And then lastly for me, maybe for Dave, can you maybe provide a little bit more detail on the BAM Labs acquisition, how it kind of becomes accretive again in 2017 and maybe simpler, high-level color to understand what's going on there?

Sure, Bobby. The impact on 2016 EPS is largely from the incremental R&D costs associated with the approximately 35 engineers that we have now in the Silicon Valley area.

The synergies that I mentioned, or product cost-reduction, are items that we have in the pipeline that are directly enabled by the acquisition, and will come online at the end of 2016 and move the overall acquisition to be accretive in 2017.

Okay I appreciate that color and best of luck going through on the fourth quarter and into calendar year 2016

John Baugh, Stifels.

Thank you and good evening. I would really love to know Hunter Saklad's Sleep Number IQ for the week -- first week of October. (Laughter) I have a few things here. First on the delivery you said I think that you will be back two weeks by the time you exit this quarter. Did I hear that correctly? And where are we with the free delivery? When do you anticipate pulling that?

Yes, John, a couple of things. First of all we did end the free home delivery a couple of weeks ago, or a week -- the 26th is when we ended the free home delivery and we are currently at 21 day lead time for the majority of our products. Then your other question was about normal customer service time frames, and yes we did state that we expected to be back to normal within the quarter.

Okay. And then on switching gears on BAM. So walk me through how we go -- I get how we're diluted because we're bringing on 35 people, walk me through how we go from diluted to accretive. What occurs? Something about product costs?

Again I'm highlighting that we have enabled some product cost-reductions through the acquisition and that will come into play starting at the end of 2016 and then benefit us enough in 2017 that'll more than offset those additional R&D costs.

So these engineers are going to be able to help you engineer costs out of your product, is that my understanding?

Yes our teams are working together to solve the issues and opportunities that we have put forth. Yes.

Okay. And maybe David quickly for you, my last question, there were a whole bunch of items on the balance sheet that obviously are somewhat skewed by the ERP. Customer pre-payments were down 13% year-over-year, accrued sales were turns were up 34% maybe that was related to Peter's question earlier -- warranty liabilities were more than double year-over-year, other long-term liabilities were way up.

Could you comment on any or all of those and how much of those are just influenced by ERP or other unusual things? Thank you.

Sure, John. The items largely that you're talking about have to do with the actions that we have taken, either in advance of the ERP implementation, so customer deposits coming down. That's directly tied with the service levels that we provided at the end of the quarter.

And then the other accrual balances that you highlighted were tied to implications of disruption that we have anticipated from the ERP implementation.

Thank you and good luck going into 2016.

Brad Thomas, KeyBanc Capital Markets.

Thank you, good afternoon, and congratulations on a strong quarter here. I wanted to follow up on the topic of sales and maybe just ask directly how you are thinking about comps for the fourth quarter.

I think the math would be that there is a $0.03 drag from the timing shift to 3% to 4% drag from the ERP. Obviously for total sales you have the extra week that you are up against. But could you just give us a sense for how you are thinking about the cadence of same-store sales especially as we think about the momentum that you may have as you move into next year?

Sure, Brad. I first want to take us back something that we need to keep in mind is Q4 of last year grew 40%, that included an extra week which on an adjusted basis was still up 29%. On a two year basis net sales even as we are guiding for Q4, even with all the moving parts on a GAAP basis, are up 30% with two year stacked comp coming in at high mid- to high-teen rate. Even with stacked units in a 10% to 12% kind of range.

When we think about the fourth quarter obviously the things you highlighted, the comparison to the prior-year with the extra week, the shift into Q3 from Q4, and then the impact on sales from the ERP implementation this quarter, we are planning to have lower sales in Q4 than the prior year. On a comp basis I would say that ARU first of all is positive in the range of mid-single digits while we expect units to be down.

Great. And just for the fourth quarter, how are you all planning your marketing spend?

Yes. A couple of things to add on the fourth quarter, I think the other part of your question was how we exit 2015 and head into 2016 and that directly ties to your question about the marketing spend. One of the things we have learned certainly in our formula is to have a steady baseline of marketing spend.

So we are continuing to do that through the ERP and obviously that creates some deleverage in media in this quarter so we are continuing our spend. We expect to return to our normal customer service levels within the quarter, we expect to have a very strong holiday, and a strong exit going into 2016.

What you are seeing the impact on fourth quarter in addition to the 53rd week is really about the ERP implementation primarily in the month of October. Obviously we planned it for this time period because it is a lower sales period for us, but we expect to be where we need to be as we head into the holidays. Marketing dollars year-over-year will still be up in the fourth quarter.

Perfect. And then just to ask it directly to make sure we are clear. When you quantify the $10 million to $12 million of negative sales effect that's assumed just to be lost? You are not assuming that spills into the first quarter are you?

We are assuming that those are lost sales.

Great. Thank you so much.

Keith Hughes, SunTrust.

Thank you. Going back to BAM, what was the purchase price again for BAM?

Total including some costs was about $57 million.

I think you said $0.10 to $0.12 hit in 2016, that's a cash hit, correct? That's not any kind of amortization fall off or anything of that nature, is it?

It's primarily cash. Right. There's a little bit of amortization.

My question is why, I think you were doing business with them before as a third party, why outlay capital for them at this point?

Great question. A couple of things. First of all this SleepIQ technology has been very important to our Business and we have proven in our research that the combination of SleepIQ with the Sleep Number bed improves one's sleep. And this is a technology platform that has the ability to continue to innovate off the platform over time. The consumer is moving deeper and deeper into health and wellness and quantified self, and this fits squarely in the middle of those trends.

Securing this from a competitive advantage perspective and improving our overall IP trade secrets, significant data, and also having the connection with our customers and having that ongoing relationship with our customers is very important to our sustainable profitable growth in our future. We have had excellent consumer adoption to this technology and we continue to see year-over-year growth with the demand.

So the technology, they developed things for you before, you own that IP. Is that correct?

Shared. It was a shared ownership in the past as well as the data. This significantly strengthens our competitive position. And there is also a page in our investor deck that we added. We updated a couple of pages in the Investor Relations deck which is online and page 11 speaks to some of the additional details.

Okay. And the $57 million, was that developed in some sort of discounted revenue stream from the IP or how did that come about?

We used various valuation methodologies and discounted cash flows as part of that.

I'm still -- was there a royalty payment that you are making to them? It seems like that would go away and defray some of the costs that we're feeling here in 2016.

Yes. And that's also considered in the numbers that we have been providing.

And the reduction overall in the SleepIQ product that is implemented in our pump.

And that is included in that $0.10 to $0.12 hit in 2016 you referred to earlier, I assume that the offset is then?

That is the net number.

Accretive in 2017 so within two years. And Keith, you will also see I think a great example, the other benefit here is the ability to accelerate our innovation pipeline.

Obviously we just did this acquisition in September we closed, and you will see this at the January CES is a great example of our engineers being able to work at a much deeper level of collaboration with the focus singular on our customers' improved sleep.

Okay. Thank you. You've kind of highlighted the fourth quarter in various ways. We knew there was going to be costs coming in the second half of the year.

Given that you are coming on from $0.60-something to effectively break even is that what you saw coming in the year or have there been some things that have caused the third quarter to be better, fourth quarter to be worse versus the plan you'd laid out earlier in the year?

That's exactly -- as we were providing guidance for the year and then even in the last call we highlighted -- we expected $0.60 of EPS in the back half. We provide annual guidance and provide some additional color on certain items to help you with modeling, but this is largely what we expected. The exception is of course the BAM shift from $0.04 gain in Q4 and the HR -- sorry, gain in Q3 and charge in Q4.

Shifting more to business trends as you look through October I know you have had some disruption going on but has there been any acceleration, deceleration, same-store, weekly, however you would measure that type of thing in terms of business as you exited third into the fourth?

I'm sorry can you repeat the question?

Just general pace of business here in October as we begin the fourth quarter have you noticed any notable acceleration, deceleration on same-store sale basis, anything of that nature?

It obviously has been clouded with our ERP implementation and that has really been the centerpiece for us in the month of October. We chose the month of October for this very reason understanding that it has a very small market share event in the early part of October and then it's a much slower month than the rest and expect to be self-sufficient as we head into the holidays.

Final question. Can you remind everyone the basis point impact on results in the fourth quarter from the calendar difference versus prior year?

It was $25 million worth of sales and $0.06 of EPS for the extra week last year.

Just do division and we'll get the basis point, is that--?

Right. There you go. All right. Thank you.

(Operator Instructions)

Seth Basham, Wedbush Securities.

Thanks a lot and good afternoon. My first question, I just want to understand and clarify some of the guidance that you are providing. Starting with the fourth quarter if I understood you correctly you are looking for implied unit comps down about 10%, is that a correct statement?

I was talking about total units. We focus on total units as you know, Seth, because I think it's a better -- the right measure for our Business. But we expect them to be down on a GAAP basis in that kind of magnitude in total.

Okay. And so just implied dollar comps for the fourth quarter, is that around negative 5%?

Yes, that's about right.

And you expected ARU to be up in the mid single digits, so the delta there is around 10% per units?

Right.

Okay. And then secondly as we think about 2016 here, you indicate that you expect positive unit comps -- or unit growth in 2016. You expect positive unit comps as well?

Again we focus -- our attention is really on the total units because we think that's the right measure for our Business given our self-imposed cannibalization when we open new stores, etc. We really would rather focus on total units, but that's our measure of health and we're expecting that to be in the positive territory for 2016.

Okay and you're looking for mid- to high-teens EPS growth. Again, some pretty easy comparisons given all the ERP damage to the Business in the back half of the year here. Is that correct?

Well and then we highlighted some of the other burdens that we are absorbing including additional launch costs in the first half of $4 million, the Lab impact on our EPS of $0.10 to $0.12, and then the incremental depreciation largely coming from our ERP launched here in the fourth quarter.

Okay, and then lastly to make sure I understand the 2015 guidance. $1.35, which is pretty much unchanged -- I think another caller had asked a similar question, but BAM obviously wasn't contemplated in that guidance at the end of the year and I assume that the tax benefit and share repurchase benefit of $0.03 each wasn't contemplated as well?

The share repurchase was contemplated and there are lots of moving parts. We have had a little bit of higher ERP implementation costs than we originally guided for at the beginning of the year. On balance the $1.35 is in line with what we had anticipated for the year.

Okay. Great. And then lastly in terms of inventories, obviously you're up substantially year-over-year at the end of the third quarter. You expect some trend down at the fourth quarter, but from a year-over-year basis where do you expect inventories to end up at the end of the fourth quarter?

Right around the same place we were at the end of the second quarter, maybe $68 million to $70 million, that kind of range.

Thanks very much.

At this time there are no further questions in queue. Now I will turn it back to Company for closing remarks.

Thank you for joining us today. We look forward to sharing our fourth quarter results with you early next year. Sleep well and dream big.

And that's the end of today's conference. Thank you all for participating. You may now disconnect.