Select Comfort Reports 25 Percent Earnings Per Share Increase

Furniture World Magazine

Select Comfort Corporation, a leading bed retailer and creator of the Sleep Number® bed, announced results for the fiscal third quarter ended September 30, 2006. Third quarter earnings per share totaled $0.25 per diluted share, an increase of 25 percent over the $0.20 per diluted share in the third quarter of 2005. Net sales increased 18 percent to $208.3 million, and net income increased 22 percent to $13.9 million, compared to net sales of $175.8 million and net income of $11.4 million in the third quarter of 2005. Net income and earnings per share in 2005 did not include stock option expense. If third quarter 2005 results had included stock option expense, earnings would have been $0.18 per diluted share in the prior year, and third quarter 2006 earnings of $0.25 per diluted share would represent earnings growth of 39 percent. A reconciliation of this 2005 pro forma measure accompanies this press release. "Overall, we had a solid third quarter, with earnings growth of 25 percent and 39 percent on a like-for-like comparison basis. This performance would have been even stronger if not for asset impairment charges this quarter. Our efforts to control costs and improve product quality are progressing and are making a significant contribution to our sustained performance," said Bill McLaughlin, Select Comfort chairman and chief executive officer. "Though our 18 percent revenue growth, led by 17 percent growth in our company-owned retail stores, continued to be strong relative to industry growth rates, sales did not meet our expectations following a record Labor Day holiday. Despite this slowdown, we are confident and committed to achieving our long-term goals." Third Quarter Highlights -Diluted earnings per share increased 25 percent, the seventh consecutive quarter of earnings growth at or above the high end of the company's long-term growth targets -Net sales increased 18 percent, including same-store sales growth of 7 percent -Operating profit margin expanded to 10.5 percent after absorbing a $1.8 million asset impairment charge -Generated record cash flows from operating activities of $50.7 million, increasing the year-to-date total to $56.4 million -Invested $25.8 million to repurchase an additional 1.3 million shares, increasing the year-to-date total to $49.5 million to repurchase 2.3 million shares The company's distribution expansion strategy continues to be a significant contributor to sales growth. Select Comfort opened 13 net new company-owned stores in the third quarter, increasing the total to 425 stores at September 30. New stores contributed 10 points toward retail store sales growth of 17 percent in the third quarter, with average first year sales per store achieving new records and exceeding planned levels. The company expanded its retail partner distribution by an additional 119 doors in the third quarter, increasing the total to 727 doors in the U.S. and Canada at September 30. Retail partner sales increased 179 percent compared to the third quarter a year ago,leading to record-level performance by the company's wholesale channel. The company now expects to end 2006 with 440 company-owned stores and a total of 800 retail partner doors. As a result of the company's ongoing purchasing efficiencies, logistics and delivery improvements and by leveraging scale in manufacturing, operating margins improved to 10.5 percent of revenue, from 10.3 percent in the third quarter of 2005. These results include a $1.8 million asset impairment charge for retail stores and software development, and stock option expense of $1.7 million, both of which penalized operating margin gains in the quarter. Gross margins improved 270 basis points to 62.3 percent of revenue, from 59.6 percent in the third quarter of 2005. Gross margins in company-owned channels - which includes retail, e-commerce and direct - improved to 64.2 percent, from 62.1 percent in the third quarter of 2005 and 62.3 percent in the second quarter of 2006. The sequential increase over the second quarter reflects productivity improvements in both manufacturing and logistics and improvements in operating scale from higher sales levels. Sales and marketing expenses, which includes retail store expenses as well as media and marketing, totaled $87.7 million, or 42.1 percent of net sales, compared to 41.3 percent of net sales in the third quarter of 2005. Media spending totaled $27.7 million, an increase of 25 percent compared to $22.1 million in the third quarter of 2005. On a year-to-date basis, media spending totaled $82.1 million, an increase of 22 percent compared to $67.1 million last year. For the full year, the company expects media expenditures will total approximately $110 million. Cash and investments totaled $112.7 million at the end of the quarter, an increase of $0.6 million compared to the balance at December 31. Cash flows from operating activities totaled $50.7 million in the third quarter, increasing the year-to-date total to $56.4 million. On a year-to-date basis, the company has invested $49.5 million to repurchase 2.3 million shares of common stock and $21.0 million to fund capital expenditures. Earnings for the nine months ended September 30, 2006 totaled $0.65 per diluted share, a 35 percent increase over the $0.48 per diluted share for nine months ended October 1, 2005. Net sales for the nine months ended September 30, 2006 increased 21 percent to $609.7 million and net income increased 30 percent to $36.4 million, compared to net sales of $503.2 million and net income of $28.0 million for the nine months ended October 1, 2005. If 2005 results had included stock option expense, earnings would have been $0.44 per diluted share in the prior year, and 2006 earnings of $0.65 per diluted share would represent earnings growth of 48 percent. A reconciliation of this 2005 pro-forma measure accompanies this press release. Outlook The company reiterated its long-term growth targets, which extend beyond 2006: - Sales growth of between 15 percent and 20 percent; - Earnings growth of between 20 percent and 25 percent, and - Same-store sales growth of between 7 percent and 12 percent. Full year sales guidance remains unchanged at or above the high-end of the company's long-term sales growth targets and earnings per share guidance was increased to between $0.95 and $0.97 per diluted share. The company's previously stated full year earnings guidance was between $0.93 and $0.97 per diluted share. The revised earnings guidance reflects growth rates of between 25 percent and 28 percent, compared to 2005 full year earnings of $0.76 per diluted share. If 2005 results had included stock option expense, full year earnings would have been $0.69 per diluted share, and the company's revised 2006 earnings per share guidance would represent growth rates of between 38 percent and 41 percent. The company established 2007 guidance for sales growth of between 15 percent and 20 percent and earnings of between $1.18 and $1.25 per diluted share. Based on the company's revised earnings guidance for 2006, earnings growth is expected to be between 22 percent and 32 percent in 2007. 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® 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.