Select Comfort Announces Second Quarter 2009 Loss

Furniture World Magazine

Select Comfort Corporation, a leading bed retailer and creator of the SLEEP NUMBER® bed, announced results for the fiscal 2009 second quarter ended July 4, 2009. Net sales for the quarter totaled $120.6 million, a decrease of 21 percent compared to $152.1 million in the second quarter of 2008. The company reported second quarter operating income of $1.0 million, an $11.2 million improvement compared to the second quarter of 2008. Net loss was $4.0 million, or $0.09 per diluted share, compared to a net loss of $6.6 million, or $0.15 per diluted share, in the second-quarter of 2008. Second-quarter results include a $3.6 million charge to eliminate the company’s remaining deferred tax assets. Excluding this non-cash expense, the company would have reported a net loss of $0.3 million or $0.01 per diluted share. During the second quarter, the company generated cash flow from operating activities of $11.5 million, reduced borrowings under its revolving credit facility to $43.8 million and reached agreement with Sterling Partners for a $35.0 million cash investment into the company, subject to shareholder approval. “We continued to make improvements in our financial results, despite ongoing economic challenges and what is historically our weakest selling period,” said Bill McLaughlin, president and CEO, Select Comfort Corporation. “During the quarter, we made progress against our 2009 turn-around plan, which resulted in positive cash flow and an improved pre-tax profit over the prior quarter.” During the second quarter, the company continued to focus on its priorities of aligning costs with current and anticipated sales levels, reigniting the Sleep Number brand, and preserving cash and improving its capital structure: Cost Reduction - Closed 21 stores during the quarter and 51 stores year-to-date, with plans to close at least 15 additional stores by the end of 2009. These actions are expected to reduce fixed store costs by approximately $14.0 million in 2009; - Enhanced effectiveness and efficiency of marketing spend, with second-quarter marketing expense as a percent of net sales down from 25.4 percent in 2008 to 17.7 percent in 2009, a 765 basis-point improvement; and - Reduced general and administrative and research and development expenses in the quarter by $2.5 million on a year-over-year basis. Reigniting the Sleep Number Brand Continued to support the company’s value strategy, benefiting from first-quarter product line redesign and refining successful promotional programs; - Continued to advance results from core direct marketing and the new local radio campaign, which highlights the differentiated benefits of the Sleep Number bed and the location of the company’s retail stores; and - Experienced sequential improvement in same-store sales to an 11 percent decline in the second quarter from a 14 percent decline in the first quarter of 2009. Preserving Cash and Improving Capital Structure Maintained strict discipline on capital spending in the quarter. Capital expenditures in the second quarter of 2009 were $0.7 million compared with $10.6 million in the prior-year period; and Reached an agreement with Sterling Partners for a $35.0 million investment, subject to shareholder approval and other closing conditions, which also would result in an amended credit agreement with new covenants and extended maturity from 2010 to 2012. “We are pleased with the impact of our efforts on our overall financial position, and our team remains focused on pursuing incremental ways to reduce costs, build our brand, and preserve cash and improve our capital structure,” continued McLaughlin. “These efforts will help ensure we have adequate capital and are well positioned for future success as our programs gain momentum and the macro-economic environment ultimately improves.” Second-Quarter Summary During the second quarter, total sales declined 21 percent compared to the prior-year period. Retail sales, which accounted for 78.9 percent of total sales, declined 16 percent compared to the prior-year period. Second-quarter gross profit margin was 61.6 percent, up 201 basis points from 59.6 percent in the prior-year period and 304 basis points on a sequential basis from 58.6 percent in the first quarter. The year-over-year improvement reflects improved efficiencies in manufacturing, offset by a more aggressive promotion strategy to generate store traffic and drive sales. Sales and marketing costs in the second quarter of 2009 decreased by 28 percent to $61.1 million or 50.6 percent of net sales. This compares to $85.4 million, or 56.2 percent of net sales in the prior-year period. General and administrative expenses were $11.7 million in the second quarter, or 9.7 percent of net sales. This compares to $14.1 million, or 9.3 percent of net sales, in the second quarter of 2008. Cash flows from operating activities totaled $35.6 million for the first six months of 2009, which included $25.8 million in tax refunds associated with prior-year losses. This compares to $10.4 million of operating cash flow for the first six months of 2008. The company reduced capital expenditures to $1.9 million for the first six months of 2009, compared to $20.9 million in the first six months of 2008, which reflects actions taken to significantly reduce investments in store expansion and IT infrastructure. As of July 4, 2009, cash and cash equivalents totaled $4.5 million, and outstanding borrowings under the company’s revolving credit facility totaled $43.8 million. Outlook “We do not anticipate a significant economic recovery or improvement in consumer confidence for the balance of the year, which will likely result in continued sales volatility in the near term,” said Jim Raabe, senior vice president and CFO, Select Comfort Corporation. “That said, we expect sales declines to moderate in the second half of 2009, as we lap the impact of the significant economic downturn we experienced during the second half of 2008.” In the second half of the year, the company anticipates it will remain cash flow positive and achieve break-even or slight profitability, before the impact of charges associated with the Sterling Partners transaction and subsequent actions. The combination of the $35.0 million investment and the amended credit agreement would improve the company’s current capital structure, allowing the company to address its liquidity needs and pursue long-term opportunities that become available. Financing Update The company continues to operate under and rely on short-term waivers to comply with certain ongoing covenants associated with the $75.0 million available under its revolving credit facility. On May 26, 2009, the company announced that it had entered into a securities purchase agreement with Sterling Partners, a leading growth-oriented, U.S.-based private equity firm. Under the terms of the agreement, Sterling Partners would purchase 50 million shares of common stock at $0.70 per share, for a total investment of $35.0 million. These shares would represent a 52.5 percent ownership interest in the company. The investment is subject to shareholder approval and customary closing provisions, and the company expects the shareholder meeting and the closing of the transaction to occur in late August or early September. The company believes there is uncertainty with respect to its ability to secure a longer-term amendment to the credit agreement without consummation of the transaction with Sterling Partners, and a likelihood of significant cost, dilution, limited financial flexibility and limited term in the event such an amendment could be secured. In conjunction with the purchase agreement, the company’s existing lenders have agreed to negotiate in good faith to amend and restate the company’s current credit agreement. The amended credit agreement would provide maximum availability of $70.0 million, include improved operating covenants and extend the maturity from June 2010 to December 2012. The amended credit agreement is subject to final lender approval and definitive documentation. On June 25, 2009, the company announced that Sterling Partners intends to seek the appointment of a new CEO, Pat Hopf, following closing of the transaction. About Select Comfort Corporation Founded more than 20 years ago, Select Comfort was ranked the no. 1 bedding retailer in the United States for nine years running1. Based in Minneapolis, 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 approximately 420 company-owned stores located across the United States; select bedding retailers; direct marketing operations; and online at www.sleepnumber.com.