Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SCSS > SEC Filings for SCSS > Form 10-K on 21-Feb-2014All Recent SEC Filings

Show all filings for SELECT COMFORT CORP

Form 10-K for SELECT COMFORT CORP


21-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 new sleep tracking technology, SleepIQTM, and a solutions-focused line of Sleep Number pillows, sheets, adjustable bases, and other bedding products, including the innovative DualTempTM temperature-balancing layer.

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/Other channel sells to and through selected retail and wholesale customers in the United States and Australia, and the QVC shopping channel.

Mission, Vision and Goals

Our mission is to improve lives by Individualizing Sleep Experiences.

Our vision is to become one of the world's most beloved brands by delivering an Unparalleled Sleep Experience. We plan to achieve this by executing our consumer brand strategy to advance our long-term goals and strengthen our competitive advantages.

Our long-term goals are:

• Everyone will know Sleep Numberฎ;

• Innovative Sleep Numberฎ products will deliver meaningful benefits;

• Customers will easily find and interact with Sleep Number;

• Customers will enthusiastically recommend Sleep Number; and

• We will leverage our unique business model to fund innovation and growth.

Results of Operations

Fiscal 2013 Summary

Financial highlights for fiscal 2013 were as follows:

• Net income decreased 23% to $60.1 million, or $1.08 per diluted share, compared with net income of $78.1 million, or $1.37 per diluted share in 2012.

• Financial results for 2012 and 2013 included a $5.6 million charge ($3.7 million, net of income tax) and a $0.5 million benefit ($0.4 million, net of income tax), respectively, associated with the June 1, 2012 chief executive officer transition. See CEO Transition Costs on page 27 for additional details.

• Net sales increased 3% to $960.2 million, compared with $935.0 million in 2012, primarily due to the addition of 30 net new stores partially offset by a 4% comparable sales decrease in our Company-Controlled channel.

• Operating income for 2013 declined to $90.7 million, or 9.4% of net sales, compared with $119.8 million, or 12.8% of net sales, for the same period one year ago. Adjusted operating income (operating income excluding CEO transition (benefit) costs) decreased to $90.2 million, or 9.4% of net sales, compared with $125.4 million, or 13.4% of net sales, for the same period one year ago. The decline in operating income was primarily driven by a 1.1 percentage point decrease in our gross profit rate and a 3.1 percentage point increase in our sales and marketing expense rate. Annual retail sales-per-store for 2013 decreased by 3% from one year ago to $2.1 million (for stores open at least one year).

• Cash provided by operating activities in 2013 totaled $88.1 million, compared with $100.6 million for the prior year.

• At December 28, 2013, cash, cash equivalents and marketable debt securities totaled $145.0 million compared with $177.8 million at December 29, 2012, and we had no borrowings under our revolving credit facility. In 2013, we repurchased 1,828,811 shares of our common stock under our Board-approved share repurchase program at a cost of $40.0 million ($21.89 per share). As of December 28, 2013, the remaining authorization under our Board-approved share repurchase program was $136.7 million.


• On January 17, 2013, we completed the purchase of the business and assets of Comfortaire Corporation, a manufacturer and marketer of adjustable air-supported sleep systems, for $15.5 million. Comfortaire Corporation was a privately held company with 2012 net sales of $10.5 million. We purchased Comfortaire to advance our innovation leadership in individualized sleep comfort.

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.

                                        2013                     2012                     2011
                                              % of                     % of                     % of
                                   $       Net Sales        $       Net Sales        $       Net Sales
Net sales                      $ 960.2       100.0  %   $ 935.0        100.0 %   $ 743.2        100.0 %
Cost of sales                    358.4        37.3        338.4         36.2       272.9         36.7
Gross profit                     601.8        62.7        596.5         63.8       470.3         63.3

Operating expenses:
Sales and marketing              439.2        45.7        398.2         42.6       317.5         42.7
General and administrative        62.8         6.5         66.6          7.1        58.1          7.8
Research and development           9.5         1.0          6.2          0.7         4.2          0.6
CEO transition (benefit)
costs                             (0.5 )      (0.1 )        5.6          0.6           -          0.0
Asset impairment charges           0.1         0.0          0.1          0.0         0.1          0.0
Total operating expenses         511.1        53.2        476.8         51.0       379.9         51.1
Operating income                  90.7         9.4        119.8         12.8        90.5         12.2
Operating income - as
adjusted (1)                      90.2         9.4        125.4         13.4        90.5         12.2
Other income, net                  0.3         0.0          0.2          0.0           -          0.0
Income before income taxes        91.0         9.5        120.0         12.8        90.4         12.2
Income tax expense                30.9         3.2         41.9          4.5        29.9          4.0
Net income                     $  60.1         6.3  %   $  78.1          8.4 %   $  60.5          8.1 %
Net income - as adjusted (1)   $  59.7         6.2  %   $  81.7          8.7 %   $  60.5          8.1 %

Net income per share:
Basic                          $  1.10                  $  1.41                  $  1.10
Diluted                        $  1.08                  $  1.37                  $  1.07
Diluted - as adjusted (1)      $  1.07                  $  1.43                  $  1.07

Weighted-average number of common
shares:
Basic                             54.9                     55.5                     55.1
Diluted                           55.8                     57.1                     56.4

(1) This non-GAAP measure is not in accordance with, nor 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 21 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:

                              2013      2012      2011
Company-Controlled channel    96.2 %    96.7 %    96.2 %
Wholesale/Other channel        3.8 %     3.3 %     3.8 %
Total                        100.0 %   100.0 %   100.0 %


The components of total net sales growth, including comparable net sales changes, were as follows:

                                                Net Sales Increase/(Decrease)
                                                2013           2012         2011

Retail comparable-store sales(1)                (4 %)           24 %        29 %
Direct and E-Commerce                           (5 %)            9 %        (1 %)
Company-Controlled comparable sales change      (4 %)           23 %        26 %
Net store openings/closings                      6 %             3 %        (1 %)
Total Company-Controlled channel                 2 %            26 %        25 %
Wholesale/Other channel                         18 %            10 %       (11 %)
Total net sales change                           3 %            26 %        23 %

(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:

                                                      2013           2012           2011

Average sales per store(1) ($ in thousands)       $    2,093     $    2,164     $    1,721
Average sales per square foot(1)                  $    1,077     $    1,324     $    1,135
Stores > $1 million in net sales(1)                       96 %           98 %           93 %
Stores > $2 million in net sales(1)                       46 %           49 %           24 %
Average net sales per mattress unit -
Company-Controlled channel(2)                     $    3,245     $    3,050     $    2,694

(1) Trailing twelve months for stores included in our comparable store sales calculation.
(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:

                      2013    2012    2011

Beginning of period   410     381     386
Opened                 71      57      19
Closed                (41 )   (28 )   (24 )
End of period         440     410     381

Comparison of 2013 and 2012

Net sales

Net sales in 2013 increased 3% to $960.2 million, compared with $935.0 million for the same period one year ago. The sales increase was primarily driven by sales from 30 net new retail stores opened in the past 12 months, partially offset by a 4% comparable sales decline in our Company-Controlled channel. Company-Controlled mattress units decreased 4% compared to the prior-year period. Average net sales per mattress unit in our Company-Controlled channel increased by 6%.

The $25.2 million net sales increase compared with the same period one year ago was comprised of the following: (i) a $53.1 million sales increase resulting from net new retail store openings and (ii) a $5.4 million increase in Wholesale/Other channel sales; partially offset by (iii) $30.0 million decrease in sales from our Company-Controlled comparable retail stores; and (iv) a $3.3 million decrease in Direct and E-Commerce sales.


Gross profit

The gross profit rate decreased to 62.7% of net sales in 2013, compared with 63.8% for the prior-year period. The 2013 sales mix shift to lower-margin products, including Memorial Day and Labor Day limited-edition mattresses and the introduction of the DualTemp layer, reduced the gross profit rate by 0.8 percentage points ("ppt.") compared to the same period one year ago. In addition, higher sales return and exchange costs, including the second quarter 2013 move to more generous return and exchange policies, reduced the gross profit rate by 0.8 ppt. The gross profit rate was favorably impacted by 0.6 ppt. related to supply chain and manufacturing efficiencies. The rate was also impacted by a variety of factors that can fluctuate from year-to-year, including performance-based incentive compensation and warranty expenses.

Sales and marketing expenses

Sales and marketing expenses in 2013 increased 10% to $439.2 million, or 45.7% of net sales, compared with $398.2 million, or 42.6% of net sales, for the same period one year ago. The $41.0 million increase resulted from (i) a $24.6 million increase in fixed selling expenses primarily due to new, repositioned and remodeled stores; (ii) a $17.9 million, or 14%, increase in media spending; and (iii) a $5.4 million increase in customer financing expenses, as a larger percentage of our customers took advantage of promotional financing offers. These increases were partially offset by lower percentage rent of $4.0 million and a net decrease in miscellaneous other expenses. The sales and marketing expense rate increased 3.1 ppt. compared with the same period one year ago due to the increase in expenses noted above and the deleveraging impact of the 4% comparable sales decrease in our Company-Controlled channel.

General and administrative expenses

General and administrative ("G&A") expenses decreased $3.8 million to $62.8 million in 2013, compared with $66.6 million in the prior year and decreased to 6.5% of net sales, compared with 7.1% of net sales one year ago. The $3.8 million decrease in G&A expenses was primarily due to (i) a $7.7 million decrease in performance-based incentive compensation; (ii) a $2.8 million reduction in outside professional fees, partially offset by (iii) a $4.6 million increase in employee compensation resulting from headcount increases to support business growth initiatives, and salary and wage rate increases that were in line with inflation; (iv) $1.9 million of additional depreciation expense resulting from the increase in capital expenditures; and (v) a $0.2 million net increase in miscellaneous other expenses. The G&A expense rate decreased by 0.6 ppt. in the current period compared with the same period one year ago due to the net reduction in expenses and the leveraging impact of the 3% net sales increase.

Research and development expenses

Research and development (R&D) expenses increased to $9.5 million, or 1.0% of net sales in 2013, compared with $6.2 million, or 0.7% of net sales, for the same period one year ago. The $3.3 million increase in R&D expenses was due to increased investments to support product innovations during 2013 and the Company's long-term product innovation roadmap.

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 Compensation Committee approved the modification of Mr. McLaughlin's unvested stock awards, including performance-based stock awards. As a result of these modifications, we recorded incremental non-cash compensation of $5.6 million ($3.7 million, net of income tax) in 2012. The performance-based stock awards are subject to applicable performance adjustments through 2014 based on free cash flow and actual market share growth versus performance targets. During 2013, we recorded a non-cash compensation benefit of $0.5 million ($0.4 million, net of income tax) resulting from performance-based stock award adjustments.

Asset impairment charges

During 2013 and 2012, we recognized asset impairment charges of $0.1 million related to computer software and certain retail store assets.

Other income, net

Other income, net was $0.3 million for 2013, compared with $0.2 million for the comparable period one year ago. The current-year improvement in other income, net was primarily due to a higher average yield on our portfolio in the current-year period, and a reduction of fees associated with our line of credit.


Income tax expense

Income tax expense was $30.9 million in 2013 compared with $41.9 million for the same period one year ago. The effective tax rate for 2013 decreased to 34.0% compared with the prior-year period rate of 34.9%. The decrease in the effective tax rate primarily resulted from the retroactive reinstatement of the 2012 research and development tax credit in the first quarter of 2013. Income tax expense for 2013 includes research and development tax credits for both 2012 and 2013.

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/Other 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; and (iv) a $1.6 million net increase in miscellaneous other expenses, partially offset by lower performance-based incentive compensation and stock-based compensation. 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 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.

Liquidity and Capital Resources

As of December 28, 2013, cash, cash equivalents and marketable debt securities totaled $145.0 million compared with $177.8 million as of December 29, 2012. The $32.8 million decrease was primarily due to $88.1 million of cash provided by operating activities offset by $76.8 million of cash used to purchase property and equipment, $20.0 million of strategic investments, including the purchase of Comfortaire (see discussion below), and $42.1 million of cash used to repurchase our common stock ($40.0 million under our Board-approved share repurchase program and $2.0 million in connection with the vesting of employee restricted stock grants). Our $86.8 million of marketable debt securities held as of December 28, 2013 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 28, 2013, and December 29, 2012 (dollars in millions). Amounts may not add due to rounding differences:

                                              2013        2012
Total cash provided by (used in):
Operating activities                        $  88.1     $ 100.6
Investing activities                          (87.3 )    (112.1 )
Financing activities                          (30.5 )     (16.9 )
Net decrease in cash and cash equivalents   $ (29.7 )   $ (28.3 )

Cash provided by operating activities for the fiscal year ended December 28, 2013 was $88.1 million compared with $100.6 million for the fiscal year ended December 29, 2012. The $12.5 million year-over-year decrease in cash from operating activities was comprised of an $18.0 million decrease in our 2013 net . . .

  Add SCSS to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SCSS - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.