July 25, 2006 at 16:01 PM EDT
Select Comfort Reports 46 Percent Increase in Earnings Per Share; Net Sales Increase 22 Percent, Same-Store Sales Increase 16 Percent; Company Raises Full Year Earnings Guidance to Reflect Strong Second Quarter Performance

Select Comfort Corporation (NASDAQ:SCSS), the nation's leading bed retailer(1) and creator of the Sleep Number(R) bed, today reported results for the fiscal second quarter ended July 1, 2006. Second quarter earnings per share totaled $0.19 per diluted share, an increase of 46 percent compared to $0.13 per diluted share in the second quarter of 2005. Net sales increased 22 percent to $188.6 million and net income increased 37 percent to $10.7 million, compared to net sales of $154.5 million and net income of $7.9 million in the second quarter of 2005. All earnings per share data reflects the company's 3-for-2 stock split that took effect on June 8.

Earnings for the first six months of 2006 totaled $0.40 per diluted share, an increase of 43 percent compared to $0.28 per diluted share in 2005. Net sales for the first six months of 2006 increased 23 percent to $401.4 million and net income increased 36 percent to $22.5 million, compared to net sales of $327.4 million and net income of $16.5 million in 2005.

Net income and earnings per share in 2005 did not include stock option expense. If second quarter 2005 results had included the effects of stock option expense, then earnings would have been $0.12 per diluted share in the prior year, and second quarter 2006 earnings of $0.19 per diluted share would represent earnings growth of 58 percent. On a year-to-date basis, 2005 earnings would have been $0.25 per diluted share, and 2006 earnings of $0.40 per diluted share would represent earnings growth of 60 percent. A reconciliation of this non-GAAP financial measure accompanies this press release.

"The company's second quarter performance is particularly gratifying in this challenging consumer and retail environment and once again demonstrates the breadth and strength of our multi-channel distribution. Our distribution expansion provides convenient channel alternatives for consumers and enables us to maintain sales growth rates well in excess of industry averages," said Bill McLaughlin, Select Comfort chairman and chief executive officer. "We successfully leveraged productivity advances and controlled costs, which led to significant margin expansion this quarter. We believe we will continue to achieve margin gains over the balance of the year while continuing to invest in long-term growth initiatives intended to sustain the company's superior growth rates."

Quarterly Highlights

-- Diluted earnings per share growth of 46 percent

-- Net sales growth of 22 percent

-- Same-store sales growth of 16 percent

-- Operating profit margin expansion from 7.9 percent to 8.7 percent

-- Initiated stock repurchases under the $150 million buy-back authorization

-- Completed staffing objectives to strengthen the company's IT and R&D functions

The company's ongoing efforts to offer consumers convenient choices for where to purchase their Sleep Number(R) bed has resulted in net sales growth in excess of 20 percent for six consecutive quarters and 17 of the past 18 quarters. Several channels exhibited significant net sales growth rates in the second quarter, including:

-- Retail sales increased 25 percent, including same-store sales growth of 16 percent

-- e-Commerce sales increased 41 percent, reflecting the seventh consecutive quarterly increase of 25 percent or more

-- Retail partner sales, reflected within total wholesale channel sales, increased 53 percent

During the quarter, the company successfully opened 10 company-owned stores to end the quarter at 412 stores, up from 396 stores as of December 31, 2005, and on track to meet the company's stated goal of between 40 and 45 net new stores in 2006. In addition, the company added 65 doors to its retail partner program to end the quarter with 492 retail partner doors, up from 308 doors as of December 31, and on track to meet the company's goal of doubling its retail partner program to between 600 and 650 doors at year-end.

Operating margins improved to 8.7 percent of revenue, compared to 7.9 percent in the second quarter of 2005. The increase reflects a 310 basis point improvement in the gross margin percentage. Offsetting the improvement were stock option expense, investments in sales and marketing initiatives and costs related to the development of the company's long-term strategic plan.

Gross margins increased to 61.0 percent of revenue, compared to 57.9 percent in the second quarter of 2005. Gross margins in company-owned sales channels - which includes retail, e-commerce and direct - increased to 62.3 percent from 60.3 percent in the second quarter of 2005. The margin improvements reflect higher unit volumes, higher average selling prices and productivity gains in both manufacturing and logistics which more than offset increased commodity costs.

Sales and marketing expenses, which includes retail store expenses, totaled $78.6 million, or 41.7 percent of net sales, compared to 41.4 percent of net sales in the second quarter of 2005. Media spending increased 18 percent to $22.8 million in the second quarter, and on a year-to-date basis, media expenditures have increased 21 percent to $54.4 million. The company expects to continue to expand media investments, which are planned to exceed $105 million in 2006.

Cash and investments totaled $94.3 million at the end of the quarter, a decrease of $17.8 million compared to the balance at December 31. On a year-to-date basis, the decrease in cash reflects $23.8 million used for the repurchase of approximately one million shares of common stock and capital expenditures of $14.0 million. Since the end of the first quarter, the company has invested $9.3 million to repurchase an additional 431,000 shares of common stock under the $150 million buy-back program authorized in May.

Outlook - Increased Expectations for 2006

As a result of the continued strong performance in the second quarter, the company is increasing its earnings per share guidance for 2006 by $0.02 to between $0.93 and $0.97 per diluted share. This guidance includes an estimated $0.08 per share in stock option expense. The company's outlook represents full year earnings growth of between 33 percent and 38 percent, excluding the effects of expensing stock options. Revenue guidance for 2006 remains unchanged, at or above the high-end of the company's stated long-term revenue growth targets of between 15 and 20 percent.

The company's long-term targets, which extend beyond 2006, remain unchanged:

-- Sales growth of between 15 and 20 percent;

-- Earnings growth of between 20 and 25 percent, and

-- Same-store sales growth of between 7 and 12 percent.

-- Sales in 2007 of $1 billion with operating margins of 12 percent, before consideration of stock option expense resulting from the implementation of FAS123R.

Conference Call

Management will host its regularly scheduled conference call to discuss the company's results and 2006 outlook at 5:00 p.m. Eastern Time (4:00 p.m. Central; 2:00 p.m. Pacific) on Tuesday, July 25, 2006. To listen to the webcast, please access the investor relations area of the company's website at: www.selectcomfort.com.

A replay will remain available through August 11, 2006, by dialing 402-998-0456. The webcast replay will remain available in the investor relations area of the company's website for approximately 60 days.

About Select Comfort

Founded in 1987, Select Comfort Corporation is the nation's leading bed retailer(1), holding 30 U.S. issued or pending patents for its personalized sleep products. The company designs, manufactures and markets a line of adjustable-firmness mattresses featuring air-chamber technology, branded the Sleep Number(R) bed, as well as foundations and sleep accessories. Select Comfort's products are sold through more than 400 company-owned retail stores located nationwide; through selected furniture retailers and specialty bedding retailers; through its national direct marketing operations; and on the Internet at www.selectcomfort.com.

Forward-Looking Statements

Statements used in this press release that relate to future plans, events, financial results or performance are forward-looking statements that are subject to certain risks and uncertainties including, 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; our ability to successfully expand distribution through independent retailers; 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; risks of potential litigation; our dependence on significant suppliers, and the vulnerability of any suppliers to commodity shortages, inflationary pressures, labor negotiations, liquidity concerns or other factors; uncertainties related to the supply of foam used to manufacture our products; 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 in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K, and other periodic reports filed with the SEC. The company has no obligation to publicly update or revise any of the forward-looking statements that may be in this news release.

(1) Top Bedding Specialists, Furniture Today, May 29, 2006.


                      SELECT COMFORT CORPORATION
                           AND SUBSIDIARIES
                Consolidated Statements of Operations
         (unaudited - in thousands, except per share amounts)


                                         Three Months Ended
                               ---------------------------------------
                                July 1,    % of     July 2,    % of
                                 2006    Net Sales   2005    Net Sales
                               --------- --------- --------- ---------

Net sales                      $188,641     100.0% $154,520     100.0%
Cost of sales                    73,504      39.0%   65,030      42.1%
                               ---------           ---------
  Gross profit                  115,137      61.0%   89,490      57.9%
                               ---------           ---------

Operating expenses:
  Sales and marketing            78,638      41.7%   64,048      41.4%
  General and administrative     20,037      10.6%   13,261       8.6%
                               ---------           ---------
Operating income                 16,462       8.7%   12,181       7.9%

Other income:
  Interest income                   761       0.4%      665       0.4%
                               ---------           ---------

Income before income taxes       17,223       9.1%   12,846       8.3%
Income tax expense                6,482       3.4%    4,984       3.2%
                               ---------           ---------
Net income                      $10,741       5.7%   $7,862       5.1%
                               =========           =========

Net income per share - basic      $0.20               $0.15
                               =========           =========

Net income per share - diluted    $0.19               $0.13
                               =========           =========


Reconciliation of weighted
 average
  shares outstanding:
Basic weighted average shares
 outstanding                     53,405              53,722
Effect of dilutive securities:
  Options                         2,618               2,576
  Warrants                           25               1,958
  Restricted shares                 197                 300
                               ---------           ---------
Dilutive weighted average
 shares outstanding              56,245              58,556
                               =========           =========



                      SELECT COMFORT CORPORATION
                           AND SUBSIDIARIES
                Consolidated Statements of Operations
         (unaudited - in thousands, except per share amounts)


                                          Six Months Ended
                               ---------------------------------------
                                July 1,    % of     July 2,    % of
                                 2006    Net Sales   2005    Net Sales
                               --------- --------- --------- ---------

Net sales                      $401,371     100.0% $327,352     100.0%
Cost of sales                   157,153      39.2%  135,765      41.5%
                               ---------           ---------
  Gross profit                  244,218      60.8%  191,587      58.5%
                               ---------           ---------

Operating expenses:
  Sales and marketing           170,140      42.4%  139,073      42.5%
  General and administrative     39,311       9.8%   26,685       8.2%
                               ---------           ---------
Operating income                 34,767       8.7%   25,829       7.9%

Other income:
  Interest income                 1,630       0.4%    1,138       0.3%
                               ---------           ---------

Income before income taxes       36,397       9.1%   26,967       8.2%
Income tax expense               13,922       3.5%   10,463       3.2%
                               ---------           ---------
Net income                      $22,475       5.6%  $16,504       5.0%
                               =========           =========

Net income per share - basic      $0.42               $0.31
                               =========           =========

Net income per share - diluted    $0.40               $0.28
                               =========           =========


Reconciliation of weighted
 average
  shares outstanding:
Basic weighted average shares
 outstanding                     53,418              53,711
Effect of dilutive securities:
  Options                         2,740               2,631
  Warrants                           51               1,959
  Restricted shares                 187                 281
                               ---------           ---------
Dilutive weighted average
 shares outstanding              56,396              58,582
                               =========           =========



                      SELECT COMFORT CORPORATION
                           AND SUBSIDIARIES
                     Consolidated Balance Sheets
         (unaudited - in thousands, except per share amounts)


                                                July 1,   December 31,
                                                 2006         2005
                                             ------------ ------------
                   Assets
Current assets:
  Cash and cash equivalents                           $-      $32,863
  Marketable securities - current                 38,306       24,122
  Accounts receivable, net of allowance for
   doubtful accounts of $629 and $552,
   respectively                                   17,636       10,109
  Inventories                                     25,182       21,982
  Prepaid expenses                                17,916        9,841
  Deferred tax assets                              6,832        6,139
                                             ------------ ------------
      Total current assets                       105,872      105,056

Marketable securities - non-current               55,971       55,102
Property and equipment, net                       58,595       53,866
Deferred tax assets                               14,193       11,256
Other assets                                       3,538        3,554
                                             ------------ ------------
      Total assets                              $238,169     $228,834
                                             ============ ============


    Liabilities and Shareholders' Equity

Current liabilities:
  Accounts payable                               $35,419      $31,655
  Customer prepayments                             9,534       14,718
  Accruals:
    Sales returns                                  4,533        5,403
    Compensation and benefits                     20,904       24,839
    Taxes and withholding                          4,363        9,624
    Other                                         10,436        8,659
                                             ------------ ------------
      Total current liabilities                   85,189       94,898

Other long-term accrued liabilities               14,756       12,589
                                             ------------ ------------
      Total liabilities                           99,945      107,487
                                             ------------ ------------

Common shareholders' equity:
  Undesignated preferred stock; 7,500 shares
   authorized, no shares issues and
   outstanding                                         -            -
  Common stock, $.01 par value; 142,500
   shares authorized, 53,922 and 53,598
   shares issued and outstanding,
   respectively                                      539          536
  Additional paid-in capital                      51,253       56,854
  Retained earnings                               86,432       63,957
                                             ------------ ------------
      Total shareholders' equity                 138,224      121,347
                                             ------------ ------------
      Total liabilities and shareholders'
       equity                                   $238,169     $228,834
                                             ============ ============



                      SELECT COMFORT CORPORATION
                           AND SUBSIDIARIES
                Consolidated Statements of Cash Flows
                      (unaudited - in thousands)


                                                     Six Months Ended
                                                     -----------------
                                                     July 1,  July 2,
                                                      2006     2005
                                                     -------- --------

Cash flows from operating activities:
  Net income                                         $22,475  $16,504
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Depreciation and amortization                      9,247    7,554
    Share-based compensation                           3,972      301
    Excess tax benefits from stock option exercises        -    1,865
    Changes in deferred tax assets                    (3,630)  (1,560)
    Change in operating assets and liabilities:
      Accounts receivable                             (7,527)  (3,063)
      Inventories                                     (3,200)  (2,793)
      Prepaid expenses                                  (363)  (4,657)
      Other assets                                        (2)      30
      Accounts payable                                 3,764    2,571
      Accrued sales returns                             (870)    (672)
      Accrued compensation and benefits               (3,935)   2,572
      Accrued taxes and withholding                   (5,261)  (2,948)
      Consumer prepayments                            (5,184)   2,098
      Other accruals and liabilities                   3,944    1,644
                                                     -------- --------
        Net cash provided by operating activities     13,430   19,446
                                                     -------- --------

Cash flows from investing activities:
  Purchases of property and equipment                (13,958) (11,565)
  Investments in marketable securities               (28,718) (11,088)
  Proceeds from maturity of marketable securities     13,665   15,125
                                                     -------- --------
        Net cash used in investing activities        (29,011)  (7,528)
                                                     -------- --------

Cash flows from financing activities:
  Repurchases of common stock                        (23,750) (12,384)
  Proceeds from issuance of common stock               6,468    5,995
  Excess tax benefits from stock option exercises          -        -
                                                     -------- --------
        Net cash used in financing activities        (17,282)  (6,389)
                                                     -------- --------

(Decrease) increase in cash and cash equivalents     (32,863)   5,529
Cash and cash equivalents, at beginning of period     32,863   15,066
                                                     -------- --------
Cash and cash equivalents, at end of period               $-  $20,595
                                                     ======== ========



                      SELECT COMFORT CORPORATION
                           AND SUBSIDIARIES
      Reconciliation of GAAP Net Income to Pro Forma Net Income
         (unaudited - in thousands, except per share amounts)


 The non-GAAP financial measures used in this press release quantify
the impact of adopting Financial Accounting Standards Board (FASB)
Statement of Accounting Standards No. 123 (Revised 2004), Share- Based
Payments (SFAS No. 123R) related to the expensing of stock option
compensation and are referred to as Pro Forma reporting. These
non-GAAP financial measures are not prepared in accordance with
generally accepted accounting principles and may be different from
non-GAAP financial measures used by other companies. Non-GAAP
financial measures should not be considered as a substitute for, or
superior to, measures of financial performance prepared in accordance
with GAAP. We view these non-GAAP financial measures to be helpful in
assessing the Company's ongoing operating results. In addition, these
non-GAAP financial measures facilitate our internal comparisons to
historical operating results. We include these non-GAAP financial
measures in our earnings announcement because we believe they are
useful to investors in allowing greater transparency related to
supplemental information we use in our financial and operational
analysis.

 Investors are encouraged to review the reconciliations of the non-
GAAP financial measures used in this press release to their most
directly comparable GAAP financial measures as provided with the
financial statements attached to this press release.


                                  Three Months Ended Six Months Ended
                                  ------------------ -----------------
                                   July 1,  July 2,  July 1,  July 2,
                                    2006     2005     2006     2005
                                  --------- -------- -------- --------

Net income, as reported            $10,741   $7,862  $22,475  $16,504
Add:  Total stock option
 compensation expense determined
 under fair value method, net of
 related tax effects                     -     (845)       -   (1,601)
                                  --------- -------- -------- --------
Adjusted net income, pro forma     $10,741   $7,017  $22,475  $14,903
                                  ========= ======== ======== ========

Earnings per share:
  Basic - as reported                $0.20    $0.15    $0.42    $0.31
  Basic - pro forma                   0.20     0.13     0.42     0.28

  Diluted - as reported              $0.19    $0.13    $0.40    $0.28
  Diluted - pro forma                 0.19     0.12     0.40     0.25

Weighted average shares
 outstanding:
  Basic - as reported               53,405   53,722   53,418   53,711
  Diluted - as reported             56,245   58,556   56,396   58,582



                      SELECT COMFORT CORPORATION
                           AND SUBSIDIARIES
                  Supplemental Financial Information
                      (unaudited - in thousands)


                                  Three Months Ended Six Months Ended
                                  ------------------ -----------------
                                   July 1,  July 2,  July 1,  July 2,
                                    2006     2005     2006     2005
                                  --------- -------- -------- --------

Percent of sales:
  Retail                              74.9%    73.2%    76.7%    74.9%
  Direct                              10.5%    12.2%    10.2%    12.2%
  E-Commerce                           5.6%     4.8%     5.4%     4.7%
  Wholesale                            9.0%     9.8%     7.7%     8.2%
                                  --------- -------- -------- --------
    Total                            100.0%   100.0%   100.0%   100.0%
                                  --------- -------- -------- --------

Sales growth rates:
  Same-store sales growth               16%      11%      17%      14%
  Net new stores                         9%       7%       8%       7%
                                  --------- -------- -------- --------

Retail total:                           25%      18%      25%      21%
  Direct                                 5%      24%       3%      20%
  E-Commerce                            41%      32%      40%      28%
  Wholesale                             13%      88%      16%      62%
                                  --------- -------- -------- --------
    Total                               22%      24%      23%      24%

Stores open:
  Beginning of period                  402      370      396      370
  Opened                                10        8       18       13
  Closed                                 -       (9)      (2)     (14)
                                  --------- -------- -------- --------
  End of period                        412      369      412      369
                                  --------- -------- -------- --------

Retail partner doors                   492      121      492      121
                                  --------- -------- -------- --------

Other metrics:
  Average sales per store ($000s)
   (a)                              $1,532   $1,330
  Average sales per square foot
   ($s) (a)                         $1,333   $1,207
  Stores greater than $1 million
   sales (a)                            83%      71%
  Average sales per mattress unit
   (Q2 Company-owned channels;
   $s)                              $2,187   $1,953
  Return on equity (trailing
   twelve months)                     37.6%    28.9%
  Cash and investments             $94,277  $93,235

(a) trailing twelve months for stores open at least one year

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