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| SCSS > SEC Filings for SCSS > Form 10-K on 21-Feb-2013 | All Recent SEC Filings |
21-Feb-2013
Annual Report
Forward-Looking Statements
The discussion in this Annual Report contains certain forward-looking statements that relate to future plans, events, financial results or performance. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as "may," "will," "should," "could," "expect," "anticipate," "believe," "estimate," "plan," "project," "predict," "intend," "potential," "continue" or the negative of these or similar terms. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, among others:
Current and future general and industry economic trends and consumer confidence;
The effectiveness of our marketing messages;
The efficiency of our advertising and promotional efforts;
Our ability to execute our Company-Controlled distribution strategy;
Our ability to achieve and maintain acceptable levels of product and service quality, and acceptable product return and warranty claims rates;
Our ability to continue to improve and expand our product line, and consumer acceptance of our products, product quality, innovation and brand image;
Industry competition, the emergence of additional competitive products, and the adequacy of our intellectual property rights to protect our products and brand from competitive or infringing activities;
Availability of attractive and cost-effective consumer credit options, including the impact of recent changes in federal law that restricts various forms of consumer credit promotional offerings;
Pending and unforeseen litigation and the potential for adverse publicity associated with litigation;
Our "just-in-time" manufacturing processes with minimal levels of inventory, which may leave us vulnerable to shortages in supply;
Our dependence on significant suppliers and our ability to maintain relationships with key suppliers, including several sole-source suppliers;
Rising commodity costs and other inflationary pressures;
Risks inherent in global sourcing activities;
Risks of disruption in the operation of either of our two manufacturing facilities;
Increasing government regulation;
The adequacy of our management information systems to meet the evolving needs of our business and existing and evolving regulatory standards applicable to data privacy and security;
The costs and potential disruptions to our business related to upgrading our management information systems;
Our ability to attract, retain and motivate qualified management, executive and other key employees, including qualified retail sales professionals and managers; and
Uncertainties arising from global events, such as terrorist attacks or a pandemic outbreak, or the threat of such events.
Additional information concerning these and other risks and uncertainties is contained under the caption "Risk Factors" in the Annual Report on Form 10-K.
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in six sections:
Overview
Results of Operations
Liquidity and Capital Resources
Off-Balance-Sheet Arrangements and Contractual Obligations
Critical Accounting Policies and Estimates
Recent Accounting Pronouncements
Overview
Business Overview
We believe that we are leading the industry in delivering an unparalleled sleep experience by offering consumers high-quality, innovative and individualized sleep solutions and services, which include a complete line of Sleep Numberฎ beds and bedding. We are the exclusive manufacturer, marketer, retailer and servicer of the revolutionary Sleep Number bed, which allows individuals to adjust the firmness and support of each side at the touch of a button. We offer further individualization through our solutions-focused line of Sleep Number pillows, sheets and other bedding products.
As the only national specialty-mattress retailer, we generate revenue by selling products through two distribution channels. Our Company-Controlled channel, which includes Retail, Direct Marketing and E-Commerce, sells directly to consumers. Our Wholesale channel sells to and through the QVC shopping channel and wholesale customers in Alaska, Hawaii and Australia.
Mission, Vision and Strategy
Our mission is to improve lives by individualizing sleep experiences. Our vision is to become the world's most beloved brand by delivering an Unparalleled Sleep Experience.
We are executing against a defined strategy which focuses on the following key
components:
Everyone will know Sleep Number and how it will improve their life;
Innovative Sleep Number products will move society forward with meaningful consumer benefits;
Sleep Number will be easy to find and customers will interact with us when and how they want;
Customers will love their Sleep Number experience and enthusiastically recommend Sleep Number to their family and friends; and
Leveraging our unique business model to fund innovation and growth will benefit our customers, employees and shareholders.
Results of Operations
Fiscal 2012 Summary
Financial highlights for fiscal 2012 were as follows:
Net income increased 29% to $78.1 million, or $1.37 per diluted share, compared with net income of $60.5 million, or $1.07 per diluted share in 2011.
Financial results for 2012 included a $5.6 million ($3.7 million, net of income tax), or $0.06 per diluted share, non-recurring, non-cash charge associated with the June 1, 2012 chief executive officer transition.
Net sales increased 26% to $935.0 million, compared with $743.2 million in 2011, primarily due to a 23% comparable sales increase in our Company-Controlled channel.
Operating income for 2012 improved to $119.8 million, or 12.8% of net sales, compared with $90.5 million, or 12.2% of net sales, for the same period one year ago. Excluding the $5.6 million CEO transition charge, 2012 operating income was $125.4 million, or 13.4% of net sales. The operating income improvement was driven by strong comparable sales growth and a 0.5 percentage points increase in our gross profit rate. Annual retail sales-per-store for 2012 increased by 26% from one year ago to $2.2 million (for stores open at least one year).
Cash provided by operating activities in 2012 totaled $100.6 million, compared with $91.0 million for the prior year.
At December 29, 2012, cash, cash equivalents and marketable debt securities totaled $177.8 million compared with $146.3 million at December 31, 2011, and we had no borrowings under our revolving credit facility. In 2012, we repurchased 1,140,861 shares of our common stock under our Board approved share repurchase program at a cost of $30.0 million ($26.32 per share).
The following table sets forth, for the periods indicated, our results of
operations expressed as dollars and percentages of net sales. Figures are in
millions, except percentages and per share amounts. Amounts may not add due to
rounding differences.
2012 2011 2010
% of % of % of
$ Net Sales $ Net Sales $ Net Sales
Net sales $ 935.0 100.0 % $ 743.2 100.0 % $ 605.7 100.0 %
Cost of sales 338.4 36.2 272.9 36.7 227.4 37.5
Gross profit 596.5 63.8 470.3 63.3 378.3 62.5
Operating expenses:
Sales and marketing 398.2 42.6 317.5 42.7 269.9 44.6
General and administrative 66.6 7.1 58.1 7.8 53.6 8.8
Research and development 6.2 0.7 4.2 0.6 2.1 0.4
CEO transition costs 5.6 0.6 - 0.0 - 0.0
Asset impairment charges 0.1 0.0 0.1 0.0 0.3 0.0
Total operating expenses 476.8 51.0 379.9 51.1 325.9 53.8
Operating income 119.8 12.8 90.5 12.2 52.4 8.6
Operating income - as
adjusted (1) 125.4 13.4 90.5 12.2 52.4 8.6
Other income (expense), net 0.2 0.0 - 0.0 (1.9 ) (0.3 )
Income before income taxes 120.0 12.8 90.4 12.2 50.5 8.3
Income tax expense 41.9 4.5 29.9 4.0 18.9 3.1
Net income $ 78.1 8.4 % $ 60.5 8.1 % $ 31.6 5.2 %
Net income - as adjusted (1) $ 81.7 8.7 % $ 60.5 8.1 % $ 31.6 5.2 %
Net income per share:
Basic $ 1.41 $ 1.10 $ 0.58
Diluted $ 1.37 $ 1.07 $ 0.57
Diluted - as adjusted (1) $ 1.43 $ 1.07 $ 0.57
Weighted-average number of common
shares:
Basic 55.5 55.1 54.0
Diluted 57.1 56.4 55.3
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(1) This non-GAAP measure is not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates annual and year-over-year comparisons for investors and financial analysts. See page 24 for a reconciliation of this non-GAAP measure to the appropriate GAAP measure.
GAAP - generally accepted accounting principles
The percentage of our total net sales, by dollar volume, from each of our
channels was as follows:
2012 2011 2010
Company-Controlled channel 96.7 % 96.2 % 94.8 %
Wholesale channel 3.3 % 3.8 % 5.2 %
Total 100.0 % 100.0 % 100.0 %
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The components of total net sales growth, including comparable net sales
changes, were as follows:
Net Sales Increase/(Decrease)
2012 2011 2010
Retail comparable-store sales(1) 24 % 29 % 21 %
Direct and E-Commerce 9 % (1 %) 5 %
Company-Controlled comparable sales change 23 % 26 % 19 %
Net store openings/closings 3 % (1 %) (5 %)
Total Company-Controlled channel 26 % 25 % 14 %
Wholesale channel 10 % (11 %) (21 %)
Total net sales change 26 % 23 % 11 %
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(1) Stores are included in the comparable-store calculation in the 13th full month of operations. Stores that have been remodeled or repositioned within the same shopping center remain in the comparable-store base.
Other sales metrics were as follows:
2012 2011 2010
Average sales per store(1) ($ in thousands) $ 2,164 $ 1,721 $ 1,295
Average sales per square foot(1) $ 1,324 $ 1,135 $ 873
Stores > $1 million in net sales(1) 98 % 93 % 70 %
Stores > $2 million in net sales(1) 49 % 24 % 7 %
Average net sales per mattress unit -
Company-Controlled channel(2) $ 3,050 $ 2,694 $ 2,424
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(1) Trailing twelve months for stores open at least one year.
(2) Represents Company-Controlled channel total net sales divided by
Company-Controlled channel mattress units.
The number of retail stores operating during the last three years was as
follows:
2012 2011 2010
Beginning of period 381 386 403
Opened 57 19 7
Closed (28 ) (24 ) (24 )
End of period 410 381 386
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Comparison of 2012 and 2011
Net sales
Net sales in 2012 increased 26% to $935.0 million, compared with $743.2 million for the same period one year ago. The sales increase was primarily driven by a 23% comparable sales increase in our Company-Controlled channel and the sales from 29 net new retail stores opened in the past 12 months. Company-Controlled mattress units increased 12% compared to the prior-year period. Average net sales per mattress unit in our Company-Controlled channel increased by 13%.
The $191.8 million net sales increase compared with the same period one year ago was comprised of the following: (i) a $147.5 million increase in sales from our Company-Controlled comparable retail stores and a $35.7 million sales increase resulting from net new retail store openings; (ii) a $5.8 million increase in Direct and E-Commerce sales; and (iii) a $2.8 million increase in Wholesale channel sales.
Gross profit
The gross profit rate increased to 63.8% of net sales in 2012, compared with 63.3% for the prior-year period. Approximately 0.9 percentage points ("ppt.") of the gross profit rate increase was due to price increases and product mix changes resulting from product innovations over the last 12 months. In addition, the prior-year period included a $1.6 million (0.2 ppt.) warranty charge related to customer-service reserves. These gross profit rate increases in 2012 were partially offset by a variety of factors that can fluctuate from year-to-year, including sales return and exchange costs and logistics expenses.
Sales and marketing expenses
Sales and marketing expenses in 2012 increased 25% to $398.2 million, or 42.6% of net sales, compared with $317.5 million, or 42.7% of net sales, for the same period one year ago. The $80.7 million increase was primarily due to a $35.3 million, or 39%, increase in media spending, an increase in variable selling expenses due to the higher sales volume and the additional costs associated with operating 29 net new retail stores. The sales and marketing expense rate declined 0.1 ppt. compared with the same period one year ago due to the leveraging impact of the 26% net sales increase.
General and administrative expenses
General and administrative ("G&A") expenses increased $8.5 million to $66.6 million in 2012, compared with $58.1 million in the prior year, but decreased to 7.1% of net sales, compared with 7.8% of net sales one year ago. The $8.5 million increase in G&A expenses was primarily due to (i) a $4.2 million increase in outside consulting and legal expenses; (ii) $2.1 million of additional depreciation expense resulting from the increase in capital expenditures to support the growth of the business; (iii) a $0.6 million increase in employee compensation expenses resulting from an increase in employee headcount to support the growth of the business, and salary and wage rate increases that were in line with inflation, partially offset by lower performance-based incentive compensation and stock-based compensation; and (iv) a $1.6 million net increase in miscellaneous other expenses. The G&A expense rate decreased by 0.7 ppt. in the current period compared with the same period one year ago due to the leveraging impact of the 26% net sales increase.
Research and development expenses
Research and development expenses increased to $6.2 million, or 0.7% of net sales in 2012, compared with $4.2 million, or 0.6% of net sales, for the same period one year ago. The $2.0 million increase in R&D expenses was due to increased investments in product innovation during 2012.
CEO transition costs
In February 2012, we announced that William R. McLaughlin, then President and Chief Executive Officer would retire from the Company effective June 1, 2012. In recognition of Mr. McLaughlin's contributions to the Company, the Company's Compensation Committee approved the modification of Mr. McLaughlin's unvested stock awards, including performance stock awards. The performance stock awards are subject to applicable performance adjustments (through 2014) based on free cash flow and actual market share growth versus performance targets. During 2012, we incurred $5.6 million ($3.7 million, net of income tax) of non-recurring, non-cash expenses associated with these stock award modifications.
Asset impairment charges
During 2012, we recognized asset impairment charges of $0.1 million related to computer software and certain retail store assets. During 2011, we recognized asset impairment charges of $0.1 million related to production machinery, computer equipment and certain retail store assets.
Other income (expense), net
Other income, net was $0.2 million for 2012, compared with other expense, net of $33 thousand for the comparable period one year ago. The current-year improvement in other income (expense), net was primarily due to a reduction in fees associated with our line of credit, a higher average yield on our investment portfolio in the current-year period, and an increase in our average cash, cash equivalents and marketable debt securities balance in 2012 compared with the prior year.
Income tax expense
Income tax expense was $41.9 million in 2012 compared with $29.9 million for the same period one year ago. The effective tax rate for 2012 increased to 34.9% compared with the prior-year period rate of 33.1%. The 2011 effective tax rate benefited from the favorable resolution of certain prior years' income tax matters.
Comparison of 2011 and 2010
Net Sales
Net sales in 2011 increased 23% to $743.2 million, compared with $605.7 million for the same period one year ago. The sales increase was driven by a 26% comparable sales increase in our Company-Controlled channel. This increase was partially offset by the decrease in sales resulting from the year-over-year decline in the number of retail stores we operated and a decrease in Wholesale channel sales. Company-Controlled sales of mattress units increased 12% compared to the same period one year ago. Average net sales per mattress unit in our Company-Controlled channel increased by 11%.
The $137.5 million net sales increase compared with the same period one year ago was comprised of the following: (i) a $141.9 million increase in sales from our retail comparable stores, partially offset by a $0.1 million sales decrease resulting from the net decline in the number of retail stores we operated, (ii) a $3.6 million decrease in the Wholesale channel sales, and (iii) a $0.7 million decrease in Direct and E-Commerce sales.
Gross Profit
The gross profit rate increased to 63.3% in 2011 compared with 62.5% in 2010. Approximately 1.5 percentage points (ppt.) of the gross profit rate improvement was due to a reduction in promotional costs incurred to generate customer traffic, selected product price increases, leverage from the higher sales volume and manufacturing efficiencies. These improvements were partially offset by an increase in warranty costs, including additional customer-service reserves established in the third quarter of 2011, and higher performance-based incentive compensation.
Sales and Marketing Expenses
Sales and marketing expenses in 2011 increased to $317.5 million, or 42.7% of net sales, compared with $269.9 million, or 44.6% of net sales, in 2010. The $47.6 million increase was primarily due to a $21.4 million, or 30%, increase in media spending, an increase in variable selling expenses due to the higher sales volume, and an increase in customer financing expenses as a larger percentage of our customers took advantage of promotional financing offers. The sales and marketing expense rate declined 1.9 ppt. compared with the same period one year ago due to the leveraging impact of the 23% net sales increase.
General and Administrative Expenses
General and administrative ("G&A") expenses increased $4.5 million to $58.1 million in 2011, compared with $53.6 million in 2010, but decreased to 7.8% of net sales, compared with 8.8% of net sales in the prior year. The $4.5 million increase in G&A expenses was primarily due to (i) a $4.8 million increase in employee compensation expenses including higher performance-based incentive compensation resulting from our strong 2011 financial performance, salaries and wages increases which were in-line with inflation, and increased stock-based compensation expense; and (ii) $0.6 million of additional depreciation expenses resulting from the current-year increase in capital expenditures to support the growth of the business. These increases were partially offset by the benefit from a $1.1 million reduction to previously recorded contingent liabilities in the second quarter of 2011. The G&A expense rate decreased by 1.0 ppt. in the current period compared with the same period one year ago, primarily due to the leveraging impact of the 23% net sales increase and the reduction in contingent liabilities.
Research and Development
Research and development ("R&D") expenses increased to $4.2 million in 2011 compared with $2.1 million in 2010. R&D expenses for 2011 were 0.6% of net sales compared with 0.4% of net sales in 2010. The $2.0 million change in R&D expenses was due to increased investments in product innovation during 2011.
Asset Impairment Charges
During 2011, we recognized impairment charges of $0.1 million related to production machinery, computer equipment and certain retail store assets. During 2010, we recognized impairment charges of $0.3 million primarily related to assets at underperforming retail stores.
Other Expense, Net
Other expense, net was $33 thousand for 2011, compared with $1.9 million for the same period one year ago. Other expense, net for 2010 included a $1.1 million write-off of unamortized debt costs as we entered into a new credit agreement on March 26, 2010 and terminated our prior credit agreement. The remaining reduction is primarily due to lower debt amortization costs associated with our current credit agreement as compared with our prior credit agreement.
Income Tax Expense
Income tax expense was $29.9 million for 2011, compared with $18.9 million for the same period one year ago. The effective tax rate for 2011 was 33.1% compared with 37.5% for the same period one year ago. The 2011 effective tax rate benefited from the favorable resolution of certain prior years' income tax matters and an increase in the tax deduction related to manufacturing activities.
Liquidity and Capital Resources
As of December 29, 2012, cash, cash equivalents and marketable debt securities totaled $177.8 million compared with $146.3 million as of December 31, 2011. The $31.5 million increase was primarily due to $100.6 million of cash provided by operating activities offset by $51.6 million of cash used to purchase property and equipment, and $34.9 million of cash used to repurchase our common stock ($30.0 million under our Board approved share repurchase program and $4.9 million in connection with the vesting of employee restricted stock grants). Our $89.9 million of marketable debt securities held as of December 29, 2012 are all highly liquid and include U.S. government and agency securities, corporate debt securities and municipal bonds.
The following table summarizes our cash flows for the fiscal years ended
December 29, 2012, and December 31, 2011 (dollars in millions). Amounts may not
add due to rounding differences:
Fiscal Year Ended
December 29, December 31,
2012 2011
Total cash provided by (used in):
Operating activities $ 100.6 $ 91.0
Investing activities (112.1 ) (56.2 )
Financing activities (16.9 ) 5.4
Net (decrease) increase in cash and cash equivalents $ (28.3 ) $ 40.2
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Cash provided by operating activities for the fiscal year ended December 29, 2012 was $100.6 million compared with $91.0 million for the fiscal year ended December 31, 2011. The $9.6 million year-over-year increase in cash from operating activities was comprised of a $17.6 million increase in our 2012 net income compared with the same period one year ago, and an $8.6 million increase in adjustments to reconcile net income to net cash provided by operating activities, partially offset by a $16.7 million decrease in cash from changes in operating assets and liabilities.
Investing activities for the fiscal year ended December 29, 2012 consisted of $51.6 million of property and equipment purchases, compared with $23.5 million for the same period one year ago. During 2012, we opened 57 retail stores and repositioned or remodeled 38 retail stores, while in 2011 we opened 19 retail stores and repositioned or remodeled 16 retail stores. Capital expenditures for 2013 are projected to be $70 - $80 million compared with $51.6 million in 2012. The capital expenditures for 2013 are primarily for new retail stores, repositioned and remodeled retail stores, continued investment in customer-management systems and other information technology that supports the growth of the business, and investments to support product innovation initiatives. On a net basis, we invested $60.6 million in marketable debt securities during the fiscal year ended December 29, 2012 compared with $30.0 million during the comparable period one year ago. Investing activities for the fiscal year ended December 31, 2011 also included the replacement of an outstanding letter of credit held by our workers' compensation insurance carrier with a $2.7 million restricted cash deposit.
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