Sleep Number Corp (SNBR) 2016 Q3 法說會逐字稿

Welcome to Select Comfort's Q3 2016 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 and Investor Relations. Thank you. You may begin.

Good afternoon and welcome to Select Comfort Corporation's third-quarter 2016 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 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 and news release and discussed in some detail in our annual report on Form 10-K and other periodic filings with the SEC. The Company's actual future results may vary materially.

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

Thanks, Dave. Good afternoon and thank you for joining our call today. My SleepIQ score last night was 90. We made important progress across the Company in the quarter. Today I will cover the highlights of our performance, the environment and our outlook for the remainder of the year.

In the third quarter we delivered the earnings-per-share we planned of $0.56 despite softer than expected sales. Net sales were $368 million, down 2% from last year. With our new ERP platform, greater customer order visibility, disciplined cost controls and more efficient processes we were able to offset topline pressure with operating leverage.

While we didn't get the sales step up we expected, our operational execution generated strong cash flow and a higher than planned operating profit rate. Year to date, we have generated a record $145 million of operating cash flow and continue to expect a record year of EBITDA. With the lower capital investment needed in the business following our transformation we have delivered a 52% increase in free cash flows year to date.

The economic environment has worsened with intense consumer distraction. From a demand perspective we have experienced periods of both strength and weakness.

For example, we had a record Labor Day performance followed by softness since that time. Accordingly, we have reduced our expectations for fourth-quarter sales by $25 million and lowered our full-year EPS outlook range to $1.15 to $1.25.

For context, this implies high single-digit sales growth at the midpoint for the full year and fourth-quarter EPS of $0.35.

Looking ahead we are confident that the business model we have built and our strategic initiatives will deliver high single-digit sales growth and leverage both the P&L and balance sheet over time.

The marketplace is changing with consolidation in the traditional part of the market and a proliferation of bed in a box digital marketers. From a product perspective most of their focus is on commoditized mattresses with price or convenience as the differentiator.

Consumers are changing too. They have an increasing desire to purchase products directly from brands they connect with.

Because of the investments we have made in strengthening our direct to consumer business model with digital at our core, we have the tools to be a formidable competitor in this new digital economy.

Our three competitive advantages: innovative proprietary products, exclusive distribution and ongoing customer relationships work together to deliver better sleep and a better customer experience. Given the changing consumer, competitive and media environment, our priority is to be deliberate with media spending for sustained value.

As the quarter unfolded we saw significant increases in media spending from both traditional and digital brands.

For instance, the cost of basic search terms escalated 2 to 3 times. We chose to keep media spend roughly flat to the prior year while developing our expertise and driving quality traffic. Specifically, we have developed the ability to link digital media mix to store unit sales. Think of this as a closed-loop lead tracking, very similar to our historical direct marketing lead and conversion tracking.

These tools and processes enable us to shift dollars from one digital type, platform or search term to another, based on the knowledge of what actually results in-store and online unit sales. Our digital lead tracking will help us compete more efficiently and effectively in the quarters ahead. This capability is unique to us as we are the only mattress company that is a direct to consumer brand with a healthy brick-and-mortar footprint in 49 states.

We completed our testing in the third quarter and will expand this initiative in the fourth quarter. Given this level of insight, we expect to deliver increased consideration, quality traffic and sales.

As I mentioned last quarter, we are building digital resources in-house for greater agility to drive demand. This improves our ability to adjust our media mix real-time into tested, proven search terms, audiences and digital media types.

With digital being such a dynamic form of media, we see this capability is critical to our success going forward.

A second focus is improving the user experience on SleepNumber.com. In August we deployed changes that improved online navigation and transaction. We are now releasing updates every two weeks for continuous improvement. We have prioritized our efforts around the actions that most highly correlate with store unit sales. Early results include higher engagement from quality traffic and stronger conversion.

From a traditional media perspective, we continue to benefit from efficient national TV buying. TV is still our most productive media and delivered a strong ROI in the quarter.

Our store footprint is a competitive advantage, both as a venue for converting digital traffic and as a growth driver in its own right. Our sleep professionals consistently deliver an outstanding and value-added customer experience.

This is where the ongoing customer relationship begins. Our repeat and referral business was consistent with our expectations in the quarter, and we're advancing new CRM capabilities which we expect to drive increased demand, starting in the fourth quarter.

We had another quarter of strong new store execution, which resulted in 7 points of growth. We opened 24 stores, more than half in mid-September, and we will realize the benefits of these new openings in the fourth quarter and beyond. For the full year our plans include 70 new non-mall stores, six new mall stores and 21 closures this year. We expect to end the year with more than 540 stores, up 11% from 2015.

Our innovative products also competitively differentiate us and are now a source for ongoing daily digital communication with our customers. We had two significant developments in the third quarter, the further upgrade of our SleepIQ platform and the launch of the it bed brand.

The newest release of SleepIQ technology enables our customers to connect SleepIQ to their other health and fitness apps and smart devices. Our proprietary SleepIQ algorithm understands how physical activity, nutrition and environment affect sleep quality and provides recommendations to help people sleep, improve their sleep.

This ongoing digital engagement with our brand leads to greater brand affinity and higher referral. We launched the it bed brand online in mid-September. This innovation delivers both convenience and quality sleep to consumers for a price similar to bed in a box brands. The it bed retails for $1,099 for a queen mattress, comes in a box and is delivered to your doorstep in five days.

But our bed is smart. It has adjustable firmness, SleepIQ technology and operates with your smartphone. The it bed has tested strongly with consumers and has also received four innovation awards. Just last month Fast Company recognized the it bed with an honorable mention in the health category for their Innovation by Design Awards.

Our focus at this point has been to learn and adjust with a fairly low digital investment. We will increase our media spend to build awareness in the coming weeks.

Early performance is confirming our research and test results. Customers are experiencing an easy purchase and delivery process and consumers have a strong perception of the it bed. The most important differentiators are leading-edge technology, price/value equation and the fact that it is from Sleep Number.

The number one barrier to online purchase is that people want to experience the bed before buying. In addition to our online launch, we are testing the it bed in 50 Sleep Number stores in seven of our markets.

Now I would like to highlight how we are leveraging the business model. As I indicated, we are benefiting from operating on a single ERP platform. Our Company is more efficient and our customer experience is more convenient, and it is still early. We have much more on the horizon.

In the third quarter we began to more fully benefit from our new ability to schedule home delivery at point-of-sale in our stores. Today, we schedule home delivery and set up our customer's SleepIQ app at the time of purchase in all our stores.

Let me share a specific example of the efficiency associated with this change for both our Company and our customer. Last year prior to our ERP platform it took 95 people four days and more than 15,000 phone calls to schedule home delivery for customers who purchased during the Labor Day weekend. This year, our customers left the store with a preselected day of delivery.

In addition to in-store scheduling our ERP platform permits automated higher density delivery routes. We continue to build proficiency with -- while balancing cost and service. We are also beginning to improve productivity in our overall supply chain, including a 10% reduction in inventory aided by the increased visibility we now have with our ERP platform.

And our manufacturing plants are accelerating lean activities and delivering increased year-over-year productivity improvement.

In summary, we continue to incorporate learning to make progress every day as we work to create more efficient operations and a more convenient customer experience. In the fourth quarter we expect continued improvements in routing efficiency, lean activity and logistics operations. We remain on track to deliver 50 or more basis points of gross margin improvement for the full year.

I'm extremely appreciative of our team members' high engagement in our mission of improving lives by individualizing sleep experiences. In fact, over the Labor Day weekend we surpassed an important milestone of having improved more than 10 million lives since our inception.

As I mentioned at the top of the call, we made important progress in the quarter, thanks to our highly capable team and partners and their dedication to our customer. We have made the right investments over the past four years to position our brand to be relevant in the new digital economy. A more convenient and seamless customer experience is fundamental. This is what we are working on.

We are excited about the opportunities we now have to take share with effortless products that deliver meaningful sleep benefits and leverage our business model.

Before I turn the call over to David, I would like to highlight our upcoming investor day in Minneapolis on November 10. At this conference we will provide a deeper review of how we will achieve our earnings commitment of $2.75 by 2019. You will meet our team, experience our award-winning store design and see the future of sleep.

Thank you, and now David will give you more details about our third-quarter results and our outlook for the remainder of the year.

Thank you, Shelly. The heavy lifting of our transformation is behind us. We have built an advantage business with innovative, differentiated products, highly productive retail and, importantly, a relevant direct-to-consumer relationship.

The investments we have made the past four years are delivering results in an unsteady consumer environment. We are well-positioned to accelerate profits and cash generation.

The seasonally high volumes during our third quarter validated our new ERP platform. I am happy to say that it performed well and provided visibility and granularity we have never had before. While we have targeted areas for continued improvement, the ERP delivered as promised in our largest volume quarter of the year.

Net sales of $368 million were softer than planned and 2% below the prior year third quarter when we pulled forward $10 million in shipments ahead of our ERP launch. Shelly highlighted the pressures on sales for the quarter. For additional perspective, especially given the impact of the ERP over the last 12 months, it is helpful to also look at our sales on a two-year basis. Compared with 2014, our current Q3 net sales grew 14%.

Year to date, our 2016 sales are up 17% versus 2014 even when you exclude the $21 million backlog benefit from Q1 this year. These are important reference points as we talk later about our guidance for the balance of 2016.

Now I will review specific sales metrics for our third quarter. Both our average revenue per mattress unit or ARU and our Company-controlled units were flat to the prior year. On a two-year stacked basis, units grew 7%, up from 5% in Q2. Comp sales declined 8% or 5% adjusting for the prior year's sales pull forward.

Our trailing 12 month average comp store sales of $2.2 million declined 12% versus a record high prior year Q3, largely due to ERP impacts in both years. We expect this TTM metric to normalize by the end of 2016.

The 52 net new stores we have added year over year contributed 7% to our growth. Year to date we have grown our store portfolio 8% to 527 stores and are pleased with the ongoing high productivity. From an operating perspective, our initiatives delivered efficiencies sooner than expected, resulting in a 60 basis point year-over-year improvement in gross margin to 63.1%.

Improvements in our customer experience, which began last quarter, are driving lower returns and scrap charges combined with supply chain and logistics cost in Q3 that were in line with the prior year. With the top line under pressure in Q3, we exercised disciplined spending controls that held operating expenses below our plans and we benefited from variable cost reductions. Our focus has been to protect our near-term and long-term growth drivers in marketing, retail and innovation while leveraging other areas.

In comparing to the prior year, please recall Q3 last year included $7 million of ERP launch costs that were partly offset by a $3.5 million gained on the Labs acquisition. Current year operating expenses also included planned increases of $3.5 million for higher R&D, $3 million higher depreciation and amortization and $2 million higher occupancy costs from 52 more stores.

Our income tax rate of 33.6% in the quarter was slightly favorable to plan. The prior-year Q3 tax rate of 30% benefited from acquisition-related tax planning.

As planned, we have also leveraged our balance sheet, generating record year-to-date cash from operations of $145 million, up 10% from the same period the prior year. We continue to prioritize high return investments in the business, including $39 million of CapEx year to date while maintaining sufficient liquidity that includes our $150 million revolver.

We also repurchased $95 million of our common stock year to date, 38% more than the $69 million repurchased year to date last year. As planned, share repurchases benefited our Q3 diluted earnings per share by $0.06 and year-to-date earnings by $0.08.

Here are important assumptions we considered when updating our 2016 EPS guidance to $1.15 to $1.25, which at the midpoint implies about $0.35 of EPS in Q4.

We did not see the Q3 sales growth step up we expected and as a result reduced our Q4 sales growth assumptions accordingly. As you think about modeling the fourth quarter, the ERP impacts in Q4 last year made direct comparisons difficult.

As a result, a two-year look back is helpful. As I mentioned earlier, our year-to-date net sales excluding the Q1 backlog benefit grew 17% on a two-year basis including 14% two-year growth in Q3.

Our updated guidance assumes slightly lower two-year sales growth of low double digits after adjusting 2014 Q4 for the $25 million extra week. This also aligns with our historical norm of Q4 sales of approximately 90% of Q3 sales.

Another two-year comparison worth noting is that our Q4 EPS midpoint guidance for $0.35 implies two-year growth of 40% after adjusting out $0.10 from Q4 of 2014 for the extra week and a legal settlement in that period.

We expect ERP enabled operating efficiencies to continue in Q4, leading to a 50 to 60 basis points of gross margin improvement for the full year. We continue to expect sales and marketing costs of 44% to 45% of net sales for the full year, approximately $60 million of depreciation and amortization, a full year income tax rate of approximately 34.5% and record EBITDA and cash from operations.

Capital spending is expected to total approximately $65 million, leading to an ending store portfolio of 540 to 545 stores and improved productivity of our website.

We expect our share repurchases to somewhat exceed free cash flows for the year and 2016 ROIC of approximately 13%, compared to our 10% weighted average cost of capital. And, lastly, our outlook does not contemplate a further deterioration of consumer spending the balance of the year.

Executing our plan which includes a robust innovation pipeline will deliver superior total shareholder returns over the long term. We look forward to providing deeper insights into our initiatives that will deliver $2.75 of EPS by 2019 at our investor day November 10.

Cindy, at this point please open up the line for questions.

(Operator Instructions). Peter Keith, Piper Jaffray.

Actually this is Jon on for Peter tonight. Our first question is just along the lines of Q4 and the implied comp guidance. I think you gave some two-year stack numbers there on the total growth, but Dave, is there anything that you can give us as far as what we should be expecting for comp for Q4?

Sure. It is in the mid-40s. A strange number because of Q4 last year, but that's directionally where it lands on a math basis.

Okay. And based on your commentary, it sounds like your ERP is completely behind you at this point. Now we saw a couple of things online from employees and customers that it looked like there was maybe some blips around Labor Day, but I guess you guys are saying there was nothing and you guys are completely clear of that now?

Yes, right. You know, Jon, the Labor Day period is the highest volume period of the year, and you're going to see challenges from time to time that come through, but we are very pleased with how this system is operating. We certainly have areas that we are targeting for improvement, and we will continue to get some benefits that we haven't yet achieved, but we are really pleased with the ERP system.

Okay, great. And then just lastly, I guess what contributed to the ARU being a little bit lower year over year in Q3, and then I think last quarter you talked about having a stable ARU for the entire year versus 2015.

So, I guess does that -- that still implies down ARU again in Q4? Is that correct?

I believe that what we said was we expected the growth to come from units primarily, and ARU slightly flat. That's still what we expect for the year.

Okay, great. Thanks a lot, guys. Good luck in the fourth quarter.

Budd Bugatch, Raymond James.

This is Bobby filling in for Budd. Thank you for taking my questions.

David, can you just comment real quickly on what you're seeing out of the store cannibalization now that you guys are accelerating the store growth again? Is the metrics similar to what they have been in the past?

Yes, thanks, Bobby. The reality of our store growth is that about 30% of the new stores are in new markets, and our cannibalization rate is in line with what we said in the past, which is about 20%.

Okay, perfect. I appreciate that extra color. Also, on the consumer weakness that you and Shelly both discussed, is it relatively even across the country or is there pockets where you are seeing more of an impact?

Yes, great question. It is even. It is highly correlated with the distractions associated with things like the Olympics or we certainly saw it with the conventions, and now with this very unusual election uncertainty that we are experiencing. So, tied to those pockets of time periods. And, as I stated, some great strength in between.

Okay, and then lastly for me, besides just the elevated costs of the more difficult getting the message out there given the election, was there any other major changes in the media that took place during the quarter, your media spending or your message?

No, and that's a great question, and I highlighted the importance of our hard-working TV and the productivity that we continue to see there and more of the traditional media buying. We do see the opportunity as falling in the area of digital, and that's why we are so excited about the initiatives that we have been working on and really chose to take this time when the consumer wasn't responding to progress the initiative on quality and knowing that we're going to get the greater payback in that area. And it is also where the sustainability will come from.

To be sitting here today having a direct to consumer model, being able to track digital behavior all the way through to a store unit sales, I am not aware of other retailers who have that capability right now and something we have been working on and are really excited about the progress we made in Q3 and are anxious to put it to work much harder for us in Q4 and beyond.

Thank you. And then I guess lastly just to touch on the direct to consumer, I did notice that direct and e-commerce was up 23% year over year. I think that was one of the largest growth, the growth number we have had in some time. Was that just the early success of the it bed or was there anything else there driving that?

Yes, what really drove that number through the quarter was the improvements we made online. I mentioned one of our digital initiatives is improvement to SleepNumber.com, which is both making it easier for the customer to navigate, find their nearest store, but it also simplifies the actual transaction.

The it bed came very late in the quarter. So this was attributed to the important changes we are making online.

I appreciate you guys answering my questions. Best of luck in the fourth quarter.

John Baugh, Stifel.

Thanks for taking my questions. Could you tell us with the election here November 8 what is the plan in the fourth quarter? Do we lay low up to that point and then increase spend thereafter? And are we going to see the mix of media shift meaningfully to digital within Q4, and maybe you could relate that to where it has been in the past?

Yes, thanks, John. I won't be real specific, because I know that competitors pay close attention to where and when we apply our media, but we do continue to expect media to be around 14% of sales for the full year, and certainly plan to lean into the initiatives that we have been developing here in the third quarter, so you can draw it from there.

Regarding the actual mix, we continue to have high productivity and returns from our TV advertising, so no significant change in overall mix. We have been speaking to digital being our second most important media type for some time, but you can imagine that that is also with the advancement of our initiatives where we intend to push on the gas.

Okay. And then regarding ERP, and I think the goal is to get deliveries down into a week, and I appreciate the Labor Day is an unusual period. So, maybe the goal wasn't to hit that in that time frame. But any update on where we are in getting to that goal?

Yes, thanks, John. The real goal is to improve the customer's experience, and we have been doing that dramatically with in-store scheduling, and Shelly highlighted that now we are setting up their SleepIQ app in the store. So, the consumer is now able to track their delivery right on the app.

That's a major improvement from where we were, and discussions about delivery windows or having a follow-up phone call to get their delivery scheduled, all of those things are a thing of the past.

And so, the consumer's experiences is already a lot better. We are continuing to work on speed to delivery, but we're also sensibly balancing that with the cost to get there.

So, there is more to come on that. We are still targeting cutting our delivery time in half by next year at this time.

Okay. And then I guess maybe a final question for you, Shelly. There are numerous data points around the wealthier consumer slowing spending. And I am just curious whether you can delineate how much is distraction, the election, Olympics, et cetera, versus a change perhaps in your customer base, whether you can see or sense anything in your research? Thank you.

Yes, another great question, John. From what we are seeing of who is purchasing the composition of those different customer buckets from demographics, psychographic has not -- we are not seeing any real change in those categories. So, we're not able to see anything outside of understanding the more resistant consumer, distracted consumer that we've been talking about.

Okay, thank you. Good luck.

Seth Basham, Wedbush Securities.

Thanks a lot for taking my question. The first thing I would like to address is just the cadence of sales growth through the quarter.

I think you mentioned that things were pretty well through Labor Day and then fell off, so is it appropriate to assume that you were tracking for mid-single digit sales growth through Labor Day and the reversal came immediately thereafter?

Yes, Seth, you gave the example of Labor Day and after, but looking at the full quarter, consistent with what we have been seeing all year we have been talking about a choppy environment since Feb week one. And we continued to see that in the quarter, and the more intense consumer distraction has certainly been, with the election uncertainty as of late, but when there is distraction like the Olympics or the conventions we also saw some softness in those periods and then strength around them.

Got it. So, is there anything that you can pinpoint that may have changed the trend after Labor Day? Was there a distracting event that occurred and persisted? Is it simply the election media?

That's what we see externally. There has certainly been a lot of social pressure overall.

We have all been seeing the news on different distractions in that area, too. That has been dominating the media as well.

Got it. And as you look at the mix of sales by product line in the quarter, was there any significant shifts to point to?

I would say that in our mix overall we saw a tickup in the lower end of our business.

Got it. And anything to point to there driving that that is worth noting?

No.

All right. And then last question is just around credit. Have you seen any change in the use of credit to purchase your products through this quarter, relative to the last couple?

Financing, we think, is important and probably a little more important to the consumer right now. We continue to look at our dollars off in financing as a total bucket or conversion, and certainly no meaningful change in the quarter for us in that area. But I would say there is more favorability towards financing.

Got it.

And you can see that competitively as well.

Understood. If I can squeeze in one word. I know you're not ready to provide guidance for 2017, but can you help us frame it in terms of how to think about what your underlying earnings are for 2016 and what the capabilities are of the model to grow off that base?

Yes, what I would say again, Seth, is that our model is designed to and our long-term guidance was based on high single-digit topline growth, mid-teen operating profit drop-through rates, leveraging the model, accretive share repurchases. And those are the same elements that we are looking to drive and deliver in 2017.

We will certainly be talking about our 2017 guidance on Q4 as we normally do.

Great, thanks a lot.

And, Seth, I would just add in our competitive advantages that we have been investing in are really coming from a place of strength as we move into 2017 with our market development progressed this year so significantly, and the combination of the innovations, both the it bed and what we intend to reveal at investor day for 2017 and beyond. We are really excited about how innovation in the store and the direct to consumer model and being able to connect with the customer digitally, all that plays in favor of the consumer trends that are transpiring, and we have invested in the right places for this time. And certainly believe we are taking share right now and intend to continue to.

Understood. Thank you very much and good luck.

Brad Thomas, KeyBanc.

Just a few follow-up questions for me. Just on that topic of credit, obviously we have seen some issues for some more subprime type companies and Synchrony I think earlier this year tightened a bit in terms of their guidance.

How are approval rates trending for you? Anything different you are seeing in terms of approval rates?

You know what, our approval rates have been very strong. They continue to be very strong, Brad. We also haven't seen any higher delinquencies or at least we are hearing from our third-party provider that they are not seeing any higher delinquencies. They love our customers and we continue to see really strong approval rates.

Great. And then the follow-up on the it bed. I know it is very early, but any color that you are able to provide on how they are performing when in-store, how the rest of your assortment is performing when the it bed is on the floor next to other models?

Well, we just set our stores a week ago, so it is very early on that front, but certainly nothing that we can point to. One thing I will share with you is 100% of our sales so far have been new customers to our brand.

That's great. And then, I guess, just lastly, I look forward to hearing all the details in a few weeks at your analyst day, but as we think about the potential to drive $2.75 in earnings, could you just remind us the same-store sales assumption that would be necessary to drive that? Thank you.

Yes, thanks, Brad. Half of the -- we said long-term we expect about half of our growth to come from comp stores and half to come from new stores.

Gotcha. Okay, thank you so much. Look forward to seeing you in a few weeks.

Curtis Nagle, Bank of America.

Sorry about that, can you hear me now?

Go ahead, Mr. Nagle.

Cindy, why don't we go to the next caller and then Curtis can jump back in the queue?

Keith Hughes, SunTrust.

Two questions. Number one, on the it bed, have you done any marketing specifically around this product or do you plan to do any, and give us an idea of how much and the format? Then I have a follow-up after that.

Yes, Keith, we have done very low spend right now, all digital, and it will be digital, and we're not going to quantify just from a competitive perspective.

So, I know you're just getting started on this product now, but at what point would you ramp it up? Is there a sales number you would have to hit or -- obviously it is in a test phase at this point, but what would the marker to get you more aggressive on it?

Yes, we have been using the first few weeks to validate and learn a number of aspects and so far it has really been more about validating and to understand the actual style and marketing from an awareness and consideration. And we have what we need at this point.

We have a couple more data points over the next few weeks, but we're pretty ready to go.

Okay. Second question on store count, looks like we're going to hit 540 or so by the end of this year. I remember some time ago, and this has been awhile, a 550 number count thrown out as a goal. So, I guess my question moving forward is, do you still expect to grow stores over the next several years at least in the range, growth range, of what we have seen or is it going to tail off?

Yes, great question especially in light of the 11% growth that we are talking about this year. When we issued our long-term guidance coming out of 2014, we talked about for 2019 with the $2.75 that it assumed 600 to 650 stores with 5% to 7% net new store growth on average over that time period. We think that's still a fair way to think about it today.

Okay, and just finally on that number, getting to that number, 600 to 650, is that something driven by a demographic, a store per head or what makes that a number you think is achievable?

Yes, well, it is -- first of all, it is always a number that we are constantly iterating against. We take our approach as a market development approach. We constantly reevaluate and test numerous different scenarios both from an individual store and a market development perspective. Especially with the changing consumer and believing that more and more customers will become comfortable with purchasing online, we do see our strategy as agile from the perspective of playing into both aspects.

So, we went into this with targeting one store per population of 350,000 to 500,000, and that considers our target of a 30- to 54-year-old with household income of greater than $75,000.

Okay, thank you.

Mark Rupe, Longbow Research.

Shelly, is there anything you can share with respect to just sticking on the topic of the stores here between the various formats, between mall and off-mall as it relates to the comp performance?

Yes, we have had similar performance with non-mall and mall. Now we have been tracking heavier towards non-mall, which you can see now that number is over 50%. It is focused by market, depending on where the best retail dynamics are in that marketplace from our view, along with the opportunity we have from the economics on the actual lease and the return over time on that investment.

There is a little more favorability with non-malls from an occupancy percent.

Okay, perfect. And then on the test in the store, the 50 stores that are testing the it beds, the metrics that you're testing on is there anything over and above the obvious being bringing in an incremental and expanding your [gross store] opportunity at a lower price point? Is there any other metrics that you're looking at?

Yes, we are looking at a number of factors. We sell a lot of -- we sell beds today that we don't show on the floor, so we want to understand this one in relation to does it need to be on the floor or not? Is there cannibalization overall to the lower end of the line by having it in-store? Or, on the flip side, does it hurt our sales to not have it in the store? And it is interesting to look at our research and research by others as well.

If you observe online brands, whether they are in the mattress industry or outside of it, they're only online for about a minute and then they are looking for physical locations. So, we see our position as highly advantaged, being a direct to consumer with 500 stores in 49 states that this is really how the consumer wants to shop today. She wants to have the availability to view and try out the product if she so desires.

At the same time, this is the best product, the best mattress there is to purchase online, because it is adjustable and you can change the firmness, so it really works perfectly for everybody. So, we like where we are at. We are interested. We want to make sure we take this time to learn about the 50 stores in those particular markets to see if it is advantageous one way or another.

And then we have our follow-on innovation pipeline next year, which should be complementary to everything we are learning right now.

Perfect, thanks. Good luck.

Michael Lasser, UBS.

This is actually (inaudible) filling in for Michael Lasser. Thanks a lot for taking our questions. One of your competitors noted that they cut back on promotion during the quarter, which hurt them. So, I guess my question is, were you able to gain some additional share during any period this quarter, because your primary competitor was not as promotional?

Well, I would just characterize that we do believe we took share in the quarter. We believe we're going to be taking share here for the full year. The ISPA data is not out yet to help us understand that. But we certainly believe we did.

Okay, great, thank you.

And at this time there are no further questions. I would now like to hand the call back to Select Comfort for final remarks.

Thanks again for joining us today. We look forward to discussing our fourth-quarter 2016 performance with you next year. Sleep well and dream big.

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