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Select Comfort Reports Second Quarter Net Loss

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Select Comfort Corporation, a leading bed retailer and creator of the SLEEP NUMBER® bed, announced results for the fiscal second quarter ended June 28, 2008. Net sales for the quarter totaled $152.1 million, a decrease of 15 percent, compared to $179.0 million in the second quarter of 2007. The company reported a second-quarter net loss of $6.6 million, or $0.15 per diluted share, compared to net income of $2.9 million, or $0.06 per diluted share, in the second quarter of 2007. “We made important progress in the second quarter in reducing costs, stabilizing sales and laying the groundwork for a return to profitability in the second half of the year, even with growing inflationary pressures and weak macro-economic conditions,” said Bill McLaughlin, chief executive officer. “We were encouraged by stabilizing sales trends and improved bottom-line performance compared with the first quarter, despite the fact that second quarter is historically our seasonal low point. Our priorities continue to be reducing costs, protecting margins and preserving cash to selectively invest in initiatives to improve the business.” Second-quarter sales generally are 10 to 15 percent lower than sales generated during other quarters. For the second quarter of 2008, revenue was 10 percent – or $16 million – less than the first quarter of 2008. An improved cost structure enabled the company to reduce its second-quarter operating loss to $10.3 million, compared with a loss of $11.0 million in the first quarter of 2008, despite lower sales. Cost reduction and profitability improvement initiatives begun in the first quarter were supplemented with additional actions identified during the second quarter, which are outlined below. The combination of these actions is expected to achieve approximately $36 million in cumulative benefits during 2008 and approximately $54 million on an annualized basis. Second Quarter Summary Retail revenue was down 15 percent, driven by same-store sales comps of negative 20 percent, offset by 18 net new company-owned stores opened during the past 12 months. Second quarter e-commerce and direct-marketing sales were lower, with revenues in these channels declining 27 percent and 13 percent, respectively. Wholesale sales declined 12 percent, primarily due to slowing retail partner orders as sluggish consumer spending continued. Second quarter gross profit margin of 59.6 percent was 160 basis points below prior year at 61.2 percent, mainly due to lower sales and higher commodity costs. Gross profit margin increased by 200 basis points from the 57.6 rate in the first quarter of this year, based on the company’s implementation of price increases and cost-reduction activities, along with an improved sales mix following the introduction of the new Sleep Number 6000 bed model. Sales and marketing costs in the second quarter of 2008 decreased to $85.4 million, representing 56.2 percent of net sales, compared to 48.5 percent in the prior-year period. General and administrative expenses in the quarter decreased to $14.1 million and were 9.3 percent of sales, equal to the percent of sales reported in the second quarter of 2007. Cash flows from operating activities totaled $10.4 million for the first six months, compared to $19.9 million for the same period last year. Capital expenditures totaled $20.9 million for the first six months of 2008, compared to $19.3 million in the first six months of 2007. As of June 28, 2008, cash and cash equivalents totaled $6.8 million and outstanding debt totaled $58.1 million. During the quarter, the company amended its credit facility to provide increased financial flexibility as it executes its operating plans. Second Half 2008 Priorities and Outlook “We are looking forward to the coming months, which historically represent our strongest selling season,” said McLaughlin. “Barring further deterioration of the macro-economic environment, the continued execution of our plan and benefits from higher seasonal demand position us to return to profitability in the second half of 2008.” The company continues to implement further cost-saving initiatives to help offset the impact of growing inflationary pressures. These include: Reductions to discretionary spending across all functions of the company, which are expected to achieve $3 million in savings during the second half of the year; The decision to close 10 additional stores before year-end, bringing the total number of anticipated store closings for the year to 25 stores; and Select price increases in July, which are expected to yield an incremental $3 million during 2008. To support revenue and maintain market share, the company pursued several other initiatives to improve the top- and bottom-line results during the back half of the year. These include: Refinement of the new marketing campaign; Implementation of a more aggressive accessories program, which includes the introduction of the “Create Your Perfect Pillow” program, launching in August; and The planned launch of a new bed model in the third quarter. The company expects operating cash flow for the remainder of the year to be positive. The company continues to forecast capital expenditures of $30 million in fiscal 2008 compared with $44 million in fiscal 2007. The company now expects to have approximately 477 retail locations at the end of fiscal 2008. Results for 2008 will benefit from a fifty-third week in the fourth quarter. About Select Comfort Corporation: Founded more than 20 years ago, the company designs, manufactures, markets and supports a line of adjustable-firmness mattresses featuring air-chamber technology, branded the Sleep Number® bed, as well as foundations and bedding accessories. SELECT COMFORT® products are sold through its more than 470 company-owned stores located across the United States; select bedding retailers; direct marketing operations; and online at www.sleepnumber.com.

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