UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
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FORM
10-K
(Mark
one)
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ý
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the Fiscal Year Ended December 31, 2005
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period from to .
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Commission
File No. 0-25121
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SELECT
COMFORT CORPORATION
(Exact
name of registrant as specified in its charter)
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MINNESOTA
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41-1597886
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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6105
Trenton Lane North
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Minneapolis,
Minnesota
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55442
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(Address
of principal executive offices)
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(Zip
code)
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Registrant’s
telephone number, including area code:
(763) 551-7000
Securities
registered pursuant to Section 12(b) of the Act:
NONE
Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined
by
Rule 405 of the Securities Act.
YES
o
NO
ý
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
YES
o
NO
ý
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. YES ý
NO
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. ý
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
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Large
accelerated filer ý
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Accelerated
filer o
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Non-accelerated
filer o
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Indicate
by check mark whether the Registrant is a shell company. YES o
NO
ý
The
aggregate market value of the common equity held by non-affiliates of the
Registrant as of July 1, 2005, was $741,699,000 (based on the last reported
sale
price of the Registrant’s common stock on that date as reported by the Nasdaq
National Market).
As
of
February 22, 2006, there were 36,123,005 shares of the Registrant’s common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The
following table provides references to the location of information, required
by
Form 10-K, that is included in (a) the Registrant’s Annual Report to
Shareholders for the year ended December 31, 2005 (the “Annual Report to
Shareholders”) or (b) the Proxy Statement for the Registrant’s 2006 Annual
Meeting of Shareholders to be held on May 9, 2006 (the “Proxy Statement”), a
definitive copy of which will be filed within 120 days of Registrant’s 2005
fiscal year end. All such information set forth under the heading “Reference”
below is included herein or incorporated herein by reference. A copy of the
Registrant’s Annual Report to Shareholders for the year ended December 31, 2005
is included as an exhibit to this report.
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ITEM
IN FORM 10-K
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REFERENCE
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PART
I
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Item 1.
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Business
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Business,
pages 2 –
16 of this
document
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Item
1A.
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Risk
Factors
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Risk
Factors, pages 16 – 26 of this document
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Item
1B.
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Unresolved
Staff Comments
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Unresolved
Staff Comments, page 26 of this document
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Item 2.
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Properties
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Properties,
page 27 of this document
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Item 3.
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Legal
Proceedings
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Legal
Proceedings, page 28 of this document
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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Submission
of Matters to a Vote of Security Holders, page 28 of this
document
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PART
II
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Item 5.
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Market
for Registrant’s Common Equity and Related Stockholder
Matters
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Common
Stock, page 29 of this document; Executive Compensation in the Proxy
Statement
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Item 6.
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Selected
Financial Data
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Selected
Consolidated Financial Data, pages 30 – 31 of this
document
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Item 7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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Management’s
Discussion and Analysis of Financial Condition and Results of Operations,
pages 32 – 38 of this document
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Item 7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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Quantitative
and Qualitative Disclosure about Market Risk, page 39 of this
document
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Item 8.
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Financial
Statements and Supplementary Data
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Pages 40 –
57 of this
document
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure, page 58 of this document
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Item 9A.
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Controls
and Procedures
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Controls
and Procedures; Management’s
Report on Internal Control Over Financial Reporting set forth on
page 58
of this document
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Item 9B.
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Other
Information
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Other
Information, page 58 of this document
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PART
III
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Item 10.
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Directors
and Executive Officers of the Registrant
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Election
of Directors, Corporate Governance and Section 16(a) Beneficial
Ownership
Reporting Compliance in the Proxy Statement; Executive Officers
of the
Registrant, pages 15 – 16 of this document; Directors and Executive
Officers of the Registrant, page 59 of this
document
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Item 11.
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Executive
Compensation
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Executive
Compensation in the Proxy Statement
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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Security
Ownership of Certain Beneficial Owners and Management in the Proxy
Statement
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Item 13.
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Certain
Relationships and Related Transactions
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Certain
Relationships and Related Transactions in the Proxy
Statement
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Item 14.
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Principal
Accountant Fees and Services
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Approval
of Selection of Independent Auditors in the Proxy
Statement
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PART
IV
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Item 15.
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Exhibits
and Financial Statement Schedules
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Exhibits
and Financial Statement Schedules, pages 60 –
61 of this document
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As
used
in this Form 10-K, the terms “we,” “us,” “our,” the “company” and “Select
Comfort” mean Select Comfort Corporation and its subsidiaries and the term
“common stock” means our common stock, par value $0.01 per share.
As
used
in this Form 10-K, the term “bedding” includes mattresses, box springs and
foundations and does not include bedding accessories, such as sheets, pillows,
headboards, frames, mattress pads and related products.
Select
Comfort®,
Sleep Number®,
Comfort Club®,
Sleep Better on Air®,
The
Sleep Number Bed by Select Comfort (logo)®,
Select Comfort( logo with double arrow design)®,
Firmness Control System™, Precision Comfort®,
Corner Lock™, Intralux®,
Everybody has a Sleep Number™, Knowing your Sleep Number is the Key to a Perfect
Night’s Sleep™, The Sleep Number Store by Select Comfort (logo)®,
You
can only find your Sleep Number on a Sleep Number Bed by Select Comfort™, Select
Comfort Creator of the Sleep Number Bed®,
What’s Your Sleep Number?®,
Grand King®,
Sleep Number SofaBed™, Personalized Warmth Collection®,
GridZone™,
and our
stylized logos are trademarks and/or service marks of Select Comfort. This
Form
10-K may also contain trademarks, trade names and service marks that are owned
by other persons or entities.
Our
fiscal year ends on the Saturday closest to December 31, and, unless the context
otherwise requires, all references to years in this Form 10-K refer to our
fiscal years. Our fiscal year is based on a 52- or 53-week year. All years
represented in this Form 10-K are 52 weeks, except for the 2003 fiscal year
ended January 3, 2004, which is a 53-week year.
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This
Annual Report on Form 10-K contains or incorporates by reference certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. For this purpose, any statements contained in
or
incorporated by reference into this Annual Report on Form 10-K that are not
statements of historical fact may be deemed to be forward-looking statements,
including but not limited to projections of revenues, results of operations,
financial condition or other financial items; any statements of plans,
strategies and objectives of management for future operations; any statements
regarding proposed new products, services or developments; any statements
regarding future economic conditions, prospects or performance; statements
of
belief and any statement or assumptions underlying any of the foregoing. In
addition, we or others on our behalf may make forward-looking statements from
time to time in oral presentations, including telephone conferences and/or
Web
casts open to the public, in press releases or reports, on our Internet Web
site
or otherwise. We try to identify forward-looking statements in this report
and
elsewhere by using words such as “may,” “will,” “should,” “could,” “expect,”
“anticipate,” “believe,” “estimate,” “plan,” “project,” “predict,” “intend,”
“potential,” “continue” or the negative of these or similar
terms.
Our
forward-looking statements speak only as of the date made and by their nature
involve substantial risks and uncertainties. Our actual results may differ
materially depending on a variety of factors, including the items discussed
in
greater detail below under the caption “Risk Factors.” These risks and
uncertainties are not exclusive and further information concerning the company
and our business, including factors that potentially could materially affect
our
financial results or condition, may emerge from time to time, including factors
that we may consider immaterial or do not anticipate at this
time.
We
wish to caution readers not to place undue reliance on any forward-looking
statement and to recognize that forward-looking statements are predictions
of
future results, which may not occur as anticipated. We assume no obligation
to
update forward-looking statements to reflect actual results or changes in
factors or assumptions affecting such forward-looking statements. We advise
you,
however, to consult any further disclosures we make on related subjects in
our
quarterly reports on Form 10-Q and current reports on Form 8-K that we file
with
or furnish to the Securities and Exchange Commission.
Our
Business
We
are
the leading developer, manufacturer and marketer of premium quality,
adjustable-firmness beds. The air-chamber technology of our proprietary
Sleep
Number bed allows adjustable firmness of the mattress and provides a sleep
surface that is clinically proven to provide better sleep quality and greater
relief of back pain in comparison with traditional mattress products. Our
Queen
and King-sized beds offer individual adjustability on each side of the
mattress.
We
were
founded as a Minnesota-based corporation in 1987. Our mission is to improve
people’s lives through better sleep and our vision is to become the leading
brand in the bedding industry.
Unlike
traditional bedding manufacturers, we are vertically integrated from production
through sales, delivery and customer service, which allows us to control
quality, cost, price and presentation. We sell our innovative products through
four distribution channels: Retail, Direct Marketing, e-Commerce and Wholesale.
In 2005, more than 90% of our net sales were derived through our build-to-order,
direct-to-consumer business which is comprised of:
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Retail:
Represents more than 75% of our total net sales and more than 80%
of our
direct-to-consumer business. We ranked as the leading bed retailer
in the
U.S. according to the May 23, 2005 edition of Furniture/Today.
As of December 31, 2005, we operated 396 company-owned stores in
45
states;
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Direct
Marketing:
Represents more than 10% of total net sales and almost 12% of our
direct-to-consumer business. Direct sales are conducted through
a
company-operated call center located in Minneapolis, Minnesota;
and
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e-Commerce:
Represents approximately 5% of total net sales and slightly more
than 5%
of our direct-to-consumer business. In addition to purchasing a
Sleep
Number bed online, customers can purchase pillows, sheets, blankets,
bedding accessories, mattress pads and other bedding accessories
through
our Web site at http://www.selectcomfort.com.
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Less
than
10% of our net sales were derived through our wholesale business which is
comprised of:
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Retail
Partners:
Since 2002, we have sold unique versions of our Sleep Number bed
through
relationships with selected home furnishing retailers and specialty
bedding retailers in the U.S. As of December 31, 2005, our Personal
Preference
line of Sleep Number beds was available through 12 different retailers
offering our product in 308 retail stores in 20 states. In December
2005,
we expanded into Canada through a strategic alliance with Sleep Country
Canada;
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TV
Shopping:
Since 2000, we have sold unique versions of our Sleep Number bed
on the
QVC shopping channel. The bed models available through QVC are currently
marketed under the names Royal
and Deluxe;
and
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Hospitality:
In 2004, we signed an agreement with Radisson Hotels and Resorts® to
provide a unique version of our Sleep Number bed into essentially
all of
Radisson’s hotel rooms in the U.S., Canada and the
Caribbean.
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Because
more than 90% of our net sales result from interacting directly with the
customer, our consumer-driven and service-oriented business model enables us
to
understand and respond quickly to consumer trends and preferences. In addition,
our company-owned stores serve as product showrooms for our Sleep Number beds
and each customer’s purchase is built-to-order. This aspect of our business
model allows us to maintain low levels of inventory and to generate an
accelerated cash-conversion cycle, which enables us to operate with minimal
working capital.
We
believe that consumers are increasingly focused on health and wellness issues
such as sleep quality, nutrition and exercise. Our target customers are
primarily between the ages of 25 and 54 with annual household incomes in excess
of $50,000. Since our inception, we have sold approximately 2.4 million beds
and
have achieved high levels of customer satisfaction. From consumer inquiries
and
customers, we have compiled a database of approximately 10.5 million profiles
that can be used for marketing and research.
Beginning
in 2000, we implemented programs to improve our cost structure and to re-brand
our products and advertising, which led to significantly improved operating
results. Through the five years ended December 31, 2005 we achieved compound
annual net sales growth of 21%, while our comparable store sales grew 15% in
2005 and 16% in 2004. In 2005, we generated $87 million in cash flows from
operating activities and we used $50 million to repurchase approximately 7%
of
our outstanding common stock. We have been debt free since the quarter ended
June 28, 2003 and had $112 million in cash and investments as of December 31,
2005.
Our
expectations over the long term are to sustain annual sales growth rates of
between 15% and 20%, with annual same-store growth between 7% and 12%,
leveraging the business model with long-term annual earnings growth rates of
between 20% and 25%. In 2006, we expect revenues will be at the high end of
our
long-term guidance and we expect earnings growth of between 23% and 30% over
2005 earnings (excluding the impact of incremental stock option expense
resulting from the implementation of new accounting standards in 2006). In
2007,
we believe we can achieve $1 billion in revenue and 12% operating margins
(before stock option expense). In addition, we believe our efficient business
model will continue to generate sufficient cash to finance our growth and
liquidity requirements.
Industry
Overview
The
U.S.
bedding industry is characterized as a mature and stable industry. According
to
preliminary ISPA (International Sleep Products Association) data for 2005,
the
industry was estimated to represent approximately $6.5 billion or roughly
23
million mattress units at the wholesale level. According to published estimates
by Furniture/Today,
retail
sales of conventional and specialty bedding and futons reached $10.7 billion
at
retail in 2004. The industry has demonstrated a 10-year compound annual growth
rate of approximately 7.3% on a wholesale revenue basis and approximately
2.5%
on a mattress units basis. We believe that industry unit growth has been
primarily driven by population growth, and an increase in the number of homes
and larger homes, including secondary residences. We believe growth in average
wholesale prices has been a result of a shift to both larger and higher quality
beds, which are typically more expensive. We believe this trend toward higher
price points is caused by a demographic shift to an older U.S. population
that
typically spends more on bedding than younger consumers, improved merchandising
and consumer education by retailers and industry advertising regarding the
benefits of higher quality sleep. Both ISPA and Furniture/Today
cite the
growth in specialty (non-innerspring) bedding products, such as visco-elastic
foam and adjustable firmness mattresses, as contributing to these overall
industry trends.
Bedding
Manufacturers
We
are
vertically integrated with manufacturing and assembly operations in Salt
Lake
City, Utah and in Irmo, South Carolina. According to Furniture/Today,
the
four largest bedding manufacturers, Sealy, Serta, Simmons and Spring Air,
accounted for 57.4% of wholesale bedding sales in 2004. This compares with
prior
estimates of 58.7% in 2003 and 60.6% in 2002.
Bedding
Retailers
We
are
vertically integrated through our company-owned stores. The U.S. bedding
retail
industry is highly fragmented. Furniture/Today
estimates that the top 25 U.S. bedding retailers accounted for approximately
36%
of the total industry. In 2005, Select Comfort was recognized by Furniture/Today
as the
largest U.S. bedding retailer for the fifth consecutive year.
Competitive
Strengths
Our
objective is to become the leading brand in the bedding industry, in terms
of
revenue share, product innovation and consumer regard. To achieve this goal,
we
intend to capitalize on the following strengths:
Differentiated,
Superior Product
Our
proprietary Sleep Number bed was designed on the basis of sleep research and
is
clinically proven to provide better sleep quality and greater relief of back
pain in comparison to traditional mattress products. Unlike traditional
mattresses made from innersprings, our innovative Sleep Number bed uses
proprietary air-chamber technology that allows the mattress to be easily
adjusted through a hand-held remote control that digitally displays an
individual’s Sleep Number. A Sleep Number is a number from zero to 100 that
represents a sleeper’s ideal level of comfort, firmness and support. Our
Queen-sized and King-sized Sleep Number beds offer individual comfort controls,
allowing for the adjustment of mattress firmness on each side of the bed. Our
research indicates that 9 of 10 couples sleep at different Sleep Number
settings, making the dual comfort control feature a compelling differentiator
from standard bedding offerings.
Clinical
research has shown that people who sleep on a Sleep Number bed fall asleep
faster and experience deeper sleep with fewer disturbances than those sleeping
on a traditional innerspring mattress. The gentle and conforming support
of the
air chambers in our Sleep Number beds provides more proper spinal alignment
and
relief from uncomfortable pressure points that can cause tossing and turning
and
poor-quality sleep. The capability of our Sleep Number bed to address consumer
sleep problems is further evidenced by the more than 50,000 customer
testimonials we have received over the years.
Our
Sleep
Number beds are priced competitively with other premium mattress products
and
are also more durable than traditional innerspring products, resulting in
a
stronger value proposition for the consumer. Because our Sleep Number beds
do
not depend on metal coils or springs for their support structure, they maintain
their shape and support better over time than traditional innerspring
mattresses. Independent durability testing has shown our Sleep Number beds
to
withstand more than 20 years of simulated use.
Proven
Brand Development Strategy
In
January 2001, we successfully repositioned our product and advertising messages,
creating the Sleep Number brand and a new multi-media advertising campaign
to
increase awareness of our innovative, proprietary beds. The brand message
hierarchy of the Sleep Number campaign is clear and proprietary:
• A
Sleep
Number represents an ideal level of mattress comfort, firmness and
support;
• Everybody
has a Sleep Number™;
• Knowing
your Sleep Number is the Key to a Perfect Night’s Sleep™;
and
• You
can
only find your Sleep Number on a Sleep Number Bed by Select Comfort™.
This
branding strategy allows our advertising and consumer communication to focus
on
our bed’s distinguishing and proprietary feature, personalized comfort, as
represented by the digital Sleep Number readout on the bed’s hand-held remote
control. In addition to re-branding our product in 2001, we broadened our
demographic and media reach by targeting adults
25-54
years old with a message of improved sleep quality. The Sleep Number brand
was
launched through our first-ever prime-time television advertising campaign,
which invited consumers to visit their local Select Comfort retail store
to find
their
personal Sleep Number. By focusing on the unique Sleep Number setting of
every
individual, the campaign quickly conveys the concept of our bed’s comfort
customization. The Sleep Number brand and positioning have been integrated
into
all of our sales channels and throughout our internal and external communication
programs.
According
to independent, third-party research through July 2005, our unaided brand
awareness increased to 13%, up from approximately 10% in the previous year,
which remains well below industry leading mattress brands. In 2005, we increased
advertising expenditures to $90 million, up from $79 million in 2004 and
$30
million in 2001. In 2006, we expect to increase advertising expenditures
to over
$100 million as we continue to build brand awareness through a combination
of
national and local media. Traditionally, we have utilized a media mix that
includes television, radio and print advertising in support of our Sleep
Number
campaign. In 2006, online spending will represent an increasing part of our
overall media mix.
Company-Controlled
Distribution
Unlike
traditional bedding manufacturers, which primarily sell through third-party
retailers, our company-controlled distribution channels —
Retail,
Direct Marketing and e-Commerce — enable us to control the selling process to
ensure that the unique benefits of our product are effectively presented to
consumers. Our direct-to-consumer business captures both the manufacturer’s and
retailer’s margin.
Our
company-controlled distribution channels are staffed by high-quality,
well-trained and passionate sales professionals, most of whom are Sleep Number
bed owners. Our retail channel comprised 77% of our net sales in 2005. At
year-end 2005, we operated 396 stores in 45 states, allowing consumers to
easily
experience our products and find their personal Sleep Number. Our direct
marketing call center and our Web site at http://www.selectcomfort.com
provide
national sales coverage, including markets not yet served by one of our retail
stores. Our Web site can be used as a product research tool, a place to purchase
or as a means to locate our nearest retail store. Through these various
channels, we maintain close contact with consumers, who provide us with
important feedback for product improvement and innovation.
Flexible
and Efficient Operating Model
Unlike
traditional bedding manufacturers and retailers that are dependent on a stock
of
finished-goods inventory to fill orders, we employ a make-to-order manufacturing
process. Through our long-term relationships with high-quality suppliers,
which
have been selected through a rigorous certification and review process, we
have
implemented a just-in-time materials supply system. This operating model
enables
us to maintain low levels of inventory and to generate an accelerated
cash-conversion cycle, which allows us to operate with minimal working capital.
In 2005, our manufacturing inventory turnover was 16x. Our make-to-order
manufacturing process allows us to introduce new or enhanced products without
generating significant obsolete or clearance-priced finished-goods inventory.
As
a result of our flexible production process, we estimate that we can add to
our current production volume in our existing manufacturing facilities with
minimal capital investment. Accordingly, we believe we have sufficient plant
capacity to sustain our business through at least 2007. Our unique air-chamber
technology and modular product design allows our beds to be packed in boxes
and
shipped via UPS directly from our manufacturing plants to our customers,
anywhere in the United States, which lowers our overall distribution costs.
Consumers also appreciate the ease of handling and moving our bed, particularly
through hallways and tight spaces. In 2003, we completed the roll-out of
home
delivery, assembly and mattress removal services to all of our retail markets,
providing our customers with a full-service delivery option.
Our
stores serve as showrooms for our Sleep Number beds, requiring minimal in-store
inventory for display beds and accessories. This low inventory model allows
us
to generate increased sales volume from existing retail floor space without
a
corresponding increase in working capital. In 2005, our retail inventory
turn
was 23x and the average net sales per store was approximately $1,417,000
compared to approximately $1,247,000 in 2004, approximately $1,101,000 in
2003
and approximately $817,000 in 2002.
Growth
Strategy
We
estimate that we have less than 6% wholesale market share of total industry
revenues and less than 2% market share of industry unit sales. Our growth
plans
are centered on increasing consumer awareness of our products and stores
through
increasing media spending, increasing distribution (primarily through opening
new company-owned retail stores and remodeling existing stores and also
through
expansion of our retail partner program) and expanding and improving our
product
lines. Our primary market consists of consumers in the U.S. domestic market.
We
believe that opportunities exist
longer
term for sales internationally and to commercial markets and in 2006 we intend
to make infrastructure investments to enable us to pursue such opportunities
in
future years. To accomplish our growth strategy, we intend to focus on the
following priorities:
Building
Brand Awareness
Our
most
significant growth driver has been building brand awareness for our innovative,
high-quality product among the broad consumer audience. With approximately
13%
unaided brand awareness nationally, we have significant opportunity for growth
through increasing awareness of the Sleep Number and Select Comfort brands,
our
innovative products and our store locations.
Our
Sleep
Number advertising campaign was introduced regionally in early 2001, and in
the
years 2002 to 2004 was expanded both on a local and national level. Our national
campaign is augmented by regional advertising that continues to reach more
markets. Our local Sleep Number campaign is run in 34 retail markets covering
approximately 55% of the U.S. population. These markets generated 68% of our
retail sales in 2005. We plan to increase investment in our local Sleep Number
campaign in 2006, while also increasing media investment in national media
vehicles. We plan to increase total media spending by over 15% to more than
$100
million in 2006.
Due
to
our multi-channel and direct-to-consumer sales model, we are able to cost
effectively implement an integrated multi-media advertising program, both on
a
national and local-market basis. Our fully integrated direct marketing
capabilities allow us to provide inquiring consumers with product information
and to follow up with promotional literature during the buying process.
In
May
2004, we entered into a strategic arrangement to supply Sleep Number beds to
Radisson Hotels and Resorts® in the U.S., Canada and the Caribbean. By year-end
2005, we had converted 32% of Radisson’s beds and we plan to install a similar
percentage of Radisson beds in 2006. We believe that the presence of Sleep
Number beds within Radisson Hotels and Resorts provides unprecedented consumer
trial opportunities that increase awareness of the product and the brand among
the thousands of guests who stay at Radisson hotels each night.
Expanding
Profitable Distribution
We
plan
to expand profitable distribution primarily by:
| • |
Increasing
comparable store sales, primarily through our multi-media advertising
campaign, increasing units sold per store, and increasing average
revenue
per transaction;
|
| • |
Increasing
our store base between 5% and 10% annually, as we continue to build
toward
our long-term goal of between 600 and 650 U.S. retail stores (we
plan to
add 40 to 45 net new retail stores in the U.S. in
2006);
|
| • |
Expanding
our presence in the hospitality channel through our strategic relationship
with Radisson Hotels and Resorts®;
|
| • |
Expanding
wholesale distribution selectively through home furniture retailers
and
specialty bedding retailers. In 2006, we expect to double the number
of
retail partners’ store locations from the 308 locations at the end of
fiscal 2005; and
|
| • |
Executing
our planned roll-out to all 110 Sleep Country Canada retail
locations.
|
We
expect
our future comparable store sales growth to be comprised of both an increase
in
the number of units sold and an increase in the average revenue per transaction.
We expect to drive this growth through increased advertising, improvements
in
our selling process, our enhanced, performance-based sales compensation plan
and
increased training of our sales professionals. Continued development of our
accessory line is also expected to drive increased store traffic and contribute
to increases in average revenue per transaction.
Supported
by our proven advertising strategy and store economics, we expect to continue
to
expand our profitable store base. We now have at least one Select Comfort retail
store in 126 Designated Market Areas in the United States, which represent
89%
of total U.S. household population. Historically, in some major metropolitan
areas, including Boston, Los Angeles and New York, we have not had a sufficient
number of stores in relation to the size of the local population to allow us
to
realize an optimal level of return on local advertising expenditures. These
under-stored markets have been the focus of our store opening plans since
2003.
We
continue to develop our wholesale sales channel, providing consumers additional
opportunities to become aware of and to purchase our Sleep Number beds. Our
wholesale channel sells through selected home furnishings retailers and
specialty
bedding
retailers in specific geographic markets and to consumers via the QVC shopping
channel. This channel allows us to expand our points of sale more quickly
and
leverage our brand building media investment.
Leading
the Industry in Product Innovation
Our
goal
is to continue to lead the industry in product innovation and sleep expertise
by
developing and marketing products that deliver personalized comfort and better
sleep. We strive to maintain a pipeline of benefits-driven product innovation,
periodically introducing new or enhanced bed or accessory products. We focus
our
research and development resources on enhancing the performance of our core
product line, improving quality and reducing costs.
In
2003,
we introduced nationally our Precision Comfort adjustable foundation product,
which allows consumers to raise the head or foot of the bed.
In
2004,
we executed our most extensive new product development roll-out in our recent
history. We introduced a new top-end bed model, the Sleep Number 9000, and
improved the appearance, function and sleep-surface comfort of every bed
in our
product line. The Sleep Number SofaBed was introduced into a limited number
of
stores nationally.
In
early
2005, we re-introduced an improved Sleep Number 4000 model into 250 of our
retail stores. Also in January 2005 we added enhanced fire retardancy materials
and construction to our beds sold in California to comply with the new
California fire retardancy standards. This product is also available upon
request by customers outside of California.
In
2006,
we plan to nearly double our R&D spending as we work to improve our existing
product line and to develop a sustainable pipeline of product enhancements
and
new products that we expect to introduce in future years.
Leveraging
our Infrastructure
We
believe we are well positioned to sustain long-term profitable growth. Our
stated goals for 2007 include $1 billion in revenues and 12% operating margins
(before stock option expense). For the full year 2005, operating margins
totaled
9.9% compared to 8.9% in 2004. Achieving our 2007 goal implies that operating
margins need to expand approximately one percentage point (100 basis points)
per
year. We believe we can accomplish this goal through a combination of scale
efficiencies and cost containment initiatives. For example, while advertising
expenditures increased in absolute dollar terms in 2005, ad spending declined
on
a percent of revenue basis. In 2006, we expect selling expenses and general
and
administrative expenses to provide leverage on a percent of revenue
basis.
Our
Products
We
sell a
proprietary line of beds under the Sleep Number brand featuring adjustable
firmness air-chamber technology. A Sleep Number is a number from zero to
100
representing an individual’s ideal level of comfort, firmness and support.
Unlike traditional mattresses, which use a series of innersprings for support,
our mattress design uses adjustable air-chamber technology. Our Sleep Number
bed
was designed on the basis of sleep research and has been shown to improve
sleep
quality through:
• Better
spinal alignment;
• Reduced
pressure points, resulting in less tossing and turning;
• Greater
relief of back pain; and
• Greater
overall comfort.
Mattresses
In
our
company-controlled sales channels, we offer five different Sleep Number bed
models, including the Sleep Number 3000, 4000, 5000, 7000 and 9000. Each
bed
comes in standard mattress sizes, ranging from twin to king, as well as some
specialty sizes. Our model 3000, 4000 and 5000 beds are available in both
traditional and pillow-top configurations; our 7000 and 9000 models are
exclusively available as pillow-top beds. All Sleep Number beds feature
high-quality, vulcanized rubber air chambers that are highly durable. Because
air is the primary support material of the mattress, Sleep Number beds do
not
lose their shape or support over time like traditional innerspring and
foam-based mattresses. Our Queen-sized and
King-sized
beds feature dual air-chambers that allow each side of the mattress to be
independently adjusted with our Firmness Control System for personalized comfort
and support. Our Firmness Control System features a compact air compressor
with
a handheld remote that is used to fill the bed’s air chambers and regulate their
firmness. The Firmness Control System for our Sleep Number bed is certified
by
Underwriters Laboratories Inc. (UL) and Underwriters’ Laboratories of Canada
(ULC).
The
air
chambers of a Sleep Number bed are surrounded on all sides by a high-density
foam perimeter to provide strong edge support. For added comfort, we offer
plush
pillowtop options with an extra cushion of support designed to cradle the body.
All Sleep Number mattresses are enclosed by a comfortable, durable Belgian
Damask covering. Our covers are sewn in our plants located in Salt Lake City,
Utah and near Columbia, South Carolina.
As
you
move up the product line, the Sleep Number bed models offer different features
and benefits, including additional comfort padding and fiberfill loft, higher
quality Belgian Damask fabrics, higher overall mattress profile, quieter
Firmness Control
Systems with additional functions, and wireless remote controls as a standard
feature.
Current
price points (excluding the matching foundation) generally range from
approximately $300 to $500 for a Twin-size Sleep Number 3000 to $4,100 for
the
King-size Sleep Number 9000. For a mattress set, including the matching
foundation, our Queen-sized models range from $900 to $4,600. These prices
are
subject to periodic promotional offerings. We offer a different series of Sleep
Number bed models to our retail partners, who establish their own resale prices
to their customers.
Foundations
The
contouring and support of our Sleep Number beds are optimized when used with
our
specially designed, proprietary foundation. This durable foundation, used in
place of a box spring, is uniquely designed to complement the mattress air
chambers and to maintain a consistent support surface for the life of the bed.
Our foundation is a modular design with interlocking panels for maximum
structural integrity, as well as high-density polymer side panels and lateral
support beams for additional support. Unlike traditional box springs, our
foundation can be disassembled and easily moved through hallways, tight spaces
and up and down stairs. Through some of our retail partners, we offer a
different foundation comprised primarily of wood. The current retail prices
of
our foundations range from $250 to $600, depending upon the size of the
bed.
In
2003
we completed the national roll-out of our Precision Comfort adjustable
foundation to our retail stores. The adjustable foundation allows consumers
to
raise the head or foot of the bed, and to experience the comfort of massage,
using a handheld remote. The current retail prices of our adjustable foundations
range from $1,825 to $2,950, depending upon the size of the bed.
Sofa
Sleeper
In
the
second quarter of 2004, we introduced the Sleep Number SofaBed line into
selected pilot market distribution. The SofaBed is now available in 120 stores
in 43 markets across the country. The Sleep Number SofaBed features a
Queen-sized Sleep Number mattress inside a beautifully appointed sofa surround,
which is available in a variety of different fabric or leather options. This
product is being produced in partnership with Berkline/Benchcraft Holdings,
LLC,
a leading manufacturer of motion furniture.
Accessories
In
addition to our mattresses and foundations, we offer a line of accessory bedding
products, including specialty pillows, mattress pads, comforters, sheets, bed
frames and leg options. The specialty pillows, available in a variety of sizes,
materials and firmness levels, are designed to provide personalized comfort
and
better quality sleep for stomach, back or side sleepers. We also market our
Personal Warmth Collection,™ a group of comforters and blankets designed to be
twice as warm on one half of the bed as the other, accommodating varying warmth
preferences among couples. We recently introduced our new GridZone™ Memory Foam
Pillow which provides varying support zones, and our quilted blanket with
Thinsulate® insulation, which was developed exclusively for Select Comfort in
partnership with 3M Company.
Delivery
and Assembly Services
Our
unique product design allows us to ship our beds in a modular format to
customers throughout the United States by UPS. We regularly review our package
sizes to take advantage of more favorable shipping rates. Informational product
brochures and easy-to-follow assembly instructions accompany each Sleep Number
bed, which can be quickly and easily assembled by
the
customer through a simple, tool-free process. For an additional fee the customer
can take advantage of our home delivery, assembly and mattress removal services.
In 2003 we expanded these services to be available through all of our retail
stores, in certain markets by a third-party provider. Delivery typically
occurs
between 7 and 14 days from the date of order and is currently priced at
$150.
Better
Night’s Sleep Guarantee and Warranty
Each
of
our Sleep Number beds (other than our Precision Comfort adjustable foundation)
comes with a 30 Night In-Home Trial and Better Night’s Sleep guarantee, which
allows consumers 30 nights at home to make sure they are 100% comfortable
with
the bed. If the consumer is not completely satisfied, we will authorize the
return of the bed and a refund of the purchase price. The consumer is
responsible for the return shipping costs. Each of our Sleep Number beds
is
backed by a 20-year Limited Warranty. We believe that due to our unique design
and craftsmanship, our Sleep Number bed is built to last 20 years or
more.
Our
Distribution Channels
We
generate revenue by selling our products through four complementary distribution
channels. Three of these channels —Retail, Direct Marketing and e-Commerce — are
company-controlled and sell directly to consumers. We also sell through a
wholesale channel to leading home furnishings retailers, specialty bedding
retailers, the QVC shopping channel and strategic partners, such as Radisson
Hotels and Resorts®. Our wholesale strategy allows us to complement our
company-controlled distribution with expanded presence through leading mattress
retailers. In addition, our wholesale strategy enables us to leverage our
advertising and increase brand awareness in large markets where it would
otherwise not be cost effective for us to spend advertising
dollars.
Retail
Our
retail stores accounted for 77% of net sales in 2005 and 78% of net sales
in
2004. As of the end of fiscal 2005, we operated 396 stores in 45 states.
In
2006, we anticipate opening between 40 and 45 net new retail stores and plan
to
relocate approximately 30 existing stores.
Our
stores are principally mall-based showrooms, averaging approximately 1,100
square feet and typically displaying four or five models of our Sleep Number
bed
and a full selection of our branded accessories. Our store design incorporates
a
bedroom-like setting intended to convey a sense of sophistication and quality
that reinforces our Sleep Number brand name as synonymous with sleep solutions.
Our sales professionals play an important role in creating an inviting and
informative retail environment. These professionals receive extensive training
regarding the features and benefits of our Sleep Number beds and accessories,
the overall importance of sleep quality and our proprietary, standardized
selling process.
Direct
Marketing
Many
consumers’ initial exposure to our Sleep Number bed is through our direct
marketing operations. Interested consumers respond to our print, radio and
cable
television advertisements by calling our toll-free number. Our direct marketing
sales professionals capture information from the consumer, send an information
packet, begin the consumer education process, and either take the order or,
if
appropriate, refer the consumer to our nearest store. Our direct marketing
operations also include a database marketing department that is responsible
for
segmentation and analysis of our database to direct the mailing of product
and
promotional information in response to inquiries. We maintain a database
of
approximately 10.5 million inquiries, including customers. In 2001, we
established a “Factory Direct” outlet through our direct marketing channel,
allowing us to selectively market refurbished products where allowed by law,
as
well as discontinued models. We also manage Comfort Club, an affinity program
for our Sleep Number bed owners, which encourages referrals of our product
to
friends and family members.
e-Commerce
Our
Web
site at http://www.selectcomfort.com
provides
consumers with a wide array of useful information as well as the convenience
of
ordering our products online or calling and ordering from one of our
Internet-dedicated sales professionals. Since building the capability to
take
online orders in May 1999, our e-commerce channel has continued to add
functionality and content to educate consumers regarding sleep science and
research, our products and the benefits they provide. Our Web site also directs
consumers to our store locations and provides other means to contact us.
Through
advanced search engine applications, our e-commerce department leverages
the
brand awareness built through our advertising and makes it easy for consumers
to
find our site. Our Web site incorporates a look and feel that is attractive
and
professional and which reinforces
the
Select Comfort and Sleep Number brand images. Our site has been recently
enhanced, allowing visitors to watch our commercials and various demonstration
videos, to apply for financing offers online, to track shipment of purchased
products, and to view and manage their Comfort Club reward
certificates.
Wholesale
We
are
selectively building wholesale relationships with home furnishings retailers
and
specialty bedding retailers. These wholesale relationships increase our points
of sale and allow us to leverage our advertising spending in key markets. Since
July 2002, our Sleep Number bed has been featured in California-based Sleep
Train stores, the first large-scale, multi-store specialty bedding retailer
to
offer our Sleep Number bed outside of our company-controlled stores. In August
2002, we began selling our Sleep Number bed through Sleep America, a specialty
retailer in the Phoenix and Tucson markets. By the end of 2005, we had expanded
our retail partners program to include a total of twelve retailers representing
308 retail store locations (frequently referred to as “doors”) in 20 states. In
2006, we plan to increase the number of doors in our retail partner program
by
more than 100%.
Since
October 2000, we have successfully offered our products through periodic
segments on the QVC shopping channel. Our Sleep Number bed was named
QVC’s
Home Innovation Product Concept of the Year
at QVC’s
2001 QStar Awards and is the #1 selling bed on QVC. We believe that our
distribution through QVC has increased overall consumer awareness of our Sleep
Number brand in addition to providing an additional sales outlet.
In
May
2004, we entered into an agreement to supply Sleep Number beds to Radisson
Hotels and Resorts® in the U.S., Canada and the Caribbean. In 2005, we replaced
approximately 32% of Radisson’s beds with Sleep Number beds and we expect to
install a similar percentage of Radisson beds in 2006. We believe that the
presence of Sleep Number beds within Radisson Hotels and Resorts provides
unprecedented consumer trial opportunities that increase awareness of the
product and brand among the thousands of guests who stay at Radisson hotels
each
night.
Store
Operations
Store
Economics
Average
net sales per store were approximately $1,417,000 in 2005 versus $626,000 in
2001, with average sales per square foot of approximately $1,264 in 2005 versus
$666 in 2001. New stores opened in 2005 are expected to average in excess of
$900,000 in net sales in the first year of operations. Approximately 77% of
our
stores generated sales of over $1,000,000 in 2005.
Our
investment to open a new store is approximately $200,000, including inventory.
We target new stores to be cash flow positive within 12 months with a payback
of
the initial cash investment in less than 24 months. Our stores break even on
a
four-wall cash flow basis with approximately $600,000 of net sales. Our
four-wall cash flow is calculated as gross profit generated from store sales
less store expenses and advertising, without deduction of depreciation
expenses.
Site
Selection
We
cluster retail stores within a metropolitan market in order to leverage our
advertising expenditures. In selecting new store sites, we generally seek
high-traffic locations of approximately 1,000 to 1,400 square feet within malls
in metropolitan areas. We conduct extensive analyses of potential store sites
and base our selection on a number of factors, including the location within
the
mall, the demographics of the trade area, the specifications of the mall
(including size, age, sales per square foot and the location of the nearest
competitive mall), the perceived strength of the mall’s anchor stores, the
performance of other specialty retail tenants in the mall, the store density
of
existing stores and our marketing and advertising plans in the respective
markets. We began testing store locations in select urban and lifestyle-oriented
shopping centers in the second half of 2003, and 21 of our 396 stores at
year-end 2005 represented non-mall locations. These non-mall locations are
typically larger, at approximately 2,000 square feet, but with economics
comparable to our mall-based stores. We expect non-mall locations will represent
approximately 40% of our projected 2006 new store openings.
Management
and Sales Professionals
Our
stores are currently organized into five regional areas and 39 districts, with
between seven and 15 stores in each district, depending on geographical
dispersion. Each regional director oversees between seven and 10 districts.
Each
district has a market manager who is responsible for sales and operations and
reports to the regional director. The market managers frequently visit stores
to
review merchandise presentation, sales force product knowledge, sales process,
financial
performance
and compliance with operating standards. The typical staff at one of our
new
Select Comfort stores consists of one store manager and two or more full-time
sales professionals. Store staffing expands as the store increases its sales
volume.
Our sales professionals devote substantially all of their efforts to sales
and
customer service, which includes helping customers and responding to
inquiries.
Training
and Compensation
All
store
personnel receive comprehensive on-site training on our technology and sleep
expertise, the features and benefits of our beds, sales and customer service
techniques and operating policies and guidelines. Initial training programs
are
reinforced through detailed product and operating manuals and periodic
performance appraisals. All store sales professionals receive base compensation
and are entitled to commissions and bonuses based on individual performance
as
well as their store’s performance. Regional directors, market managers and store
managers are eligible to receive, in addition to their base compensation,
bonuses for the achievement of performance objectives.
Marketing
and Advertising
Awareness
among the broad consumer audience of our brand, product benefits and store
locations historically has been our most significant opportunity for growth.
The
Sleep Number advertising campaign was introduced early in 2001 to support
our
retail stores in selected markets through our first comprehensive multi-media
advertising campaign using prime-time TV, national cable television,
infomercials, drive-time radio and newspaper advertisements. We have expanded
the comprehensive local multi-media Sleep Number advertising campaign from
the
initial eight markets in 2001 to 34 markets in 2005. In addition, our successful
radio personality endorsement advertising program now totals 129 radio
personalities in approximately 112 retail store markets.
In
the
direct marketing channel, our advertising message is communicated through
targeted print and radio advertisements, use of infomercials and short-form
direct TV advertising and through product brochures, videos, DVDs and other
product and promotional materials mailed in response to consumer inquiries.
The
direct marketing channel has historically relied heavily on our advertising
through nationally syndicated radio personalities, such as Paul Harvey and
Rush
Limbaugh, and print and direct mail programs. Since 2002, we have significantly
increased our advertising investment on national cable TV, predominantly
purchased at advantageous direct response media rates and incorporating actress
Lindsay Wagner as spokeswoman. This provides a base of awareness which is
supplemented with local retail store advertising. Our direct marketing
operations continually monitor the effectiveness and efficiency of our
advertising by tracking the cost per inquiry and cost per order of our
advertising.
Since
2001, the Sleep Number positioning has been integrated into our marketing
messages across all of our distribution channels, advertising vehicles and
media
types. We have increased our 1-800 advertising on national cable TV as an
economical means of increasing national brand awareness for our Sleep Number
bed. Through our dedicated call center, we are able to provide the inquiring
consumer more information or send a video and brochure. In 2005, our total
media
spending increased by approximately $11 million to approximately $90 million
and
we plan to increase advertising expenditures by more than 15% to over $100
million in 2006.
Owners
of
our beds purchased through company-controlled channels are members of our
Comfort Club, our customer loyalty program designed primarily to reward our
owners for recommending our beds. Each time a referred customer purchases
a bed,
the referring Comfort Club member receives a $50 coupon for purchase of our
products, with increasing benefits for multiple referrals. In 2005,
approximately 28,000 new customers bought beds after receiving referrals
from
our Comfort Club members, and existing owners bought approximately 32,000
additional beds.
Operations
Manufacturing
and Distribution
We
have
two manufacturing plants, one located in Irmo, South Carolina, and the other
in
Salt Lake City, Utah. The manufacturing operations in South Carolina and
Utah
consist of quilting and sewing of the fabric covers for our beds and final
assembly and packaging of mattresses and foundations. In addition, our
electrical Firmness Control Systems are assembled in our Salt Lake City plant.
In 2005, we opened a distribution warehouse in Omaha, Nebraska to supply
finished product under our program with Radisson Hotels and
Resorts®.
We
manufacture beds to fulfill orders rather than stocking inventory, which
enables
us to maintain lower levels of finished goods inventory and operate with
limited
regional warehousing. Orders are currently shipped from our manufacturing
facilities
via UPS or through our company-controlled home delivery, assembly and mattress
removal service, typically within 48 hours following order receipt. Orders
are
usually received by the customer within 5 to 14 days from the date of order.
In
2003, we expanded the availability of our company-controlled delivery, assembly
and removal services to all of our retail markets. Select Comfort’s home
delivery, assembly and mattress removal service also has contributed to
improving the overall customer experience. Our home delivery technicians are
Sleep Number® bed owners who can articulate the benefits of the bed, reinforcing
the sales process and ensuring satisfied customers. The total number of beds
delivered through our full-service home delivery team was 143,000 in 2005,
representing 38% of total beds sold. To help meet our expanded sales goals
in
2006, we plan to make investments in home delivery systems, scheduling and
personnel to enable continued improvement and efficiency in our home delivery
service.
Suppliers
We
currently obtain all of the materials and components used to produce our beds
from outside sources. A number of components, including our proprietary air
chambers, our proprietary blow-molded foundations, various components for our
Firmness Control Systems, as well as foam, fabrics and zippers, are sourced
from
suppliers who serve as our sole source of supply for these components. For
several of these components, we are evaluating the potential to purchase from
multiple suppliers.
Our
proprietary air chambers are produced to our specifications by one Eastern
European supplier, which has been our sole source of supply of air chambers
since 1994. Under our agreement with this supplier, we are obligated to purchase
certain minimum quantities. This agreement runs through October 2007 and is
thereafter subject to automatic annual renewal unless either party gives 365
days’ notice of its intention not to renew the agreement. We expect to continue
this supplier relationship for the foreseeable future.
Our
proprietary blow-molded foundations are produced to our specifications by one
domestic supplier under an agreement that expires in October 2006. This
agreement is subject to automatic annual renewal unless either party gives
180
days’ notice of its intention not to renew the agreement. We expect to continue
this supplier relationship for the foreseeable future.
All
of
the suppliers that produce unique or proprietary products for us have in place
either contingency or disaster recovery plans or redundant production
capabilities in other locations in order to safeguard against any unforeseen
disasters. We review these plans and sites on a regular basis to ensure the
supplier’s ability to maintain uninterrupted supply of materials and
components.
Research
and Development
Our
research and development department continuously seeks to improve current
product performance and benefits based on sleep science. Through customer
surveys and consumer focus groups, we seek feedback on a regular basis to help
enhance our products. Since the introduction of our first bed, we have continued
to improve and expand our product line, including a quieter Firmness Control
System, remote controls with digital settings, more luxurious fabrics and
covers, new generations of foams and foundation systems and enhanced border
walls. Our research and development expenses were $2.2 million in 2005, $1.9
million in 2004, and $1.3 million in 2003. We plan to nearly double our research
and development investment in 2006.
Customer
Service
We
maintain an in-house customer service department staffed by customer service
representatives who receive extensive training in sleep technology and all
aspects of our products and operations. Our customer service representatives
field customer calls and also interact with each of our retail stores to address
customer questions and concerns raised with retail sales professionals. Our
customer service department also makes outbound calls to new customers during
our in-home trial phase to provide solutions to possible problems in order
to
enhance customer education, build customer satisfaction and reduce
returns.
Consumer
Credit Arrangements
Our
qualified customers are offered revolving credit to finance purchases through
a
private label consumer credit facility provided by GE Money Bank. In December
2005 we entered into an amended and restated agreement with GE Money Bank that
extends this consumer credit arrangement through February 15, 2011, subject
to
earlier termination upon certain events and subject to automatic
extensions.
Under
this agreement, GE Money Bank sets the minimum acceptable credit ratings, the
interest rates, fees and all other terms and conditions of the customer
accounts, including collection policies and procedures, and is the owner of
the
accounts. In connection with all purchases financed under these arrangements,
GE
Money Bank pays us an amount equal to the total amount of such purchases, net
of
promotional related discounts, upon delivery to the customer. GE Money Bank’s
right to set the minimum customer credit ratings could, if exercised, impact
sales by affecting the number of customers who can finance purchases. We are
liable to GE Money Bank for chargebacks arising out of (i) breach of our
warranties relating to the underlying sale transaction, (ii) defective products
or (iii) our failure to comply with applicable operating procedures under the
facility. We are not liable to GE Money Bank for credit losses arising out
of
our customers’ credit defaults.
Consumers
that do not qualify for credit under our agreement with GE Money Bank may
apply
for credit under a secondary program maintained by the company through another
provider.
Competition
The
bedding industry is highly competitive. Participants in the bedding industry
compete primarily on price, quality, brand name recognition, product
availability and product performance, including the perceived levels of comfort
and support provided by a mattress. Our beds compete with a number of different
types of bedding alternatives, including innerspring bedding, foam bedding,
waterbeds, futons and other air-supported bedding products that are sold through
a variety of channels, including home furnishing stores, specialty bedding
stores, department stores, mass merchants, wholesale clubs, telemarketing
programs, television infomercials and catalogs. We believe that our success
depends in part on increasing consumer awareness and acceptance of our existing
products and the continuing introduction of product improvements or new products
with features or benefits that differentiate our products from those offered
by
other manufacturers.
We
estimate that innerspring bedding sales represent approximately 80% of all
U.S.
bedding sales. The traditional bedding industry is characterized by a high
degree of concentration among the four largest manufacturers of innerspring
bedding with nationally recognized brand names, including Sealy, which also
owns
the Stearns & Foster brand name, Serta, Simmons and Spring Air. Numerous
other manufacturers, primarily operating on a regional or niche basis, serve
the
balance of the bedding market. Simmons, as well as a number of smaller
manufacturers, have offered air-supported bedding products in recent years.
Tempur-Pedic International, Inc., and a number of other mattress manufacturers,
offer foam mattress products.
Intellectual
Property
We
hold
various U.S. and foreign patents and patent applications regarding certain
elements of the design and function of our products, including air control
systems, remote control systems, air chamber features, border wall and corner
piece systems, foundation systems and features related to sofa sleepers with
air
mattresses, as well as other technology. We have 28 issued U.S. patents,
expiring at various dates between May 2006 and June 2022, and four U.S. patent
applications pending. We also hold 17 foreign patents and 10 foreign patent
applications pending. Notwithstanding these patents and patent applications,
we
cannot ensure that these patent rights will provide substantial protection
or
that others will not be able to develop products that are similar to or
competitive with our products. To our knowledge, no third party has asserted
a
claim against us alleging that any element of our product infringes or otherwise
violates any intellectual property rights of any third party.
“Select
Comfort”
and
“Sleep
Number”
are
trademarks registered with the U.S. Patent and Trademark Office. We have a
number of other registered trademarks including our “Select
Comfort”
logo
with the double arrow design, “Select
Comfort Creator of the Sleep Number Bed,”
“What’s
Your Sleep Number?”,
“Precision
Comfort,”
“The
Sleep Number Bed by Select Comfort”
(logo),
“The
Sleep Number Store by Select Comfort”
(logo),
“Comfort
Club”
and
“Sleep
Better on Air.”
U.S.
applications are pending for a number of other marks. Several of these
trademarks have been registered, or are the subject of pending applications,
in
various foreign countries. Each federally registered mark is renewable
indefinitely as long as the mark remains in use. We are not aware of any
material claims of infringement or other challenges asserted against our right
to use these marks.
Governmental
Regulation
Our
operations are subject to state and local consumer protection and other
regulations relating to the bedding industry. These regulations vary among
the
states in which we do business. The regulations generally impose requirements
as
to the proper labeling of bedding merchandise, restrictions regarding the
identification of merchandise as “new” or otherwise, controls as to hygiene and
other aspects of product handling and sale and penalties for violations. Our
direct marketing and e-commerce operations are or may become subject to various
adopted or proposed federal and state “do not call” and “do not mail” list
requirements.
The
federal Consumer Product Safety Commission and various state regulatory
agencies
have been considering new rules relating to fire retardancy standards for
the
bedding industry. Effective December 31, 2005, the State of California
adopted a
new fire retardancy standard applicable to bedding products sold in California
for general consumer residential use. In February 2006, the Consumer Product
Safety Commission announced the adoption of a federal open flame fire retardancy
standard similar to the California standard, which will be effective nationwide
in July 2007. We developed product modifications to meet the new standard,
which
have added costs to the modified products and require more complicated
manufacturing processes, reducing our manufacturing capacity. We offer
these
modified products both to California residents and as an option to customers
outside of California.
A
portion
of our net sales consists of refurbished products that are assembled in part
from components returned to us from customers. These refurbished products must
be properly labeled and marketed as refurbished products under applicable state
laws. Our sales of refurbished products are limited to approximately 24 states,
as the balance of the states do not allow the sale of refurbished bedding
products.
We
are
subject to federal, state and local laws and regulations relating to
occupational health and safety, pollution and environmental protection. We
will
also be subject to similar laws in foreign jurisdictions as we expand
distribution of our products internationally in the future.
Our
retail pricing policies and practices are subject to antitrust regulations
in
the United States and other jurisdictions where we may sell our products in
the
future.
We
believe we are in compliance in all material respects with each of these
governmental regulations.
Information
Systems
We
use
technology to support our business and reduce operating costs, enhance our
customer experience and provide information to manage our business. We use
technology platforms from market leaders such as Oracle, Microsoft, Dell, Sun
and Cisco to run both packaged applications and internally developed systems.
We
have purchased upgraded replacements for the majority of our technology
infrastructure over the past several years as equipment has come off of
lease.
Our
major
systems include an in-store point of sale (POS) system, a retail portal system,
direct marketing and customer service in-bound/out-bound telemarketing systems,
e-commerce systems, retail partners support systems and Oracle ERP systems.
Our
in-store retail systems include one or two POS terminals in each store,
depending on sales volume. The POS terminals are connected via a dedicated,
secured Internet connection to our enterprise systems. That same communication
connection is used to provide the stores with access to store productivity
and
reporting systems via our retail portal. The retail, direct marketing, customer
service, e-commerce and retail partner applications are interfaced to provide
a
fully integrated view of our customers and their activities across sales
channels. Our Oracle-based ERP applications are on a current release and include
modules in support of our finance, human resources and manufacturing operations.
We have been expanding our use of integrated, packaged systems centered around
the Oracle ERP applications to provide improved flexibility, functionality
and
productivity.
We
use a
combination of primarily internal employees, supplemented by domestic
consultants and contractors to deliver and maintain our technology systems
and
assets. Outsourcing is occasionally used for cost-effectiveness or strategic
reasons. Our production data center and e-commerce Web site are hosted at an
outsourced facility that provides top-tier, fully secured data center space.
We
maintain a disaster recovery plan that is tested annually.
Employees
At
December 31, 2005, we employed 2,685 persons, including 1,402 retail store
employees, 55 direct marketing sales employees, 87 customer service employees,
411 manufacturing employees, 409 home delivery employees and 321 management
and
administrative employees. Approximately 200 of our employees were employed
on a
part-time basis at December 31, 2005. Except for managerial employees and
professional support staff, all of our employees are paid on an hourly basis
plus commissions for sales associates. None of our employees is represented
by a
labor union or covered by a collective bargaining agreement. We believe that
our
relations with our employees are good.
Executive
Officers of the Registrant
William
R. McLaughlin,
49,
joined our company in March 2000 as President and Chief Executive Officer.
In
May 2004, Mr. McLaughlin was also elected to the position of Chairman of
our
Board of Directors. From December 1988 to March 2000, Mr. McLaughlin served
as
an executive of PepsiCo Foods International, Inc., a snack food company and
subsidiary of PepsiCo, Inc., in various capacities, including from September
1996 to March 2000 as President of Frito-Lay Europe, Middle East and Africa,
and
from June 1993 to June 1996 as President of Grupo Gamesa, S.A. de C.V., a
cookie
and flour company based in Mexico.
Keith
C. Spurgeon,
51, joined
our company as Senior Vice President, Sales in February 2002. From September
2000 to February 2002, Mr. Spurgeon served as an independent business
consultant. From 1996 to September 2000 he was Chairman of the Board and
Chief
Executive Officer of Zany Brainy, Inc., a retailer of educational toys and
books
for children. Zany Brainy filed for Chapter 11 bankruptcy protection in May
2001. He served as Vice President-Asia/Australia at Toys “R” Us, Inc. from 1991
to 1996 after holding various management positions from 1986 to 1991. Mr.
Spurgeon began his career at Jewel Food Stores.
J.
Douglas Collier,
39,
joined our company as Chief Marketing Officer and Senior Vice President,
Marketing in July 2005. From 2002 to June 2005, Mr. Collier held leadership
positions with La-Z-Boy Incorporated, most recently as Chief Marketing Officer
and Vice President, Marketing and Furniture Galleries Development. From 2000
to
2001, Mr. Collier was the Senior Vice President, Marketing and Product
Management for Iomega Corporation. From 1996 to 2000, he held various positions
with NIBCO, Inc., including General Manager and Director of eBusiness and
Marketing. From 1992 to 1996, Mr. Collier served in several capacities for
Whirlpool Corporation, including as a Product Director for Whirlpool Europe
and
Director of Business Development and Process Improvement for Whirlpool North
America. Prior to 1992, he held several positions with GE Canada
(CAMCO).
Kathryn
V. Roedel,
45,
joined our company as Senior Vice President, Global Supply Chain in April
2005.
From 1983 to 2005, she held leadership positions within two divisions of
General
Electric Company, in Sourcing, Manufacturing, Quality and Service. From 2003
to
March 2005, Ms. Roedel served as the General Manager, Global Supply Chain
Strategy for GE Medical Systems. Other key positions included General Manager,
Global Quality and Six Sigma; Vice President – Technical Operations and
Director/Vice President – Quality Programs for GE Clinical Services, a
division of GE Medical Systems.
Wendy
L. Schoppert,
39,
joined our company as Senior Vice President and General Manager – New
Channel Development & Strategy in April 2005. From 2002 to March 2005, Ms.
Schoppert led various departments within U.S. Bancorp Asset Management, most
recently serving as Head of Private Asset Management and Marketing. From
1996 to
2000, she held several positions with America West Holdings Corporation,
including Vice President of America West Vacations and head of the airline’s
Reservations division. Prior to 1996, Ms. Schoppert held various finance-related
positions at both Northwest Airlines and American Airlines.
James
C. Raabe,
45, has
served as Senior Vice President and Chief Financial Officer since April 1999.
From September 1997 to April 1999, Mr. Raabe served as our Controller. From
May
1992 to September 1997, he served as Vice President – Finance of ValueRx,
Inc., a pharmacy benefit management provider. Mr. Raabe held various positions
with KPMG LLP from August 1982 to May 1992.
Mark
A. Kimball, 47,
has
served as Senior Vice President, Legal, General Counsel and Secretary since
August 2003. From July 2000 to August 2003, Mr. Kimball served as Senior
Vice
President, Human Resources and Legal, General Counsel and Secretary. From
May
1999 to July 2000, Mr. Kimball served as our Senior Vice President, Chief
Administrative Officer, General Counsel and Secretary. For more than five
years
prior to joining us, Mr. Kimball was a partner in the law firm of Oppenheimer
Wolff & Donnelly LLP practicing in the area of corporate
finance.
Scott
F. Peterson,
46, has
served as Senior Vice President, Human Resources since August 2003. From
January
2002 to August 2003, Mr. Peterson served as Senior Vice President, Human
Resources, for LifeTime Fitness, a proprietor of health and fitness clubs.
From
March 2000 through November 2001, he served as Chief People Officer for
SimonDelivers.com, an internet-based grocery sales and delivery company.
From
1990 through 2000, he served in a variety of capacities with The Pillsbury
Company, a food manufacturer, most recently as Vice President, Human Resources,
for the Bakeries and Foodservice Division.
Michael
J. Thyken, 45,
joined our company in July 2000 as Vice President and Chief Information Officer,
and since July 2001 has served as Senior Vice President and Chief Information
Officer. During 1999, he was Group Director of Application Development at
Jostens, a manufacturer of scholastic recognition products. From 1994 to
1999,
Mr. Thyken was Director of
Technical
Services for Target Stores, then a division of Dayton Hudson Corporation,
a
department store retailer. From 1984 to 1994, Mr. Thyken served in various
positions with IBM Corporation.
Available
Information
Our
corporate Internet Web site is http://www.selectcomfort.com. Through a link
to a
third-party content provider, our corporate Web site provides free access
to our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on
Form 8-K and all amendments to those reports filed or furnished pursuant
to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after electronic filing with the Securities and Exchange
Commission. The information contained on our Internet Web site or connected
to
our Web site is not incorporated by reference into this Form 10-K and should
not
be considered part of this report.
We
may not be able to sustain growth or profitability.
Our
net
sales have grown in each of the last four fiscal years after two consecutive
years of declining net sales. Our 18 most recent quarters have been profitable
after eight consecutive quarters of losses. We may not be able to sustain
growth
or profitability on a quarterly or annual basis in future periods. Our future
growth and profitability will depend upon a number of factors, including
but not
limited to:
|
•
|
The
efficiency and effectiveness of our Sleep Number advertising campaign
and
other marketing programs in building product and brand awareness,
driving
traffic to our points of sale and increasing
sales;
|
|
•
|
The
level of consumer acceptance of our products, new product offerings
and
brand image;
|
|
•
|
Our
ability to execute our retail store distribution strategy, including
increasing sales and profitability through our existing stores,
securing
suitable and cost-effective locations for additional retail stores
and
cost-effectively closing under-performing store
locations;
|
|
•
|
Our
ability to hire, train, manage and retain qualified retail store
management and sales professionals;
|
|
•
|
Our
ability to secure and retain wholesale accounts on a profitable
basis and
to profitably manage growth in wholesale distribution, including
the
impact on our retail stores and other company-controlled distribution
channels;
|
|
•
|
The
success of our program with Radisson Hotels and Resorts in achieving
planned levels of placement of our beds with the hotels and resorts
and in
driving consumer awareness of our product and
brand;
|
|
•
|
Our
ability to continuously improve our products to offer new and enhanced
consumer benefits, better quality and reduced
costs;
|
|
•
|
Our
ability to maintain cost-effective sales, production and delivery
of our
products;
|
|
•
|
Our
ability to secure adequate sources of supply at reasonable cost,
especially considering our single sources of supply for some components
and just-in-time manufacturing processes, as well as potential
shortages
of commodities;
|
|
•
|
Our
ability to maintain sales volumes and profit margins and effectively
manage the effects of inflationary pressures caused by rising fuel
and
commodity costs as well as fluctuating currency rates and increasing
industry regulatory requirements, all of which could increase product
and
service costs;
|
|
•
|
Our
ability to successfully expand our home delivery, assembly and
mattress
removal capabilities on a cost-effective
basis;
|
|
•
|
Our
ability to secure quality services on a cost-effective basis from
third-party providers of delivery, assembly and mattress removal
services;
|
|
•
|
Our
ability to cost-effectively offer consumer credit options through
third
party credit providers;
|
|
•
|
The
level of competition in the mattress industry and our ability to
successfully identify and respond to emerging and competitive trends
in
the mattress industry;
|
|
•
|
General
economic conditions and consumer confidence;
and
|
|
•
|
Global
events, such as terrorist attacks or a pandemic outbreak, or the
threat of
such events.
|
We
may
not be successful in executing our growth strategy or in sustaining profitable
growth. Failure to successfully execute any material part of our strategic
plan
or growth strategy could significantly harm our business, operating results
and
financial condition.
Our
comparable store sales or other operating results may fluctuate significantly.
An unanticipated decline in comparable store sales or other operating results
may disappoint investors and result in a decline in our stock
price.
Our
comparable store sales and other operating results have fluctuated significantly
in the past. For example, from 1998 through 2005, our quarterly comparable
store
sales results ranged from a decrease of 8% to an increase of 38%. These past
results may not be a meaningful indicator of future performance. Our comparable
store sales and other operating results may fluctuate significantly in the
future. A variety of factors affect our comparable store sales and other
operating results and may contribute to fluctuations in these results in the
future, including but not limited to:
|
•
|
Levels
of consumer awareness of our products, brand name and store
locations;
|
|
•
|
Levels
of consumer acceptance of our existing products, new product offerings
and
brand image;
|
|
•
|
The
efficiency and effectiveness of our Sleep Number advertising campaign
and
other marketing programs in building awareness of our products and
brand
name, in driving traffic to our store locations, and in motivating
consumers to purchase our products;
|
|
•
|
Consumer
shopping and mall traffic trends;
|
|
•
|
Higher
levels of sales in the first year of operations as each successive
class
of new stores is opened;
|
|
•
|
Comparable
store sales performance in prior
periods;
|
|
•
|
The
continuing maturation of our store base with increasing levels of
average
sales per store;
|
|
•
|
The
amount, timing and relative success of promotional events, advertising
expenditures, new product introductions and product line
extensions;
|
|
•
|
The
quality and tenure of store-level managers and sales
professionals;
|
|
•
|
The
level of competitive activity;
|
|
•
|
The
timing of new store openings and related
expenses;
|
|
•
|
The
growth of our other distribution channels, including in particular
the
wholesale distribution of our products through home furnishings and
specialty mattress retailers into markets with existing company-owned
retail stores;
|
|
•
|
Our
ability to offer effective consumer credit and other promotional
offerings;
|
|
•
|
Any
increases in return rates or warranty
claims;
|
|
•
|
Any
disruptions in third-party delivery services;
and
|
|
•
|
General
economic conditions and consumer
confidence.
|
Future
fluctuations or decreases in our comparable store sales or other operating
results could significantly harm our business, operating results and financial
condition. In addition, an unanticipated decline in comparable store sales
or
other operating results may disappoint securities analysts or investors and
result in a decline in our stock price.
Our
future growth and profitability will depend in large part upon the effectiveness
and efficiency of our advertising expenditures in generating consumer awareness
and sales of our products.
We
are
dependent on the effectiveness and efficiency of our advertising expenditures
(which were approximately $90 million in 2005, $79 million in 2004, $60 million
in 2003, $40 million in 2002 and $30 million in 2001) in generating consumer
awareness and sales of our products. Our future growth and profitability will
depend in large part upon the effectiveness and efficiency of our advertising
expenditures, including but not limited to our ability to:
|
•
|
Create
greater awareness of our products and brand
name;
|
|
•
|
Drive
consumer traffic to our points of distribution and to motivate consumers
to purchase our products;
|
|
•
|
Develop
new and effective creative messages that will resonate with
consumers;
|
|
•
|
Select
the right markets in which to advertise and the most effective and
efficient level of spending in each of our
markets;
|
|
•
|
Determine
the appropriate creative message and media mix for advertising
expenditures;
|
|
•
|
Effectively
manage advertising costs (including creative and media) in order
to
maintain acceptable costs per inquiry, costs per order and operating
margins; and
|
|
•
|
Convert
consumer inquiries into actual
orders.
|
Our
advertising expenditures may not generate sufficient levels of product and
brand
name awareness or result in increased sales. In addition, we may not be able
to
manage our advertising expenditures on a cost-effective basis to maintain
acceptable operating margins.
The
mattress industry is highly competitive. Our business could be significantly
harmed by existing competitive pressures or from one or more new entrants into
the market.
Our
Sleep
Number beds compete with a number of different types of mattress alternatives,
including standard innerspring mattresses, foam mattresses, waterbeds, futons
and other air-supported mattress products sold through a variety of channels,
including home furnishings stores, specialty mattress stores, department stores,
mass merchants, wholesale clubs, telemarketing programs, television infomercials
and catalogs. The mattress industry is characterized by a high degree of
concentration among the four largest manufacturers of innerspring mattresses
with nationally recognized brand names, including Sealy, which also owns the
Stearns & Foster brand, Serta, Simmons and Spring Air. Numerous other
manufacturers, primarily operating on a regional or niche basis, serve the
balance of the mattress market. Tempur-Pedic International, Inc. and other
companies compete in the mattress industry with foam mattress products. A number
of mattress manufacturers, including Simmons, as well as a number of smaller
manufacturers, including low-cost foreign manufacturers, have offered air beds
that compete with our products.
Many
of
our competitors, including in particular the four largest mattress
manufacturers, have greater financial, marketing and manufacturing resources
and
better brand name recognition than we do and sell products through broader
and
more established distribution channels. These competitors, or new entrants
into
the market, may compete aggressively and gain market share with existing and
new
mattress products, and may pursue or expand their presence in the air bed
segment of the market. Some competitors may engage in aggressive advertising
strategies that may include false or misleading claims about competitive
products and/or our products. Any such competition could inhibit our ability
to
retain or increase market share, inhibit our ability to maintain or increase
prices and reduce our margins, which could significantly harm our
business.
Our
products represent a significant departure from traditional innerspring
mattresses and the failure of our products to achieve market acceptance would
significantly harm our business, operating results and financial
condition.
We
estimate that innerspring mattress sales represent approximately 80% of all
mattress sales. Four large manufacturers of innerspring mattresses dominate
the
U.S. mattress market. Our air chamber technology represents a significant
departure from traditional innerspring mattresses. Because no established market
for adjustable firmness mattress products existed prior to the introduction
of
our products in 1988, we faced the challenge of establishing the viability
of
this market, as well as gaining widespread acceptance of our products. The
market for adjustable firmness mattresses is now evolving and the
future
success of our products will depend upon both the continued growth of this
market and consumer acceptance of our products. The failure of our products
to
achieve consumer acceptance for any reason would significantly harm our
business, operating results and financial condition.
Our
plan to pursue additional and maintain existing wholesale relationships with
home furnishings retailers, specialty mattress retailers and the QVC shopping
channel may not yield the benefits we expect and may involve other risks
that
may harm our business.
An
important element of our growth strategy is to expand profitable distribution
by
increasing sales through our existing channels and by increasing opportunities
for consumers to become aware of, and to purchase, our products through
additional points of distribution, such as wholesale distribution. We have
only
recently established a limited number of wholesale relationships with home
furnishings retailers, specialty mattress retailers and the QVC shopping
channel
and therefore have limited wholesale experience. Our wholesale relationships
may
not result in the intended benefits of leveraging our advertising spending
and
increasing our brand awareness, sales and overall market acceptance of our
products. We also expect the gross margin from wholesale sales to be less
than
the gross margin we generate in our company-controlled channels. The success
of
our wholesale strategy will depend upon numerous factors, including but not
limited to the following:
|
•
|
The
ability of our personnel to adequately analyze and identify suitable
wholesale distribution partners and markets in which our retail
presence
is under-represented;
|
|
•
|
Our
ability to negotiate favorable distribution terms with our wholesale
distribution partners;
|
|
•
|
Our
ability and the ability of our wholesale distribution partners
to
adequately train, motivate and retain sales professionals who are
selling
our products;
|
|
•
|
Our
ability to adapt our distribution and other operational and management
systems to an expanded network of points of
sale;
|
|
•
|
Our
ability and the ability of our wholesale distribution partners
to attract
customers and generate sales sufficient to justify the expense
of
establishing the wholesale distribution relationship;
and
|
|
•
|
Our
ability to maintain sales growth in our company-controlled retail
stores
in markets in which wholesale distribution partners are
added.
|
We
have
established relationships with a limited number of home furnishings retailers
and specialty mattress retailers over the last several years. The loss of
one or
more of these accounts could have a material adverse affect upon our wholesale
distribution strategy and could adversely impact our ability to achieve our
overall sales growth and profitability objectives. Any failure to achieve
the
objectives of our wholesale distribution strategy may significantly harm
our
operating results and financial condition.
The
failure of our program to place beds in Radisson Hotels and Resorts to achieve
planned objectives may harm our business and adversely impact our operating
results and financial condition.
An
important element of our growth strategy is to expand consumer awareness
of our
products and brand. We have recently established a relationship with Radisson
Hotels and Resorts with plans to replace a majority of the 75,500 beds in
Radisson Hotels and Resorts in the United States, Canada and the Caribbean
with
Sleep Number beds over the next several years. This program is designed in
part
to drive consumer awareness of our products and brand among the guests of
Radisson Hotels and Resorts. The success of this strategy will depend upon
numerous factors, including but not limited to levels of acceptance of our
products among Radisson Hotels and Resorts franchisees, the execution of
marketing programs in connection with this relationship, and the quality
of
guests’ experiences on our beds at the Radisson Hotels and Resorts. Any failure
to achieve the objectives of our relationships with Radisson Hotels and Resorts
may significantly harm our operating results and financial
condition.
We
rely upon several key suppliers that are, in some instances, our sole source
of
supply. The failure of one or more of these suppliers or our other key suppliers
to supply components for our products on a timely basis, or a material change
in
the purchase terms for our components, could significantly harm our business,
operating results and financial condition.
We
currently obtain all of the materials and components used to produce our
beds
from outside sources. A number of components, including our proprietary air
chambers, our proprietary blow-molded foundations, various components for
our
Firmness Control Systems, as well as foam, fabrics and zippers, are sourced
from
suppliers who serve as our sole source of supply for these
components.
We
have a
supply agreement with the supplier of our air chambers that expires in October
2007, subject to automatic annual renewal thereafter unless either party
gives
365 days’ notice of non-renewal. We have a supply agreement with the supplier of
our blow-molded foundations that expires in October 2006, subject to automatic
annual renewal thereafter unless either party gives 180 days’ notice of
non-renewal. If our relationship with the supplier of our air chambers or
blow-molded foundations is terminated, we could have difficulty in replacing
these sources since there are few other suppliers capable of manufacturing
these
components.
We
generally purchase many of our other components and raw materials centrally
to
obtain volume discounts and achieve economies of scale. We therefore obtain
a
large percentage of our components and raw materials from a small number
of
suppliers. We do not have any long-term purchase agreements with, or other
contractual assurances of continued supply, pricing or access from, any of
our
suppliers, except as noted above. Other than our air chambers and foundations,
we purchase most of our components and raw materials through purchase orders.
If
prices increase and we are unable to pass on the increase in our costs to
our
customers, then our operating results and financial condition may be
significantly harmed. The loss of one or more of our key suppliers, the failure
of one or more of our key suppliers to supply components to our products
on a
timely basis, or a material change in the purchase terms for our components
could significantly harm our business, operating results and financial
condition.
We
utilize “just-in-time” manufacturing processes with minimal levels of raw
materials, work in process and finished goods inventories, which could leave
us
vulnerable to shortages of supply of key components. Any such shortage could
result in our inability to satisfy consumer demand for our products in a
timely
manner and lost sales, which could significantly harm our business, operating
results and financial condition.
We
generally assemble our products after we receive orders from customers utilizing
“just-in-time” manufacturing processes. Lead times for ordered components may
vary significantly and depend upon a variety of factors, such as the location
of
the supplier, the complexity in manufacturing the component and general demand
for the component. Some of our components, including our air chambers, have
relatively longer lead times. We generally maintain minimal levels of raw
materials, work in process and finished goods inventories, except for our
air
chambers, of which we generally carry approximately six weeks of inventory.
As a
result, an unexpected shortage of supply of key components used to manufacture
our products, or an unexpected and significant increase in the demand for
our
products, could lead to inadequate inventory and delays in shipping our beds
to
customers. Any such delays could result in lost sales, which could significantly
harm our business, operating results and financial condition.
The
foreign manufacturing of our air chambers and some of our other components
involves risks that could increase our costs, lead to inadequate inventory
levels or delays in shipping beds to our customers, which could substantially
harm our business, operating results and financial
condition.
Since
our
air chambers and some of our other components are manufactured outside the
United States, our operations could be significantly harmed by the risks
associated with foreign sourcing of materials, including but not limited
to:
|
•
|
Political
instability resulting in disruption of
trade;
|
|
•
|
Existing
or potential duties, tariffs or quotas that may limit the quantity
of
certain types of goods that may be imported into the United States
or
increase the cost of such goods;
|
|
•
|
Disruptions
in transportation that could be caused by a variety of factors
including
terrorist acts, shipping delays, foreign or domestic dock strikes,
customs
inspections or other factors;
|
|
•
|
Any
significant fluctuation in the value of the U.S. dollar against
foreign
currencies; and
|
|
•
|
Economic
uncertainties, including inflation.
|
These
factors could increase our costs of doing business with foreign suppliers,
lead
to inadequate inventory levels or delays in shipping beds to our customers,
which could substantially harm our business, operating results and financial
condition. If any of these or other factors were to render the conduct of
any of
our foreign suppliers’ businesses more difficult or
impractical,
we may have difficulty sourcing key components of our products, which could
materially and adversely affect our operating results and financial
condition.
We
have plans to expand our distribution internationally, which presents some
additional risks to our business.
To
date,
the vast majority of our sales have been made in the U.S. and we have sold
only
very minimal quantities of products in foreign jurisdictions. In late 2005
we
began to distribute our products in Canada through a Canadian-based bedding
retailer and we have begun to pursue plans to enable distribution of our
products in some European countries. Expansion of our distribution to foreign
jurisdictions, and our lack of experience in international distribution,
present
some risks to our business, including without limitation the need to build
awareness of our products and brand in new markets, the need to gain market
acceptance for new products that represent a significant departure from
traditional bedding products, logistical and systems complexities, different
levels of protection of our intellectual property, language and cultural
differences, the need to comply with additional and different regulatory
requirements, foreign currency exchange risks and political
instability.
Although
several members of our senior management team have significant experience
in
international distribution of consumer goods, as a company our experience
in
this area is limited. We plan to invest in our international infrastructure
in
advance of sales in international jurisdictions which may adversely impact
our
overall profitability. If we are unable to achieve consumer awareness and
market
acceptance for our products in foreign jurisdictions, we may not be able
to
achieve sales and profitability in our international operations to justify
the
investment.
Increases
in commodity prices, component costs and/or delivery costs could harm our
profitability.
In
recent
months there have been significant increases or volatility in the prices
of
certain commodities, including but not limited to fuel, oil, natural gas,
rubber, cotton, plastic resin, chemical ingredients to foam and steel. Increases
in prices of these commodities may result in significant cost increases related
to our raw materials and product components, as well as increases in the
cost of
delivering our products to our customers. These increases in costs may require
us to increase our prices, potentially adversely impacting our unit sales
volumes, and may increase our costs of doing business, potentially adversely
impacting our operating results and financial condition.
More
than one-third of our net sales are financed by a third party. The termination
of our agreement with this third party, any material change to the terms
of our
agreement with this third party or in the availability or terms of credit
offered to our customers by this third party, or any delay in securing
replacement credit sources, could harm our business, operating results and
financial condition.
Our
qualified customers are offered a revolving credit arrangement to finance
purchases from us through a private label consumer credit facility provided
by
GE Money Bank. In December 2005 we entered into an amended and restated
agreement with GE Money Bank that extends this consumer credit arrangement
through February 15, 2011, subject to earlier termination upon certain events
and subject to automatic extensions.
Under
this agreement, GE Money Bank sets the minimum acceptable credit ratings,
the
interest rates, fees and all other terms and conditions of the customer
accounts, including collection policies and procedures, and is the owner
of the
accounts. In connection with all purchases financed under these arrangements,
GE
Money Bank pays us an amount equal to the total amount of such purchases,
net of
promotional related discounts. Any increase by GE Money Bank in the minimum
customer credit ratings necessary to qualify for credit could adversely impact
our sales by decreasing the number of customers who can finance purchases.
We
are liable to GE Money Bank for chargebacks arising out of (i) breach of
our
warranties relating to the underlying sale transaction, (ii) defective products
or (iii) our failure to comply with applicable operating procedures under
the
facility. We are not liable to GE Money Bank for losses arising out of our
customers’ credit defaults.
We
have
the right to terminate the agreement in order to manage this consumer credit
program internally at any time after 2008. Upon the termination of the
agreement, we have the right, but not the obligation, to purchase GE Money
Bank’s portfolio of customer accounts.
Approximately
38% of our net sales during 2005 and 37% of our net sales during 2004 were
financed by GE Money Bank or its predecessor, Mill Creek Bank. Consumers
that do
not qualify for credit under our agreement with GE Money Bank may apply
for
credit under a secondary program maintained by the company through another
provider.
Termination
of our agreement with GE Money Bank or with our secondary provider, any
material
change to the terms of our agreements with these providers or in the
availability or terms of credit for our customers from these providers,
or any
delay in securing replacement credit sources, could harm our business,
operating
results and financial condition.
The
loss of the services of any members of our executive management team could
materially and adversely impact our ability to execute our business strategy
and
growth initiatives and could significantly harm our
business.
We
are
currently dependent upon the continued services, ability and experience of
our
executive management team, particularly William R. McLaughlin, our Chairman
and
Chief Executive Officer. The loss of the services of Mr. McLaughlin or any
other
member of our executive management team could have a material adverse effect
on
our ability to execute our business strategy and growth initiatives and on
our
results of operation and financial condition. We do not maintain any key
person
life insurance on any members of our executive management team. Our future
growth and success will also depend upon our ability to attract, retain and
motivate other qualified personnel.
If
we are unable to enhance our existing products and to develop and market
new
products that respond to customer needs and achieve market acceptance, we
may
not be able to sustain our growth or profitability.
One
of
our growth strategies is to continue to lead our industry in product innovation
and sleep expertise by enhancing existing products and by developing and
marketing new products that deliver personalized comfort and better sleep.
We
may not be successful in developing or marketing enhanced or new products
that
will receive acceptance in the marketplace. Further, the resulting level
of
sales from any of our enhanced or new products may not justify the costs
associated with the development and marketing. Any failure to continue to
develop and market enhanced or new products in a cost-effective manner could
harm our ability to sustain our growth or profitability.
If
we are unable to protect our intellectual property, we may be unable to prevent
other companies from using our technology in competitive
products.
We
own
various U.S. and foreign patents and patent applications related to certain
elements of the design and function of our beds and related products. We
also
own several registered and unregistered trademarks and trademark applications,
including in particular our Select Comfort and Sleep Number trademarks, which
we
believe have significant value and are important to the marketing of our
products to customers. In addition to patents and trademarks, we rely upon
copyrights, trade secrets and other intellectual property rights and we have
implemented several measures to protect our intellectual property and
confidential information contained in our products, such as entering into
assignment of invention and nondisclosure agreements with certain of our
employees. Our ability to compete effectively with other companies depends,
to a
significant extent, upon our ability to maintain the proprietary nature of
our
owned intellectual property and confidential information. Our intellectual
property rights may not provide substantial protection against infringement
or
piracy and may be circumvented by our competitors. Our protective measures
may
not protect our intellectual property rights or confidential information
or
prevent our competitors from developing and marketing products that are similar
to or competitive with our beds or other products. In addition, the laws
of some
foreign countries may not protect our intellectual property rights and
confidential information to the same extent as the laws of the United States.
If
we are unable to protect our intellectual property, we may be unable to prevent
other companies from using our technology or trademarks in connection with
competitive products, which could adversely affect our sales or require us
to
decrease our prices.
Intellectual
property litigation, which could result in substantial costs to us and the
diversion of significant time and effort by our executive management, may
be
necessary to enforce our patents and trademarks and to protect our trade
secrets
and proprietary technology. We may not have the financial resources necessary
to
enforce or defend our intellectual property rights.
We
are
not aware of any material intellectual property infringement or invalidity
claims that may be asserted against us, however, it is possible that third
parties, including competitors, may successfully assert such claims. The
cost of
defending such claims, or any resulting liability, or any failure to obtain
necessary licenses on reasonable terms, may adversely impact our operating
results and financial condition.
We
depend upon UPS and other carriers to deliver some of our products to customers
on a timely and cost-effective basis. Any significant delay in deliveries
to our
customers could lead to increased returns and cause us to lose future sales.
Any
increase in freight charges could increase our costs of doing business and
harm
our profitability.
Historically,
we have relied almost exclusively on UPS for delivery of our products to
customers. For a significant portion of the third quarter of 1997, UPS was
unable to deliver our products within acceptable time periods due to a labor
strike, causing delays in deliveries to customers and requiring us to use
alternative carriers. UPS may not be able to avert labor difficulties in
the
future or may otherwise experience difficulties in meeting our requirements
in
the future. From 2000 to 2003, we demonstrated an ability to shift a portion
of
our product delivery business to FedEx, as necessary. In addition, we either
provide directly, or contract with a third party to provide, in-home delivery,
assembly and mattress removal services,
and
in
2003 expanded the availability of this service to all of our retail stores
across the country. Despite these alternative carriers, if UPS were to
experience difficulties in meeting our requirements we may not be able to
deliver products to all of our customers on a timely or cost-effective basis
through any one or more of these or other alternative carriers. Any significant
delay in deliveries to our customers could lead to increased returns and
cause
us to lose future sales. Any increase in freight charges could increase our
costs of doing business and harm our profitability.
Significant
and unexpected return rates under our 30-night trial period and warranty
claims
under our 20-year limited warranty on our beds, in excess of our returns
and
warranty reserves, could significantly harm our business, operating results
and
financial condition.
Part
of
our marketing and advertising strategy focuses on providing a 30-night trial
in
which customers may return their beds and obtain a refund of the purchase
price
if they are not fully satisfied with our product. As we expand our sales,
return
rates may not remain within acceptable levels. A significant and unexpected
increase in return rates could significantly harm our business, operating
results and financial condition. We also provide our customers with a 20-year
limited warranty on our beds. However, since we have only been selling beds
in
significant quantities since 1992, we may receive significant and unexpected
claims under these warranty obligations that could exceed our warranty reserves.
Significant warranty claims in excess of our warranty reserves could
significantly harm our business, operating results and financial
condition.
We
may be unable to effectively manage our growth, which could significantly
harm
our business, operating results and financial condition.
Our
growth strategy has placed, and will continue to place, significant strains
on
our management, production, information systems and other resources. To manage
growth effectively, we must maintain a high level of manufacturing quality
and
efficiency, continue to enhance our operational, financial and management
systems, including our database management, tracking of inquiries, inventory
control and distribution systems, and expand, train and manage our employee
base. We may not be able to effectively manage this expansion in any one
or more
of these areas, and any failure to do so could significantly harm our business,
operating results and financial condition.
Our
management information systems may prove inadequate.
We
depend
upon our management information systems for many aspects of our business.
Some
of our key software has been developed by our own programmers and this software
may not be easily modified or integrated with other software and systems.
Our
business will be materially and adversely affected if our management information
systems are disrupted or if we are unable to improve, upgrade, integrate
or
expand our systems as we execute our growth strategy.
Damage
to either of our manufacturing facilities could increase our costs of doing
business or lead to delays in shipping our beds, which could result in increased
returns and adversely affect future sales.
We
have
two manufacturing plants, which are located in Irmo, South Carolina and in
Salt
Lake City, Utah. Unlike other mattress manufacturers, we manufacture beds
to
fulfill orders rather than stocking finished goods inventory. Therefore,
the
destruction or shutting down of either of our manufacturing facilities for
a
significant period of time as a result of fire, explosion, act of war or
terrorism, flood, hurricane, tornado, typhoon, earthquake, lightning or other
natural disaster could increase our costs of doing business and lead to delays
in shipping our beds to customers. Such delays could result in increased
returns
and adversely affect future sales. Due to our make-to-order business model,
these adverse consequences to our business may be greater for our company
than
with other mattress manufacturers.
Significant
and long-term failure of our Web site could adversely affect our net
sales.
We
depend
on our Web site for a certain percentage of our net sales and for advertising
of
our products. If our Web site becomes unavailable for a significant period
of
time due to failure of our information technology systems or the Internet,
our
net sales could be adversely affected.
Our
business is subject to seasonal influences and a substantial portion of our
net
sales is often realized in the last month or last few weeks of a quarter,
due in
part to our promotional schedule and commission structure. Because the level
of
our sales and marketing expense is based on our expectations of future customer
inquiries and net sales and cannot be adjusted quickly, a shortfall in these
expectations may harm our profitability.
Our
business is subject to some seasonal influences, with lower sales in the
second
quarter and higher sales during the fourth quarter holiday season due to
greater
mall traffic. Furthermore, a substantial portion of our sales is often realized
in the last
month
or
last few weeks of a quarter, due in part to our promotional schedule and
commission structure. The level of our sales and marketing expenses and new
store opening costs is based, in significant part, on our expectations of
future
customer inquiries and net sales and cannot be adjusted quickly. If there
is a
shortfall in expected net sales or in the conversion rate of customer inquiries,
we may be unable to adjust our spending in a timely manner and our profitability
may be significantly harmed.
We
are subject to government regulations relating to the bedding industry and
to
various aspects of our operations and may be required to incur expenses or
to
modify our operations in order to ensure compliance with these
regulations.
Our
operations are subject to state and local consumer protection and other
regulations relating to the bedding industry. These regulations vary among
the
states in which we do business. The regulations generally impose requirements
as
to the proper labeling of bedding merchandise, restrictions regarding the
identification of merchandise as “new” or otherwise, controls as to hygiene and
other aspects of product handling and sale and penalties for violations.
Our
direct marketing and e-commerce operations are or may become subject to
various
adopted or proposed federal and state “do not call” or “do not mail” list
requirements.
The
federal Consumer Product Safety Commission and various state regulatory agencies
have been considering new rules relating to fire retardancy standards for
the
bedding industry. Effective January 1, 2005, the State of California adopted
a
new open flame fire retardancy standard applicable to mattress products sold
in
California for general consumer residential use. In February 2006, the Consumer
Product Safety Commission announced the adoption of a federal open flame
fire
retardancy standard similar to the California standard, which we believe
will be
effective nationwide in July 2007. We have developed product modifications
to
meet the new standard, which have added costs to the modified products and
require more complicated manufacturing processes, reducing our manufacturing
capacity.
A
portion
of our net sales consists of refurbished products that are assembled in part
from components returned to us from customers. These refurbished products
must
be properly labeled and marketed as refurbished products under applicable
state
laws. Our sales of refurbished products are limited to approximately 24 states,
as the remaining states do not allow the sale of refurbished mattress
products.
We
are
subject to federal, state and local laws and regulations relating to
occupational health and safety, pollution and environmental protection.
Our
retail pricing policies and practices are subject to antitrust regulations
in
the United States and other jurisdictions where we may sell our products
in the
future. If any of our policies or practices were to be challenged by antitrust
regulators or private parties, we could be required to devote substantial
resources to respond, and any such required response could also divert
the time
and attention of management.
Although
we believe that we are in compliance in all material respects with these
regulations and have implemented a variety of measures to promote continuing
compliance, regulations may change over time and we may be required to
incur
expenses and/or to modify our operations in order to ensure compliance
with
these regulations, which could harm our operating results. If we are found
to be
in violation of any of the foregoing regulations, we could become subject
to
fines, penalties or other sanctions, as well as potential adverse public
relations, which could materially and adversely impact our business and
our
operating results.
We
are subject to class action litigation alleging deceptive trade practices,
fraud
and breach of warranty. This litigation may be costly to defend, could adversely
affect our operating results and, if we are unsuccessful in our defense,
could
subject our company to material liability.
In
October 2004, a lawsuit was filed against our company in Hennepin County
District Court in the State of Minnesota by one of our customers alleging
deceptive trade practices, fraud and breach of warranty related to the alleged
propensity of our products to develop mold. The complaint sought class
certification and various forms of legal and equitable relief, including
but not
limited to rescission and/or actual damages in an amount to be determined
at
trial, including interest, costs and attorney’s fees. In December 2004, we filed
a motion to dismiss the claims in their entirety. In March 2005, the Court
dismissed plaintiff’s false advertising claim and deceptive trade practice
damage claim. On January 30, 2006, following reconsideration of our motion
to
dismiss, the Court dismissed all of plaintiff’s claims in their entirety. The
plaintiff has the right to appeal the Court’s order dismissing the case. If the
plaintiff chooses to pursue an appeal, we would continue to vigorously defend
the litigation and the Court’s order dismissing the case, and we could incur
substantial defense costs. It is
also
possible that similar claims may be asserted in Minnesota or other
jurisdictions, which could require substantial defense costs. Any such claims
could also divert the time and attention of our management and could result
in
adverse publicity, either of which could significantly harm our operating
results and financial condition. Any adverse determination in any such
litigation could also result in material liability, which could significantly
harm our operating results and financial condition.
We
may face exposure to product liability claims.
We
face
an inherent business risk of exposure to product liability claims in the
event
that the use of any of our products is alleged to have resulted in personal
injury or property damage. In the event that any of our products proves to
be
defective, we may be required to recall or redesign such products. In 2004
we
experienced increased returns and adverse impacts on sales as a result of
media
reports related to the alleged propensity of our products to develop mold.
We
may experience material increases in returns and material adverse impacts
on
sales in the event any similar media reports were to occur in the future.
We
maintain insurance against product liability claims, but such coverage may
not
continue to be available on terms acceptable to us and may not be adequate
for
liabilities actually incurred. A successful claim brought against us in excess
of available insurance coverage, or any claim or product recall that results
in
significant adverse publicity against us, may have a material adverse effect
on
our business.
We
depend upon endorsements by national radio personalities to promote our
products. The loss of these endorsements, or any reduction in their
effectiveness, could adversely affect our net sales and
profitability.
Our
integrated marketing program depends in part on national radio personalities
and
spokespersons, including Paul Harvey, Rush Limbaugh and Lindsay Wagner
and other
nationally known personalities. The loss of these endorsements, or any
reduction
in the effectiveness of these endorsements, could adversely affect our
net sales
and profitability.
The
expensing of stock compensation programs required under new accounting rules
effective in 2006 may have a material adverse effect on our operating results
and financial condition.
In
December 2004, the Financial Accounting Standards Board issued SFAS No. 123
(revised 2004) “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123,
“Accounting for Stock-Based Compensation,” (SFAS 123). SFAS 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair value beginning
with the first interim or annual period after December 15, 2005. The pro
forma
disclosures we have previously made as permitted under SFAS 123 will no longer
be an alternative to financial statement recognition. We are required to
adopt
SFAS 123R by the first quarter of fiscal 2006, beginning January 1, 2006.
Under
SFAS 123R, we must determine the appropriate fair value model to be used
for
valuing share-based payments, the amortization method for compensation cost,
and
the transition method to be used at date of adoption. We are evaluating the
requirements of SFAS 123R and expect that the adoption of SFAS 123R will
have a
material impact on our consolidated results of operations and earnings per
share. Our pro forma disclosures have historically reported an annual impact
to
diluted earnings per share of $0.06 to $0.11 for fiscal years 2003 through
2005.
We expect that share-based compensation expense under SFAS 123R will reduce
our
diluted earnings per share by approximately $0.10 to $0.11 in 2006.
Additional
terrorist attacks in the United States or against U.S. targets or actual
or
threats of war or the escalation of current hostilities involving the United
States or its allies could significantly impact our business, financial
condition, operating results or stock price in unpredictable
ways.
Additional
terrorist attacks in the United States or against U.S. targets, or threats
of
war or the escalation of current hostilities involving the United States
or its
allies, or military or trade disruptions impacting our domestic or foreign
suppliers of components of our products, may impact our operations, including,
but not limited to, causing delays or losses in the delivery of merchandise
to
us and decreased sales of our products. These events could cause an increase
in
oil or other commodity prices, which could adversely affect our materials
or
transportation costs, including delivery of our products to customers. More
generally, any of these events could cause consumer confidence and spending
to
decrease or result in increased volatility in the U.S. and worldwide financial
markets. These events also could cause an economic recession in the United
States or abroad. Any of these occurrences could have a significant impact
on
our business, operating results and financial condition and may result in
volatility of our stock price.
As
a
result of the terrorist attacks in the United States and the threat of war
involving the United States, we believe many consumers have traveled less
and
purchased more products for their home. We believe these trends have contributed
to an increase in our net sales. These trends may not continue and they may
not
continue to positively affect our net sales.
An
outbreak of Avian Flu or a pandemic, or the threat of a pandemic, may adversely
impact our ability to produce and deliver our products or may adversely impact
consumer demand.
Concern
has grown in recent months over the possibility of a significant or global
outbreak of avian flu or a similar pandemic. A significant outbreak of avian
flu, or a similar pandemic, or even a perceived threat of such an outbreak,
could cause significant disruptions to our supply chain, manufacturing
capability and distribution system that could adversely impact our ability
to
produce and deliver products, which could result in a loss of sales and an
adverse impact on our results of operations and financial condition. Similarly,
such events could cause significant adverse impacts on consumer confidence
and
consumer demand generally, which could significantly and adversely impact
our
sales, results of operations and financial condition.
None.
Retail
Locations
We
currently lease all of our existing retail store locations and expect that
our
policy of leasing, rather than owning stores, will continue as we expand our
store base. Our store leases generally provide for an initial lease term of
5 to
10 years with a mutual termination option if we do not achieve certain minimum
annual sales thresholds. Generally, the store leases require us to pay minimum
rent plus percentage rent based on net sales in excess of certain thresholds,
as
well as certain operating expenses.
The
following table provides information regarding the 396 stores that we operated
in 45 states as of December 31, 2005, the date of our most recent fiscal
year-end:
|
State
|
Stores
|
State
|
Stores
|
|||||
|
Alabama
|
3
|
Nebraska
|
3
|
|||||
|
Arizona
|
9
|
Nevada
|
3
|
|||||
|
Arkansas
|
1
|
New
Hampshire
|
4
|
|||||
|
California
|
45
|
New
Jersey
|
12
|
|||||
|
Colorado
|
12
|
New
Mexico
|
2
|
|||||
|
Connecticut
|
7
|
New
York
|
14
|
|||||
|
Delaware
|
2
|
North
Carolina
|
10
|
|||||
|
Florida
|
24
|
North
Dakota
|
1
|
|||||
|
Georgia
|
11
|
Ohio
|
15
|
|||||
|
Idaho
|
1
|
Oklahoma
|
3
|
|||||
|
Illinois
|
19
|
Oregon
|
5
|
|||||
|
Indiana
|
9
|
Pennsylvania
|
18
|
|||||
|
Iowa
|
5
|
Rhode
Island
|
1
|
|||||
|
Kansas
|
4
|
South
Carolina
|
4
|
|||||
|
Kentucky
|
4
|
South
Dakota
|
2
|
|||||
|
Louisiana
|
3
|
Tennessee
|
11
|
|||||
|
Maine
|
2
|
Texas
|
29
|
|||||
|
Maryland
|
10
|
Utah
|
4
|
|||||
|
Massachusetts
|
9
|
Virginia
|
11
|
|||||
|
Michigan
|
11
|
Washington
|
13
|
|||||
|
Minnesota
|
15
|
West
Virginia
|
1
|
|||||
|
Missouri
|
13
|
Wisconsin
|
9
|
|||||
|
Montana
|
2
|
|||||||
Manufacturing
and Headquarters
We
lease
approximately 122,000 square feet in Minneapolis, Minnesota that includes our
corporate headquarters, our direct marketing call center, our customer service
group, our research and development department and a distribution center that
accepts returns and processes warranty claims. This lease expires in 2009 and
contains two five-year renewal options. We sublease approximately 15,000 square
feet in Minneapolis for a home delivery distribution center and a portion of
our
corporate headquarters staff. This sublease expires in May 2007 and has a
two-year renewal option.
We
lease
two additional manufacturing and distribution centers in Irmo, South Carolina
and Salt Lake City, Utah of approximately 105,000 square feet and approximately
101,000 square feet, respectively. We lease the Irmo facility through February
2008, with a five-year renewal option thereafter, and the Salt Lake City
facility through April 2009, with a five-year renewal option
thereafter.
To
support our program with Radisson Hotels and Resorts, we lease approximately
40,000 square feet in Omaha, Nebraska, through July 2007. This lease also has
two one-year renewal options.
In
October 2004, a lawsuit was filed against our company in Hennepin County
District Court in the State of Minnesota by one of our customers alleging
deceptive trade practices, fraud and breach of warranty related to the alleged
propensity of our products to develop mold. The complaint sought class
certification and various forms of legal and equitable relief, including but
not
limited to rescission and/or actual damages in an amount to be determined at
trial, including interest, costs and attorney’s fees. In December 2004, we filed
a motion to dismiss the claims in their entirety. In March 2005, the Court
dismissed plaintiff’s false advertising claim and deceptive trade practice
damage claim. On January 30, 2006, following reconsideration of our motion
to
dismiss, the Court dismissed all of plaintiff’s claims in their entirety. The
plaintiff has the right to appeal the Court’s order.
We
are
involved in other various claims, legal actions, sales tax disputes and other
complaints arising in the ordinary course of business. In the opinion of
management, any losses that may occur from these other matters are adequately
covered by insurance or are provided for in our consolidated financial
statements and the ultimate outcome of these other matters will not have a
material effect on our consolidated financial position or results of
operations.
Not
applicable.
Our
common stock trades on the Nasdaq Stock Market under the symbol “SCSS.” As of
March 1, 2006, there were approximately 208 holders of record of our common
stock. The following table sets forth the quarterly high and low sales prices
per share of our common stock as reported by Nasdaq National Market for the
two
most recent fiscal years. These quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not necessary represent
actual
transactions.
|
Fourth
Quarter
|
Third
Quarter
|
Second
Quarter
|
First
Quarter
|
||||||
|
Fiscal
2005
|
|
|
|
||||||
|
High
|
$
28.75
|
|
$
22.56
|
|
$
24.73
|
|
$
22.75
|
|
|
|
Low
|
$
17.32
|
$
18.42
|
$
18.18
|
$
16.59
|
|||||
|
Fiscal
2004
|
|||||||||
|
High
|
$
20.70
|
$
27.81
|
$
30.23
|
$
28.55
|
|||||
|
Low
|
$
14.75
|
$
13.14
|
$
22.09
|
$
21.40
|
Information
concerning shares of our common stock authorized for issuance under equity
compensation plans set forth in our Proxy Statement for our 2006 Annual Meeting
of Shareholders under the caption “Equity Compensation Plan Information” is
incorporated herein by reference.
Select
Comfort has not paid any dividends on its common stock in the past.
Information
concerning stock repurchases completed during the fourth quarter of fiscal
2005
is set forth below.
|
Fiscal
Period
|
Total
Number of
Shares
including
Non-Qualified
(1)
|
Average
Price
Paid
per Share
|
Total
number
of
Shares
Purchased
as
Part
of
Publicly
Announced
Plans
or
Programs
(2)
|
Availability
|
|||||
|
October
2005
|
177,518
|
|
$
19.86
|
|
177,506
|
|
|
||
|
November
2005
|
—
|
|
$
-
|
|
—
|
|
|
||
|
December
2005
|
41
|
|
$
25.50
|
|
41
|
|
$
20,344,000
|
|
|
|
Total
|
177,559
|
|
$
19.86
|
|
177,547
|
|
|
———————————
(1)
Includes 53 shares acquired in open market transactions by the administrator
of
the Company’s non-qualified deferred compensation plan in order to accommodate
investment elections of plan participants.
(2)
In
February 2006, the Company’s Board of Directors revised the Company’s share
repurchase program. The Audit Committee of the Board of Directors reviews,
on a
quarterly basis, the authority granted as well as any repurchases under this
program. This authorization is currently not subject to expiration. As
of February 22, 2006, the total outstanding authorization was $16.6
million.
(in
thousands, except per share and selected operating data, unless otherwise
indicated)
The
Consolidated Statements of Operations Data and Consolidated Balance Sheet
Data
presented below have been derived from our Consolidated Financial Statements
and
should be read in conjunction with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our Consolidated Financial
Statements and Notes thereto included in this Annual Report:
|
|
Year
|
|||||||||||||||
|
2005
|
2004
|
2003(1)
|
|
2002
|
2001
|
|||||||||||
|
Consolidated
Statements of Operations Data:
|
||||||||||||||||
|
Net
sales
|
$
|
691,066
|
$
|
557,639
|
$
|
458,489
|
$
|
335,795
|
$
|
261,687
|
||||||
|
Gross
profit
|
410,476
|
340,674
|
287,326
|
209,999
|
154,477
|
|||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Sales
and marketing
|
286,053
|
249,925
|
206,248
|
155,848
|
138,417
|
|||||||||||
|
General
and administrative
|
55,672
|
41,218
|
38,423
|
32,854
|
25,296
|
|||||||||||
|
Store
closings and asset impairments
|
162
|
-
|
71
|
233
|
1,366
|
|||||||||||
|
Operating
income (loss)
|
68,589
|
49,531
|
42,584
|
21,064
|
(10,602
|
)
|
||||||||||
|
Net
income (loss)
|
$
|
43,767
|
$
|
31,555
|
$
|
27,102
|
$
|
37,466
|
$
|
(12,066
|
)
|
|||||
|
Pro
forma net income (loss) (2)
|
n/a
|
n/a
|
n/a
|
$
|
11,969
|
$
|
(7,481
|
)
|
||||||||
|
Net
income (loss) per share:
|
||||||||||||||||
|
Basic
|
$
|
1.23
|
$
|
0.88
|
$
|
0.83
|
$
|
1.53
|
$
|
(0.66
|
)
|
|||||
|
Diluted
|
$
|
1.14
|
$
|
0.80
|
$
|
0.69
|
$
|
1.10
|
$
|
(0.66
|
)
|
|||||
|
Pro
forma (2)
|
n/a
|
n/a
|
n/a
|
$
|
0.36
|
$
|
(0.41
|
)
|
||||||||
|
Shares
used in calculation of net income (loss) per share:
|
||||||||||||||||
|
Basic
|
35,571
|
36,010
|
32,771
|
24,549
|
18,157
|
|||||||||||
|
Diluted
|
38,449
|
39,683
|
39,277
|
34,532
|
18,157
|
|||||||||||
|
Consolidated
Balance Sheet Data:
|
||||||||||||||||
|
Cash,
cash equivalents and marketable securities
|
$
|
112,087
|
$
|
91,743
|
$
|
75,118
|
$
|
40,824
|
$
|
16,375
|
||||||
|
Working
capital
|
10,158
|
23,479
|
54,315
|
27,064
|
(3,739
|
)
|
||||||||||
|
Total
assets
|
228,834
|
191,813
|
153,506
|
108,633
|
67,436
|
|||||||||||
|
Long-term
debt, less current maturities
|
-
|
-
|
-
|
2,991
|
17,109
|
|||||||||||
|
Total
shareholders' equity
|
121,347
|
114,344
|
92,201
|
54,024
|
5,937
|
|||||||||||
|
Selected
Operating Data:
|
||||||||||||||||
|
Stores
open at period-end (3)
|
396
|
370
|
344
|
322
|
328
|
|||||||||||
|
Stores
opened during period
|
40
|
31
|
27
|
15
|
11
|
|||||||||||
|
Stores
closed during period
|
14
|
5
|
5
|
21
|
16
|
|||||||||||
|
Average
net sales per store (000's) (4)
|
$
|
1,417
|
$
|
1,247
|
$
|
1,101
|
$
|
817
|
$
|
626
|
||||||
|
Percentage
of stores with more than $1.0 million in net sales (4)
|
77
|
%
|
64
|
%
|
49
|
%
|
24
|
%
|
10
|
%
|
||||||
|
Comparable
store sales increase (decrease) (5)
|
15
|
%
|
16
|
%
|
31
|
%
|
27
|
%
|
(4
|
)%
|
||||||
|
Average
square footage per store open during period (4)
|
1,121
|
1,032
|
990
|
972
|
941
|
|||||||||||
|
Net
sales per square foot (4)
|
$
|
1,264
|
$
|
1,208
|
$
|
1,113
|
$
|
841
|
$
|
666
|
||||||
|
Average
store age (in months at period end)
|
79
|
75
|
70
|
61
|
51
|
|||||||||||
|
Operating
free cash flow (000’s) (6)
|
$
|
61,658
|
$
|
31,083
|
$
|
30,839
|
$
|
28,342
|
$
|
(4,445
|
)
|
|||||
| (1) | Fiscal year 2003 had 53 weeks. All other fiscal years presented had 52 weeks. |
| (2) | Pro forma net income (loss) per share reflects the effect on net income from the recognition of an income tax benefit (provision) for years where a regular tax provision, at a rate of 38%, was not recorded. Generally accepted accounting principles (GAAP) did not allow us to reduce net income for income tax expense in 2002 or to provide an income tax benefit in 2001. Because we have recorded income tax expense in 2003, 2004 and 2005 and we expect to continue recording income tax in future periods, we believe pro forma net income (loss) per share provides a more meaningful comparison than GAAP net income (loss) per share for 2002 and 2001. |
A
reconciliation of net income (loss) and net income (loss) per diluted share
(as
determined in accordance with GAAP) to pro forma net income (loss) and pro
forma
net income (loss) per diluted share is as follows:
|
|
2002
|
2001
|
|||||
|
GAAP
net income (loss)
|
$
|
37,466
|
$
|
(12,066
|
)
|
||
|
Effect
of:
|
|||||||
|
Income
tax (provision) benefit at 38% of income before tax
|
(7,501
|
)
|
4,585
|
||||
|
Restoration
of deferred tax asset
|
(17,996
|
)
|
-
|
||||
|
Pro
forma net income (loss)
|
$
|
11,969
|
$
|
(7,481
|
)
|
|
GAAP
net income (loss) per diluted share
|
$
|
1.10
|
$
|
(0.66
|
)
|
||
|
Effect
of:
|
|||||||
|
Income
tax (provision) benefit at 38% of income before tax
|
(0.22
|
)
|
0.25
|
||||
|
Restoration
of deferred tax asset
|
(0.52
|
)
|
-
|
||||
|
Pro
forma net income (loss) per diluted share
|
$
|
0.36
|
$
|
(0.41
|
)
|
|
(3)
|
Includes stores operated in leased departments within other retail stores (0, 13, 13, 13, and 22 at the end of 2005, 2004, 2003, 2002, and 2001, respectively). |
|
(4)
|
For stores open during the entire period indicated. |
|
(5)
|
Stores enter the comparable store calculation in the 13th full month of operation. Stores that have been remodeled or relocated within the same shopping center remain in the comparable store base. The number of comparable stores used to calculate such data was 354, 339, 316, 307, and 317 for 2005, 2004, 2003, 2002 and 2001, respectively. Our 2004 and 2003 comparable store sales increase reflects adjustments for an additional week of sales in 2003. Without adjusting for the additional week, comparable store sales would have been 14% for 2004 and 34% for 2003. |
|
(6)
|
Operating free cash flow (OFCF) is a key financial measure but should not be construed as an alternative to operating income or net cash provided by (used in) operating activities (as determined in accordance with GAAP). We believe that OFCF is a useful supplement to cash flow data in understanding cash flows generated from operations after reductions for capital expenditures. A reconciliation of net cash provided by (used in) operating activities to operating free cash flow for each of the fiscal years indicated is as follows: |
|
|
2005
|
2004
|
2003
|
2002
|
2001
|
|||||||||||
|
Net
cash provided by operating activities
|
$
|
87,498
|
$
|
52,482
|
$
|
49,203
|
$
|
36,144
|
$
|
414
|
||||||
|
Purchases
of property and equipment
|
(25,840
|
)
|
(21,399
|
)
|
(18,364
|
)
|
(7,802
|
)
|
(4,859
|
)
|
||||||
|
Operating
free cash flow (OFCF)
|
$
|
61,658
|
$
|
31,083
|
$
|
30,839
|
$
|
28,342
|
$
|
(4,445
|
)
|
|||||
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, such factors as general and industry economic trends,
uncertainties arising from global events, consumer confidence, effectiveness
of
our advertising and promotional efforts; our ability to secure suitable retail
locations, our ability to attract and retain qualified sales professionals
and
other key employees; consumer acceptance of our products, product quality,
innovation and brand image, our ability to continue to expand and improve our
product line; industry competition; warranty expenses; the outcome of pending
litigation, including consumer class action litigation; our dependence on
significant suppliers, and the vulnerability of any suppliers to recessionary
pressures, labor negotiations, liquidity concerns or other factors; rising
commodity costs; and increasing government regulations, including new
flammability standards for the bedding industry.
Additional
information concerning these and other risks and uncertainties is contained
under the caption “Risk Factors” in this Annual Report on Form
10-K.
Overview
Select
Comfort is the leading developer, manufacturer and marketer of premium-quality,
adjustable-firmness beds. The air-chamber technology of our proprietary Sleep
Number®
bed
allows adjustable firmness on each side of the mattress and provides a sleep
surface that is clinically proven to provide better sleep quality and greater
relief of back pain compared to traditional mattress products. In addition,
we
market and sell accessories and other sleep related products which focus on
providing personalized comfort to complement the Sleep Number®
bed and
provide a better night’s sleep to the consumer.
We
generate revenue by selling our products through four complementary distribution
channels. Three of these channels: retail, direct marketing and e-commerce,
are
company-controlled and sell directly to consumers. Our wholesale channel sells
to leading home furnishings retailers, specialty bedding retailers, the QVC
shopping channel and to several end users such as Radisson Hotels and
Resorts®.
The
proportion of our total net sales, by dollar volume, from each of our channels
during the last three years is summarized as follows:
|
2005
|
2004
|
2003
|
|||
|
Retail
|
76.7%
|
78.1%
|
78.5%
|
||
|
Direct
marketing
|
10.8%
|
11.5%
|
13.0%
|
||
|
E-commerce
|
5.0%
|
4.6%
|
4.3%
|
||
|
Wholesale
|
7.5%
|
5.8%
|
4.2%
|
||
|
Total
|
100.0%
|
100.0%
|
100.0%
|
The
components of sales growth, including comparable store sales increases, are
as
follows:
|
2005
|
2004*
|
2003*
|
|||
|
Channel
increase
|
Channel
increase
|
Channel
increase
|
|||
|
Retail:
|
|||||
|
Comparable
store sales increase
|
15%
|
16%
|
31%
|
||
|
New/closed
stores, net
|
7%
|
8%
|
7%
|
||
|
Retail
total
|
22%
|
24%
|
38%
|
||
|
Direct
marketing
|
16%
|
10%
|
23%
|
||
|
E-commerce
|
35%
|
34%
|
35%
|
||
|
Wholesale
|
59%
|
73%
|
21%
|
*
There
were 52 weeks in fiscal 2005 and 2004 and 53 weeks in fiscal 2003. Comparable
store sales and sales growth rates have been adjusted and reported as if each
year had the same number of weeks.
The
number of company-operated retail stores during the last three years and
independently owned and operated retail partner stores, are summarized as
follows:
|
2005
|
2004
|
2003
|
|||
|
Company-owned
retail stores:
|
|||||
|
Beginning
of year
|
370
|
344
|
322
|
||
|
Opened
|
40
|
31
|
27
|
||
|
Closed
|
(14)
|
(5)
|
(5)
|
||
|
End
of year
|
396
|
370
|
344
|
||
|
Retail
partner stores
|
308
|
89
|
77
|
We
anticipate opening 45 to 50 new retail stores and closing up to five existing
stores in 2006. We also expect to increase the number of stores in our retail
partner program by more than 100% in 2006.
Our
growth plans are centered on increasing the awareness of our products and
stores
through expansion of media, increasing distribution – primarily through new
retail store openings and supplemented with sales through other mattress
retailers, and through improvement and expansion of our product lines. Our
primary market consists of the sale of products directly to consumers in
the
U.S. We believe that opportunities exist longer term for sales internationally
and to commercial markets. In December 2005 we entered the Canadian market
through a retail partner with locations in major Canadian markets.
Increases
in sales, along with controlling costs, have provided significant increases
to
operating income and operating margin. The majority of operating margin
improvement has been generated through leverage in selling expenses (increased
sales through the existing store base) and leverage of our existing
infrastructure (general and administrative expenses). We expect any future
improvements in operating margin to be derived from similar sources. Our
target
is to sustain same-store sales growth between 7% and 12%, total annual sales
growth rates of 15% to 20% and annual earnings growth rates of between 20%
to
25% (earnings growth targets are before incremental stock option expense
in
2006).
Future
Accounting Requirements
In
the
first quarter of fiscal 2006 we are required to adopt SFAS No. 123 (revised
2004, “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair value. The pro
forma
disclosures we have previously made as permitted under SFAS 123 no longer
will
be an alternative to financial statement recognition. Under SFAS 123R, we
must
determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost, and the transition
method to be used at date of adoption. We are evaluating the requirements
of
SFAS 123R and expect that the adoption of SFAS 123R will have a material
impact
on our consolidated results of operations and earnings per share. Our pro
forma
disclosures reported the cost of share-based compensation payments as having
an
annual impact to diluted earnings per share in the range of $0.06 to $0.11
for
fiscal years 2003 through 2005. We expect that share-based compensation expense
under SFAS 123R will reduce our diluted earnings per share by approximately
$0.10 to $0.11 in 2006.
RESULTS
OF OPERATIONS
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 earnings per share amounts.
|
2005
|
2004
|
2003
|
|||||||||||||||||||
|
$
|
|
%
of
Net
Sales
|
$
|
|
%
of
Net
Sales
|
$
|
|
%
of
Net
Sales
|
|
||||||||||||
|
Net
sales
|
$
|
691.1
|
100.0
|
%
|
$
|
557.6
|
100.0
|
%
|
$
|
458.5
|
100.0
|
%
|
|||||||||
|
Cost
of sales
|
280.6
|
40.6
|
217.0
|
38.9
|
171.2
|
37.3
|
|||||||||||||||
|
Gross
profit
|
410.5
|
59.4
|
340.6
|
61.1
|
287.3
|
62.7
|
|||||||||||||||
|
Operating
expenses:
|
|||||||||||||||||||||
|
Sales
and marketing
|
286.0
|
41.4
|
249.9
|
44.8
|
206.2
|
45.0
|
|||||||||||||||
|
General
and administrative
|
55.7
|
8.1
|
41.2
|
7.4
|
38.4
|
8.4
|
|||||||||||||||
|
Store
closings and asset impairments
|
0.2
|
0.0
|
0.0
|
0.0
|
0.1
|
0.0
|
|||||||||||||||
|
Total
operating expenses
|
341.9
|
49.5
|
291.1
|
52.2
|
244.7
|
53.4
|
|||||||||||||||
|
Operating
income
|
68.6
|
9.9
|
49.5
|
8.9
|
42.6
|
9.3
|
|||||||||||||||
|
Other
income (expense), net
|
2.2
|
0.3
|
1.4
|
0.3
|
0.4
|
0.1
|
|||||||||||||||
|
Income
before income taxes
|
70.8
|
10.2
|
50.9
|
9.2
|
43.0
|
9.4
|
|||||||||||||||
|
Income
tax expense
|
27.0
|
3.9
|
19.4
|
3.5
|
15.9
|
3.5
|
|||||||||||||||
|
Net
income
|
$
|
43.8
|
6.3
|
%
|
$
|
31.6
|
5.7
|
%
|
$
|
27.1
|
5.9
|
%
|
|||||||||
|
2005
|
2004
|
2003
|
||||||
|
Net
income per share:
|
||||||||
|
Basic
|
$
1.23
|
|
$
0.88
|
|
$
0.83
|
|
||
|
Diluted
|
1.14
|
|
0.80
|
|
0.69
|
|
||
|
Weighted-average
number of common shares:
|
||||||||
|
Basic
|
35.6
|
|
36.0
|
|
32.8
|
|
||
|
Diluted
|
38.4
|
|
39.7
|
|
39.3
|
|
||
Net
Sales
We
record
revenue at the time product is shipped to our customer, except when beds are
delivered and set up by our home delivery employees, in which case revenue
for
products and home delivery services is recorded at the time the bed is delivered
and set up in the home. We reduce sales at the time revenue is recognized for
estimated returns. This estimate is based on historical return rates, which
are
reasonably consistent from period to period. If actual returns vary from
expected rates, revenue in future periods is adjusted, which could have a
material adverse effect on future results of operations. Historically, we have
not experienced material adjustments to the financial statements due to changes
to these estimates.
Cost
of Sales
Cost
of
sales includes costs associated with purchasing materials, manufacturing costs
and costs to deliver our products to our customers. Cost of sales also includes
estimated costs to service warranty claims of customers. This estimate is based
on historical claim rates experienced during the warranty period. Because this
estimate covers an extended period of time, a revision of estimated claim rates
could result in a significant adjustment of estimated future costs of fulfilling
warranty commitments and could have a material adverse effect on future results
of operations. From time to time we have revised our estimates of warranty
reserves to reflect changes in projected claim rates and projected costs of
fulfilling warranty claims. However, these estimate revisions have not
historically materially affected our annual results.
Gross
Profit
Our
gross
profit margin is dependent on a number of factors and may fluctuate from quarter
to quarter. These factors include the mix of products sold, the level at which
we offer promotional discounts to purchase our products, the cost of materials,
delivery and manufacturing and the mix of sales between wholesale and
company-controlled distribution channels. Sales of products manufactured by
third parties, such as accessories and our adjustable foundation, generate
lower
gross margins. Similarly, sales directly to consumers through company-controlled
channels generally generate higher gross margins than sales through our
wholesale channels because we capture both the manufacturer's and retailer's
margin.
Sales
and Marketing Expenses
Sales
and
marketing expenses include advertising and media production, other marketing
and
selling materials such as brochures, videos, customer mailings and in-store
signage, sales compensation, store occupancy costs and customer service. We
expense all store opening and advertising costs as incurred.
Advertising
expense was $89.9 million in 2005, $78.5 million in 2004, and $59.5 million
in 2003. Future advertising expenditures will depend on the effectiveness and
efficiency of the advertising in creating awareness of our products and brand
name, generating consumer inquiries and driving consumer traffic to our points
of sale. We anticipate that full year advertising expenditures in 2006 will
increase by more than 15% to over $100 million.
General
and Administrative Expenses
General
and administrative expenses include costs associated with management of
functional areas, including information technology, human resources, finance,
sales and marketing administration, investor relations, risk management and
research and development. Costs include salaries, bonus and benefits,
information hardware, software and maintenance, office facilities, insurance,
shareholder relations costs and other overhead.
Store
Closings and Asset Impairments
Store
closing and asset impairment expenses include charges made against operating
expenses for store related or other capital assets that have been written-off
when a store is underperforming and generating negative cash flows. We evaluate
our long-lived assets, including leaseholds and fixtures in existing stores
and
stores expected to be remodeled, based on expected cash flows through the
remainder of the lease term after considering the potential impact of planned
operational improvements and marketing programs. Expected cash flows may not
be
realized, which could cause long-lived assets to become impaired in future
periods and could have a material adverse effect on future results of
operations. Store assets are written off when we believe these costs will not
be
recovered through future operations.
Quarterly
and Annual Results
Quarterly
and annual operating results may fluctuate significantly as a result of a
variety of factors, including increases or decreases in comparable store sales,
the timing, amount and effectiveness of advertising expenditures, any changes
in
sales return rates or warranty experience, the timing of new store openings
and
related expenses, net sales contributed by new stores, the timing of promotional
offerings, competitive factors, rising commodity costs, any disruptions in
supplies or third-party services, seasonality of retail sales, timing of QVC
shows and wholesale sales, consumer confidence and general economic conditions.
Furthermore, a substantial portion of net sales is often realized in the last
month of a quarter, due in part to our promotional schedule and commission
structure. As a result, we may be unable to adjust spending in a timely manner,
and our business, financial condition and operating results may be significantly
harmed. Our historical results of operations may not be indicative of the
results that may be achieved for any future period.
Comparison
of 2005 and 2004
Net
Sales
Net
sales
in 2005 increased 24% to $691.1 million from $557.6 million in 2004,
due to a 19% increase in mattress unit sales and higher average selling prices.
The average selling price per bed in our company-controlled channels was $2,151,
an increase of approximately 9% from 2004. The
higher average selling price resulted primarily from a price increase introduced
at the beginning of 2005 and improvements in product mix. The increase in
mattress unit sales was driven primarily by growth in same-store sales and
distribution expansion.
The
increase in net sales by sales channel was attributable to (i) a $94.9 million
increase in sales from our retail stores, including an increase in comparable
store sales of $64.9 million and an increase of $30.0 million from new stores,
net of stores closed, (ii) a $10.4 million increase in direct marketing sales,
(iii) a $8.9 million increase in sales from our e-commerce channel and (iv)
a
$19.3 million increase in sales from our wholesale channel.
Gross
Profit
Gross
profit decreased to 59.4% in 2005 from 61.1% in 2004, primarily due to changes
in channel mix (i.e., increased percentage of our total net sales from our
lower
margin channels), higher warranty reserves, increased product and delivery
costs
resulting from rising commodity and fuel costs, offset partially by sales price
increases and favorable sales return rates.
Sales
and Marketing Expenses
Sales
and
marketing expenses in 2005 increased 14% to $286.0 million from
$249.9 million in 2004 and decreased as a percentage of net sales to 41.4%
from 44.8% for the comparable prior-year period. The $36.1 million increase
was primarily due to additional media investments, increased number of stores
and variable costs due to higher sales. The decrease as a percentage of net
sales was comprised primarily of a 1.1 percentage point (ppt) increase in
leverage of media investments, 0.6 ppt of other marketing leverage and a 1.7
ppt
leverage of fixed costs (occupancy, base sales compensation and certain
marketing
expenses)
over higher sales. With additional sales growth, we expect sales and marketing
expenses as a percentage of net sales to decline in 2006 as we achieve greater
leverage from our base sales compensation and occupancy costs.
General
and Administrative Expenses
General
and administrative (G&A) expenses in 2005 increased 35% to $55.7 million
from $41.2 million in 2004 and increased as a percentage of net sales to
8.1%
from 7.4% for the comparable prior-year period. The dollar increase in G&A
was primarily due to increased incentive compensation expense of $7.1 million
resulting from our all-employee incentive compensation program, increased
compensation and benefits expenses related to additional headcount of $3.4
million, increased professional fees of $2.7 million, and $1.0 million in
additional depreciation and maintenance expense from information technology
infrastructure investments. We generally expect future G&A growth rates to
be lower than the rate of sales growth due to leveraging the fixed component
of
G&A expenses across a higher sales base, excluding stock option compensation
expense in 2006.
Other
Income, Net
Other
income increased $0.8 million to $2.2 million in 2005 from $1.4 million in
2004.
The improvement is primarily due to increased interest income resulting from
higher average balances of invested cash and higher interest rates.
Income
Tax Expense
Income
tax expense increased $7.6 million to $27.0 in 2005 from $19.4 in 2004
principally due to higher pre-tax income. The effective tax rate was 38.2%
in
2005 and 38.1% in 2004.
Comparison
of 2004 and 2003
Net
Sales
Net
sales
in 2004 increased 22% to $557.6 million from $458.5 million in 2003,
due to a 10% increase in mattress unit sales and higher average selling prices.
The additional week in fiscal 2003 reduced sales growth in 2004 by approximately
2%. The average selling price per bed in our company-controlled channels
was
$1,906, an increase of approximately 13% from 2003. The higher average selling
price resulted primarily from growth in unit sales at higher price points
following the introduction of a new luxury mattress model at the upper end
of
our model line-up.
The
increase in net sales by sales channel was attributable to (i) a $75.1 million
increase in sales from our retail stores, including an increase in comparable
store sales of $56.4 million, an estimated $7.6 million reduction in sales
due
to a 53rd
week in
2003 and an increase of $26.3 million from new stores, net of stores closed,
(ii) a $4.5 million increase in direct marketing sales, (iii) a $6.1 million
increase in sales from our e-commerce channel and (iv) a $13.4 million increase
in sales from our wholesale channel.
Gross
Profit
Gross
profit decreased to 61.1% in 2004 from 62.7% in 2003, primarily due to channel
mix (i.e. increased percentage of our total net sales from our lower margin
wholesale channel), a warranty charge of $1.2 million (pre-tax) to allow
for broader flexibility to satisfy future warranty claims after modifying
our
customer service practices, increased utilization of our home delivery services
and increased sales of adjustable foundations which are not manufactured
by us
and result in lower gross margins.
Sales
and Marketing Expenses
Sales
and
marketing expenses in 2004 increased 21% to $249.9 million from
$206.2 million in 2003 and decreased as a percentage of net sales to 44.8%
from 45.0% for the comparable prior-year period. The $43.7 million increase
was primarily due to additional media investments, sales-based incentive
compensation, and increased number of stores. The decrease as a percentage
of
net sales was comprised primarily of a 1.1 percentage point (ppt) increase
in
media investments offset by a 0.9 ppt leverage of fixed costs (occupancy,
base
sales compensation and certain marketing expenses) over higher
sales.
General
and Administrative Expenses
General
and administrative (G&A) expenses in 2004 increased 7% to $41.2 million from
$38.4 million in 2003 but decreased as a percentage of net sales to 7.4%
from
8.4% for the comparable prior-year period. The dollar increase in G&A was
primarily
due to higher headcount-related expenditures of $4.5 million, increased
professional fees of $3.2 million, and $1.6 million in additional depreciation
and maintenance expense from information technology infrastructure investments,
offset by a reduction in incentive compensation expense of $7.0
million.
Other
Income, Net
Other
income increased $1.0 million to $1.4 million in 2004 from $0.4 million in
2003.
The improvement is primarily due to increased interest income resulting from
higher average balances of invested cash and higher interest rates.
Income
Tax Expense
Income
tax expense increased $3.5 million to $19.4 in 2004 from $15.9 in 2003
due to higher pre-tax income and effective tax rates. The effective tax rate
was
38.1% in 2004 and 37.0% in 2003.
Liquidity
and Capital Resources
As
of
December 31, 2005, we had cash, cash equivalents and marketable securities
of
$112.1 million, of which $57.0 million is classified as a current asset.
As of
January 1, 2005, we had cash, cash equivalents and marketable securities
of
$91.7 million, of which $50.8 million is classified as a current asset. Working
capital totaled $10.2 million at the end of 2005 compared to $23.5 million
at
year-end 2004. The decrease in working capital was due primarily to an increase
in accrued compensation and benefits reflecting an increase in the Company’s
all-employee incentive compensation program. The $20.4 million improvement
in
cash and marketable securities balances were the result of generating $61.7
million of operating free cash flow ($87.5 million of cash provided by operating
activities, reduced by $25.8 million of capital expenditures), offset by
$41.3
million of cash used in financing activities. We expect to continue to generate
positive cash flows from operations in the future, while not anticipating
significant additional working capital requirements.
We
generated cash from operations of $87.5 million in 2005 and $52.5 million
in 2004. The $35.0 million year-to-year improvement in cash from operations
resulted primarily from improved net income of $12.2 million, reductions
in net
operating assets and liabilities of $17.5 million, higher depreciation expense
of $2.1 million and a decrease in deferred tax assets of $2.7
million.
Capital
expenditures amounted to $25.8 million in 2005, compared to $21.4 million
in
2004. In both periods our capital expenditures related primarily to new and
remodeled retail stores and investments in information technology. In 2005,
we
opened 40 retail stores, while in 2004, we opened 31 retail stores and completed
the marquee and design upgrade of approximately 130 stores. We anticipate
opening 45 to 50 new stores in 2006 and relocating approximately 30 existing
stores. We will fund the investment in new and upgraded stores with cash
on hand
and cash generated from operations. We expect our new stores to be cash flow
positive within the first 12 months of operations and, as a result, do not
anticipate a negative effect on net cash provided by operations. Management
expects capital expenditures in fiscal 2006 to total between $40 and $45
million
for distribution expansion, manufacturing productivity enhancements and
technology improvements, including infrastructure supporting our long-term
plans
for expansion into international markets.
Net
cash
used in financing activities totaled $41.3 million in 2005, compared to $14.5
million in 2004. The $26.8 million increase in cash used in financing activities
was comprised of a $28.9 million increase in repurchases of common stock
under
our board-authorized common stock repurchase program offset by an increase
of
$2.0 million received for exercises of stock options and warrants and for
employee purchases of common stock. Additional purchases of Select Comfort
stock
may be made from time-to-time, subject to market conditions and at prevailing
market prices, through open market purchases. Repurchased shares will be
retired
and may be reissued in the future for general corporate or other purposes.
Total
outstanding authorization as of February 22, 2006 was $16.6 million. We may
terminate or limit the stock repurchase program at any time.
Cash
generated from operations should be a sufficient source of liquidity for
the
short- and long- term and should provide adequate funding for capital
expenditures and common stock repurchases, if any. In addition, our business
model, which can operate with minimal working capital, does not require
significant additional capital to fund operations. In 2003, we obtained a
$15
million bank revolving line of credit to provide additional cash flexibility
in
the case of unexpected significant external or internal developments. The
line
of credit is a three-year senior secured revolving facility expiring May
2006.
The interest rate on borrowings is calculated using LIBOR plus 1.50% to 2.25%
with the incremental rate dependent on our leverage ratio, as defined by
the
lender. We are subject to certain financial covenants under the agreement,
principally consisting of minimum liquidity requirements, working capital
and
leverage ratios. We have remained and expect to remain in the foreseeable
future
in full compliance with the financial covenants. While we have not had
borrowings outstanding under this
credit
agreement, we expect to obtain a new line of credit with expanded borrowing
capacity prior to expiration of the agreement.
The
table
below represents the scheduled maturities of our long-term contractual
obligations as of December 31, 2005
(in
thousands):
|
|
Payments
Due by
Period
|
|||||||||||||||
|
|
Total
|
<
1 Year
|
1 –
3 Years
|
3 –
5 Years
|
>
5 Years
|
|||||||||||
|
Operating
leases
|
$
|
109,043
|
$
|
24,902
|
$
|
43,176
|
$
|
28,822
|
$
|
12,143
|
||||||
|
Inventory
purchase commitments
|
61,000
|
61,000
|
-
|
-
|
-
|
|||||||||||
|
Total
|
$
|
170,043
|
$
|
85,902
|
$
|
43,176
|
$
|
28,822
|
$
|
12,143
|
||||||
Critical
Accounting Policies and Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions.
Predicting future events is inherently an imprecise activity and as such
requires the use of judgment. Actual results may vary from estimates in amounts
that may be material to the financial statements. The accounting policies
discussed below are considered critical because changes to certain judgments
and
assumptions inherent in these policies could materially affect the financial
statements.
Our
critical accounting policies relate to share-based compensation, revenue
recognition, accrued sales returns, accrued warranty costs, and store closing
and long-lived asset impairment expenses.
In
certain instances, U.S. generally accepted accounting principles allow for
the
selection of alternative accounting methods. One such significant accounting
policy involves the selection from alternative methods of accounting for stock
options.
Share-Based
Compensation
Two
alternative methods currently exist for accounting for stock options: the
intrinsic value method and the fair value method. We use the intrinsic value
method of accounting for stock options, and accordingly, no compensation expense
has been recognized in the financial statements for options granted to
employees, or for the discount feature of our employee stock purchase plan.
In
accordance with SFAS 123R, we are required to change our accounting practice
for
stock options to the fair value method by the first quarter of fiscal 2006,
beginning January 1, 2006.
Revenue
Recognition
We
record
revenue at the time product is shipped to our customer, except when beds are
delivered and set up by our home delivery employees, in which case revenue
is
recorded at the time the bed is delivered and set up in the home.
Accrued
Sales Returns
We
reduce
sales at the time revenue is recognized for estimated returns. This estimate
is
based on historical return rates, which are reasonably consistent from period
to
period. If actual returns vary from expected rates, revenue in future periods
is
adjusted, which could have a material adverse effect on future results of
operations.
Accrued
Warranty Costs
The
estimated costs to service customer warranty claims is included in cost of
sales. This estimate is based on historical claim rates during the warranty
period. Because this estimate covers an extended period of time, a revision
of
estimated claim rates and/or rising commodity costs could result in a
significant adjustment of estimated future costs of fulfilling warranty
commitments and could have a material adverse effect on future results of
operations. From time to time we have revised our estimates of warranty reserves
to reflect changes in projected claim rates and projected costs of fulfilling
warranty claims. Historically, these estimate revisions have not materially
affected our annual results.
Store
Closing and Asset Impairment Expenses
We
evaluate our long-lived assets, including leaseholds and fixtures in existing
stores, based on expected cash flows through the remainder of the lease term
after considering the potential impact of planned operational improvements
and
marketing programs. Expected cash flows may not be realized, which could cause
long-lived assets to become impaired in future periods and could have a material
adverse effect on future results of operations. Store assets are written off
when we believe these costs will not be recovered through future
operations.
Financial
instruments that potentially subject us to concentrations of credit risk consist
principally of investments. The counterparties to the agreements consist of
government agencies and various major corporations of investment grade credit
standing. We do not believe we are exposed to significant risk of
non-performance by these counterparties because we limit the amount of credit
exposure to any one financial institution and any one type of
investment.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL
CONTROL OVER FINANCIAL REPORTING
The
Board
of Directors and Shareholders
Select
Comfort Corporation:
We
have
audited management's assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting that Select Comfort
Corporation maintained effective internal control over financial reporting
as of
December 31, 2005, based on criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
management's assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management's assessment that Select Comfort Corporation maintained
effective internal control over financial reporting as of December 31, 2005,
is
fairly stated, in all material respects, based on criteria established in
Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Also,
in
our opinion, Select Comfort Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Select
Comfort Corporation and subsidiaries as of December 31, 2005 and January
1,
2005, and the related consolidated statements of operations, shareholders’
equity, and cash flows for each of the years in the three-year period ended
December 31, 2005 and our report dated March 14, 2006 expressed an unqualified
opinion on those consolidated financial statements.
Minneapolis,
Minnesota
March
14,
2006
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON
CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE
The
Board
of Directors and Shareholders
Select
Comfort Corporation:
We
have
audited the accompanying consolidated balance sheets of Select Comfort
Corporation and subsidiaries as of December 31, 2005 and January 1, 2005,
and
the related consolidated statements of operations, shareholders’ equity, and
cash flows for each of the years in the three-year period ended December
31,
2005. In connection with our audits of the consolidated financial statements,
we
also have audited financial statement Schedule II – Valuation and
Qualifying Accounts. These consolidated financial statements and financial
statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Select Comfort Corporation
and subsidiaries as of December 31, 2005 and January 1, 2005, and the results
of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Select Comfort
Corporation’s internal control over financial reporting as of December 31,
2005, based on criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 14, 2006 expressed an unqualified opinion on
management’s assessment of, and the effective operation of, internal control
over financial reporting.
Minneapolis,
Minnesota
March
14,
2006
SELECT
COMFORT CORPORATION
AND
SUBSIDIARIES
Consolidated
Balance Sheets
December
31, 2005 and January 1, 2005
(in
thousands, except per share amounts)
|
|
2005
|
2004
|
|||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
32,863
|
$
|
15,066
|
|||
|
Marketable
securities – current (note 2)
|
24,122
|
35,747
|
|||||
|
Accounts
receivable, net of allowance for doubtful accounts
of $552 and $685, respectively
|
10,109
|
8,644
|
|||||
|
Inventories
(note 3)
|
21,982
|
20,481
|
|||||
|
Prepaid
expenses
|
9,841
|
7,375
|
|||||
|
Deferred
tax assets (note 8)
|
6,139
|
5,287
|
|||||
|
Total
current assets
|
105,056
|
92,600
|
|||||
|
Marketable
securities – non-current (note 2)
|
55,102
|
40,930
|
|||||
|
Property
and equipment, net (note 4)
|
53,866
|
43,911
|
|||||
|
Deferred
tax assets (note 8)
|
11,256
|
10,755
|
|||||
|
Other
assets
|
3,554
|
3,617
|
|||||
|
Total
assets
|
$
|
228,834
|
$
|
191,813
|
|||
|
Liabilities
and Shareholders’ Equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
31,655
|
$
|
26,267
|
|||
|
Consumer
prepayments
|
14,718
|
9,368
|
|||||
|
Accruals:
|
|||||||
|
Sales
returns
|
5,403
|
5,038
|
|||||
|
Compensation
and benefits
|
24,839
|
13,913
|
|||||
|
Taxes
and withholding
|
9,624
|
6,392
|
|||||
|
Other
|
8,659
|
8,143
|
|||||
|
Total
current liabilities
|
94,898
|
69,121
|
|||||
|
Long-term
liabilities
|
12,589
|
8,348
|
|||||
|
Total
liabilities
|
107,487
|
77,469
|
|||||
|
Shareholders'
equity (notes 7 and 10):
|
|||||||
|
Undesignated
preferred stock; 5,000 shares authorized, no
shares issued and outstanding
|
-
|
-
|
|||||
|
Common
stock, $0.01 par value; 95,000 shares authorized, 35,732
and 35,828 shares issued and outstanding, respectively
|
357
|
358
|
|||||
|
Additional
paid-in capital
|
60,426
|
95,548
|
|||||
|
Unearned
compensation
|
(3,393
|
)
|
(1,752
|
)
|
|||
|
Retained
earnings
|
63,957
|
20,190
|
|||||
|
Total
shareholders' equity
|
121,347
|
114,344
|
|||||
|
Commitments
and contingencies (notes 5 and 11):
|
|||||||
|
Total
liabilities and shareholders' equity
|
$
|
228,834
|
$
|
191,813
|
See
accompanying notes to consolidated financial statements.
SELECT
COMFORT CORPORATION
AND
SUBSIDIARIES
Consolidated
Statements of Operations
Years
ended December 31, 2005, January 1, 2005 and January 3,
2004
(in
thousands, except per share amounts)
|
|
2005
|
2004
|
2003*
|
|||||||
|
Net
sales
|
$
|
691,066
|
$
|
557,639
|
$
|
458,489
|
||||
|
Cost
of sales
|
280,590
|
216,965
|
171,163
|
|||||||
|
Gross
profit
|
410,476
|
340,674
|
287,326
|
|||||||
|
Operating
expenses:
|
||||||||||
|
Sales
and marketing
|
286,053
|
249,925
|
206,248
|
|||||||
|
General
and administrative
|
55,672
|
41,218
|
38,423
|
|||||||
|
Store
closings and asset impairments
|
162
|
-
|
71
|
|||||||
|
Total
operating expenses
|
341,887
|
291,143
|
244,742
|
|||||||
|
Operating
income
|
68,589
|
49,531
|
42,584
|
|||||||
|
Other
income (expense):
|
||||||||||
|
Interest
income
|
2,174
|
1,414
|
612
|
|||||||
|
Interest
expense
|
-
|
-
|
(170
|
)
|
||||||
|
Other
income, net
|
2,174
|
1,414
|
442
|
|||||||
|
Income
before income taxes
|
70,763
|
50,945
|
43,026
|
|||||||
|
Income
tax expense (note 8)
|
26,996
|
19,390
|
15,924
|
|||||||
|
Net
income
|
$
|
43,767
|
$
|
31,555
|
$
|
27,102
|
||||
|
Basic
net income per share (note 9):
|
||||||||||
|
Net
income per share – basic
|
$
|
1.23
|
$
|
0.88
|
$
|
0.83
|
||||
|
Weighted
average common shares – basic
|
35,571
|
36,010
|
32,771
|
|||||||
|
Diluted
net income per share (note 9):
|
||||||||||
|
Net
income per share – diluted
|
$
|
1.14
|
$
|
0.80
|
$
|
0.69
|
||||
|
Weighted
average common shares – diluted
|
38,449
|
39,683
|
39,277
|
See
accompanying notes to consolidated financial statements.
*
Fiscal
year 2003 had 53 weeks. All other fiscal years presented had 52
weeks.
SELECT
COMFORT CORPORATION
AND
SUBSIDIARIES
Consolidated
Statements of Shareholders’ Equity
Years
ended December 31, 2005, January 1, 2005 and January 3,
2004
(in
thousands)
|
Common
Stock
|
Additional
Paid-In
|
Unearned
|
Retained
Earnings/
(Accumulated
|
||||||||||||||||
|
|
Shares
|
Amount
|
Capital
|
Compensation
|
Deficit)
|
|
Total
|
||||||||||||
|
Balance
at December 28, 2002
|
30,728
|
$
|
307
|
$
|
92,184
|
$
|
-
|
$
|
(38,467
|
)
|
$
|
54,024
|
|||||||
|
Exercise
of common stock options (note 7)
|
1,008
|
10
|
7,411
|
-
|
-
|
7,421
|
|||||||||||||
|
Exercise
of common stock warrants
|
3,232
|
32
|
405
|
-
|
-
|
437
|
|||||||||||||
|
Repurchase
of common stock
|
|||||||||||||||||||