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Bedding Retailer Select Comfort Reports 22% Sales Increase

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Select Comfort Corporation , a leading bed retailer and creator of the Sleep Number(R) bed, reported results for the fiscal second quarter ended July 1, 2006. Second quarter earnings per share totaled $0.19 per diluted share, an increase of 46 percent compared to $0.13 per diluted share in the second quarter of 2005. Net sales increased 22 percent to $188.6 million and net income increased 37 percent to $10.7 million, compared to net sales of $154.5 million and net income of $7.9 million in the second quarter of 2005. All earnings per share data reflects the company's 3-for-2 stock split that took effect on June 8. Earnings for the first six months of 2006 totaled $0.40 per diluted share, an increase of 43 percent compared to $0.28 per diluted share in 2005. Net sales for the first six months of 2006 increased 23 percent to $401.4 million and net income increased 36 percent to $22.5 million, compared to net sales of $327.4 million and net income of $16.5 million in 2005. Net income and earnings per share in 2005 did not include stock option expense. If second quarter 2005 results had included the effects of stock option expense, then earnings would have been $0.12 per diluted share in the prior year, and second quarter 2006 earnings of $0.19 per diluted share would represent earnings growth of 58 percent. On a year-to-date basis, 2005 earnings would have been $0.25 per diluted share, and 2006 earnings of $0.40 per diluted share would represent earnings growth of 60 percent. A reconciliation of this non-GAAP financial measure accompanies this press release. "The company's second quarter performance is particularly gratifying in this challenging consumer and retail environment and once again demonstrates the breadth and strength of our multi-channel distribution. Our distribution expansion provides convenient channel alternatives for consumers and enables us to maintain sales growth rates well in excess of industry averages," said Bill McLaughlin, Select Comfort chairman and chief executive officer. "We successfully leveraged productivity advances and controlled costs, which led to significant margin expansion this quarter. We believe we will continue to achieve margin gains over the balance of the year while continuing to invest in long-term growth initiatives intended to sustain the company's superior growth rates." Quarterly Highlights -- Diluted earnings per share growth of 46 percent. -- Net sales growth of 22 percent. -- Same-store sales growth of 16 percent. -- Operating profit margin expansion from 7.9 percent to 8.7 percent. -- Initiated stock repurchases under the $150 million buy-back authorization. -- Completed staffing objectives to strengthen the company's IT and R&D functions. The company's ongoing efforts to offer consumers convenient choices for where to purchase their Sleep Number(R) bed has resulted in net sales growth in excess of 20 percent for six consecutive quarters and 17 of the past 18 quarters. Several channels exhibited significant net sales growth rates in the second quarter, including: -- Retail sales increased 25 percent, including same-store sales growth of 16 percent. - e-Commerce sales increased 41 percent, reflecting the seventh consecutive quarterly increase of 25 percent or more. - Retail partner sales, reflected within total wholesale channel sales, increased 53 percent. During the quarter, the company successfully opened 10 company-owned stores to end the quarter at 412 stores, up from 396 stores as of December 31, 2005, and on track to meet the company's stated goal of between 40 and 45 net new stores in 2006. In addition, the company added 65 doors to its retail partner program to end the quarter with 492 retail partner doors, up from 308 doors as of December 31, and on track to meet the company's goal of doubling its retail partner program to between 600 and 650 doors at year-end. Operating margins improved to 8.7 percent of revenue, compared to 7.9 percent in the second quarter of 2005. The increase reflects a 310 basis point improvement in the gross margin percentage. Offsetting the improvement were stock option expense, investments in sales and marketing initiatives and costs related to the development of the company's long-term strategic plan. Gross margins increased to 61.0 percent of revenue, compared to 57.9 percent in the second quarter of 2005. Gross margins in company-owned sales channels - which includes retail, e-commerce and direct - increased to 62.3 percent from 60.3 percent in the second quarter of 2005. The margin improvements reflect higher unit volumes, higher average selling prices and productivity gains in both manufacturing and logistics which more than offset increased commodity costs. Sales and marketing expenses, which includes retail store expenses, totaled $78.6 million, or 41.7 percent of net sales, compared to 41.4 percent of net sales in the second quarter of 2005. Media spending increased 18 percent to $22.8 million in the second quarter, and on a year-to-date basis, media expenditures have increased 21 percent to $54.4 million. The company expects to continue to expand media investments, which are planned to exceed $105 million in 2006. Cash and investments totaled $94.3 million at the end of the quarter, a decrease of $17.8 million compared to the balance at December 31. On a year-to-date basis, the decrease in cash reflects $23.8 million used for the repurchase of approximately one million shares of common stock and capital expenditures of $14.0 million. Since the end of the first quarter, the company has invested $9.3 million to repurchase an additional 431,000 shares of common stock under the $150 million buy-back program authorized in May. Outlook - Increased Expectations for 2006: As a result of the continued strong performance in the second quarter, the company is increasing its earnings per share guidance for 2006 by $0.02 to between $0.93 and $0.97 per diluted share. This guidance includes an estimated $0.08 per share in stock option expense. The company's outlook represents full year earnings growth of between 33 percent and 38 percent, excluding the effects of expensing stock options. Revenue guidance for 2006 remains unchanged, at or above the high-end of the company's stated long-term revenue growth targets of between 15 and 20 percent. The company's long-term targets, which extend beyond 2006, remain unchanged: - Sales growth of between 15 and 20 percent; - Earnings growth of between 20 and 25 percent, and - Same-store sales growth of between 7 and 12 percent. - Sales in 2007 of $1 billion with operating margins of 12 percent, before consideration of stock option expense resulting from the implementation of FAS123R. About Select Comfort: Founded in 1987, Select Comfort Corporation is the nation's leading bed retailer(1), holding 30 U.S. issued or pending patents for its personalized sleep products. The company designs, manufactures and markets a line of adjustable-firmness mattresses featuring air-chamber technology, branded the Sleep Number(R) bed, as well as foundations and sleep accessories. Select Comfort's products are sold through more than 400 company-owned retail stores located nationwide; through selected furniture retailers and specialty bedding retailers; through its national direct marketing operations; and on the Internet at www.selectcomfort.com.

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