Select Comfort Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.17.13 | About: Select Comfort (SCSS)

Select Comfort (NASDAQ:SCSS)

Q1 2013 Earnings Call

April 17, 2013 5:00 pm ET

Executives

Dave Schwantes

Shelly R. Ibach - Chief Executive Officer, President and Director

Wendy L. Schoppert - Chief Financial Officer and Executive Vice President

Analysts

Jessica Schoen - Barclays Capital, Research Division

Peter J. Keith - Piper Jaffray Companies, Research Division

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Chad Bolen

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Joshua Borstein - Longbow Research LLC

Todd A. Schwartzman - Sidoti & Company, LLC

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

Operator

Good afternoon. Welcome to Select Comfort's First Quarter 2013 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I'd like to introduce Dave Schwantes, Senior Director of Investor Relations. Thank you, you may begin.

Dave Schwantes

Thank you, Angie. Good afternoon, and welcome to the Select Comfort Corporation First Quarter 2013 Earnings Conference Call. Thank you for joining us. I am Dave Schwantes, Senior Director of Investor Relations. With me today are Shelly Ibach, our President and CEO and Wendy Schoppert, our Executive Vice President and CFO. This telephone conference is being recorded and will be available on our website at sleepnumber.com.

Please refer to the details in our news release to access the replay. Please also refer to our news release for a reconciliation of certain non-GAAP financial measures included in the news release or that may be discussed on this call. The primary purpose of this call is to discuss the results of the fiscal period just ended. However, our commentary and responses to your questions may include certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties outlined in our earnings news release and discussed in some detail in our annual report on Form 10-K and other periodic filings with the SEC. The company's actual future results may vary materially.

I will now turn the call over to Shelly for her comments.

Shelly R. Ibach

Thanks, Dave. Good afternoon, everyone. Today, I'll discuss first quarter results, including what affected performance, and the steps we took to correct the issue. I'll also review growth initiatives within the context of our differentiated business model, which includes proprietary products and exclusive distribution, and I'll end by speaking to full year guidance.

As we communicated on March 4, we underperformed versus our internal goals in the first quarter. Net sales for the quarter were $258 million versus $262 million the previous year, a 2% year-over-year decline. Comparable sales in company-controlled channels declined by 9%, and we delivered an adjusted EPS of $0.41 in the quarter versus $0.45 in 2012.

The root cause for our first quarter traffic and sales decline was significant changes to our media buying. Once identified, we took immediate actions to rectify the situation, including realigning the media buy to our proven formula and adjusting discretionary expenses for the quarter. We remain focused on executing our growth strategy, prioritizing product innovation and exclusive distribution, while we work through this isolated, yet disruptive situation.

Our underperformance involved the anchor of our integrated growth formula, building brand awareness. For context, over the past 3 years, we had carefully built in advance a proven media buying formula that has consistently delivered increased unaided awareness, followed by market share growth.

I'll provide specifics about what happened. In the quarter, we consolidated media buying from multiple agencies to one, while also transferring our internal media planning to the same agency. While this direction promises longer-term efficiency and effectiveness, the transition presented challenges. Three things suddenly and unexpectedly changed in our execution, which negatively impacted results: First, the transition resulted in a media buy that was significantly different than our formula, in both type and placement. Second, the new media buy narrowed who were reaching instead of broadening the target audience as intended. Finally, broad -- national broad reach TV was purchased approximately 30% lower than our formula.

Since awareness remains our #1 opportunity, this execution had both a negative and material impact on our traffic and sales, especially during the President's Day mattress shopping event. Understanding the root cause, we took decisive action to correct the issue in 3 areas: Number one, getting our media buy back on formula. We worked urgently with our agency partner to identify the deviations from our proven formula and begin to aggressively implement corrections. Number two, tightening our operating mechanism. We reinstated our disciplined approach to execution with tight control, including internal planning as a dual path with the agency. Number three, increasing leadership oversight. We employed a stronger internal structure to support media. With the departure of our chief marketing officer, I assumed direct oversight, and we rehired a former media consultant, reestablishing the team that built and refined our media buying formula.

We are experiencing slow and steady recovery in traffic, units and sales. Fully correcting the media buy is taking time due to the complexity in media buying lead times. We are confident in our second quarter media plan and buy, but our lead-based business has a lag time, and we are still rebuilding the base. We expect continued performance improvement throughout the second quarter.

As I indicated earlier, we remain on plan with the other 2 growth drivers: expanding exclusive distribution and introducing breakthrough products. First, I'll highlight distribution progress. We launched the 8th aggressive growth market, and we remain on plan to double market share within 3 years in the previously launched 7 markets. As a reminder, this strategy involves a total of 13 markets or 1/3 of U.S. bedding sales.

In addition, we continue to nationally grow market share as we execute our local market development strategy. New stores primarily fill in existing markets and generate approximately $2 million in sales their first year. Store growth will be a source of mattress unit growth. We remain on track to add approximately 6% to 9% net new stores in 2013, which are weighted to the back half of the year.

The newest driver of our growth formula is product innovation. We have been investing in our industry leadership position of individualizing comfort through innovation and are about to launch the first in a series of breakthrough product offerings that will engage and benefit our customers in profound ways. During the past 2 years, we have increased funding for R&D. And in June, added a chief product officer, as well as an organizational structure to support a robust multi-year pipeline of exclusive innovations. In January, we strengthened our intellectual property with the Comfortaire acquisition. We also made an investment in an R&D partner related to product we will introduce in the next 12 months.

You will begin to see results from our product roadmap in the second quarter. We will introduce Sleep Number DualTemp, an exciting new technology that addresses one of the most significant sleep issues experienced by customers, sleeping too hot or sleeping too cold. We believe only air can provide truly individualized comfort. For that reason, our new Sleep Number DualTemp layer uses proprietary ActiveAir technology that evenly distributes each sleeper's desired temperature, combined with a simple user experience, including wireless remotes that can be personalized.

This is an exclusive premium product that combines high function and design, and it can be purchased for use with all mattress brands. The Sleep Number DualTemp layer is priced at $16.99 and will be available at all Sleep Number locations with the national marketing launch slated for June. I invite you to view an interactive version of this innovative product via a link on the Investor Relations page of sleepnumber.com. It will give you a better sense of the magnitude of the innovation and value equation. Similar to our past product introductions, DualTemp will contribute to ASP growth, and we believe it will be a driver of traffic. For our usual approach to forecasting, we will establish performance history before adding significant incremental revenue to our plan. For now, our 2013 revenue outlook includes minimal incremental sales from our product innovation launches.

This has been a challenging quarter for us. Our guidance reflects the impact of our media issue, including a negative comp in the second quarter, while we rebuild our awareness and lead base. With the backdrop of the slower industry growth, we have taken a conservative view of sales for the back half. Consequently, we're estimating low to mid-single-digit comps for the balance of the year. The resulting full year 2013 outlook for EPS is between $1.30 and $1.45.

To recap, in the quarter, we rapidly addressed our issue and managed through this short-term challenge with the fiscal prudence we've historically demonstrated. At the same time, we remain focused on delivering an elevated customer experience and advancing our top priorities. We executed well across the other areas of the business, and therefore, delivered as planned on exclusive distribution and breakthrough product innovation.

Looking ahead, we're committed to both short and long-term growth to benefit our customers, employees and shareholders.

I will now turn the call over to Wendy to provide more financial detail.

Wendy L. Schoppert

Thanks, Shelly. Good afternoon, everyone. I'll begin with the financial details of our first quarter performance, followed by the assumptions behind our 2013 outlook and close with an update on cash.

First quarter's adjusted EPS of $0.41 was $0.04 or 9% below last year. Total net sales in the quarter decreased 2% to $258 million, including a 9% decline in comparable store sales within our company-controlled channels. As stated, changes to our media buying primarily drove our below plan performance. As planned, net new stores over the past 12 months contributed 6 points of sales growth during the first quarter. In the quarter, we added 10 new stores and closed 9 stores, including the relocation of 5 mall stores to new non-mall locations within the same trade area. We also remodeled 8 mall stores with our experiential store design.

The 3% decline in sales within our company-controlled channels included a 15% decline in mattress units and a 14% increase in ASP. The ASP increase was driven by product innovation, including continued increases in our FlexFit adjustable base attach rate, product mix, pricing and bedding collection penetration.

Adjusted operating margin in the first quarter was 13.5%, compared to 15.2% in the prior year. This 170 basis point decrease was driven by a 200 basis point increase in sales and marketing expenses and a 50 basis point increase in R&D, partially offset by a 70 basis point improvement in gross margin and a 20 basis point decrease in G&A. The 70 basis point improvement in gross margin to 63.3% was driven by pricing associated with product innovation and comparison against the prior year closeout of our entry-level Classic Series beds, partially offset by deleverage from lower mattress unit volume.

Turning to first quarter expenses, we were deliberate about how we adjusted costs as we began to experience pressure on sales. Our objective was to reduce discretionary expenses, while maintaining focus on our 2 investment priorities for 2013, product innovation and infrastructure, including distribution and systems to support our customer growth strategy.

The 200 basis point increase in sales and marketing expenses included a 40 basis point increase in selling expenses and a 160 basis point increase in marketing expenses. Selling expenses included $5 million or 210 basis points of increased fixed compensation, occupancy and depreciation cost, primarily associated with our new relocated and remodeled stores. The marketing deleverage was primarily due to the media ineffectiveness we've discussed. Media spending in the quarter was $38 million or 14.7% of sales, compared to $35 million or 13.4% of sales in the prior year. We expect media, as a percent of sales, to be between 13.5% and 14% for the remainder of the year. We also incurred $8 million less in media and fixed sales and marketing expenses versus our plan as part of our cost-reduction initiatives.

The 20 basis point leverage in G&A reflected lower performance-based compensation, partially offset by investments in infrastructure, including depreciation associated with growth-related capital spending. As part of our cost-reduction efforts, we incurred $1.5 million less discretionary G&A versus our plan. The 50 basis point increase in R&D reflected our sustained focus on product innovation, and we expect similar levels of R&D investment through 2013.

Moving to the balance sheet, we ended the quarter with $181 million of cash and securities, up $4 million from year end, which reflected operating cash flow of $45 million, offset by self-funded CapEx of $14 million, strategic investments of $17 million and stock repurchases of $10 million, and we retained a strong working capital position with our advantaged business model.

Now to our 2013 outlook. We currently expect full year EPS in the range of $1.30 to $1.45 versus 2012 adjusted EPS of $1.43 and versus prior guidance of $1.65 to $1.80. Roughly half of the decrease from prior guidance is associated with first quarter underperformance versus our plan. The remaining half is in the second and third quarters. We believe the media buying issue won't be fully resolved until after our Memorial Day event and quarter end, and we are taking a conservative approach to the third quarter against the backdrop of slower industry trends. As stated at the start of the year, we also expect second quarter's year-over-year EPS performance to be lower than other quarters as we continue investing in product innovation and infrastructure during the seasonally lowest quarter.

As Shelly stated, our guidance assumes low-to-mid single digit comps for the balance of the year, including a negative comp in the second quarter and high single-digit comps in the second half. As always, we build into our outlook variables that are known and proven. To that end, we have not assumed any significant positive impact from product innovation, such as the new DualTemp product being unveiled today or additional introductions planned this year.

Given the important role distribution plays within our customer growth strategy and the returns we are achieving on our investments, we are reconfirming our store count guidance of between 435 and 445 stores by year end. We expect the majority of this year's 25 to 35 net store additions to occur during the third and fourth quarters. We also expect approximately 70% of our stores will have our productive experiential design by year end.

For full year 2013, we expect operating margin deleverage, primarily driven by sales and marketing expense deleverage to approximately 45% of sales as we continue to invest in new relocated and remodeled stores and R&D investments associated with 2013 to 2014 new product introductions. This should be partially offset by modest gross margin improvement and modest G&A leverage. Our 2013 guidance also assumes a tax rate of 35%. Later this year, we will reassess the timeframe for achieving our long-term financial targets of at least $1.5 billion of sales and 15% operating margin. We look forward to communicating our updated timeline at a future date.

I'll close with a few words about cash. We ended the quarter with $181 million in cash and securities with no debt on our balance sheet, and we expect to end the year with a cash and securities balance that is well above our stated minimum level. Our capital allocation strategy in 2013 will continue to prioritize investments in our growth. We expect 2013 CapEx of $70 million to $80 million, including new stores, relocations and remodels, technology as we continue to update and enhance our customer information systems and infrastructure needs associated with product innovation. We also are continuing to repurchase shares, with the objective of maintaining share count at or slightly below current levels. And we expect our balance sheet to remain debt-free in 2013.

I'll now turn it back over to Shelly for final comments.

Shelly R. Ibach

Thanks, Wendy. Our differentiated business model offers significant competitive advantages, including proprietary products. We are the leaders in adjustability, with 25 years of refining air quality and functionality. Exclusive distribution; we control an extraordinary retail experience, including pricing and innovation. Vertical integration, which gives us control of every brand touch point and allows us to build life-long relationships with our customers. We remain committed to our customer-focused growth strategy and are early in our growth journey, with just over 5% market share. We have a strong financial position, with cash and securities of $181 million, no debt and a track record of fiscal responsibility. We are confident in our recovery, and we look forward to updating you about our progress during the next earnings call.

In closing, I would like to acknowledge and thank our Sleep Number brand ambassadors and outside partners for an important milestone we achieved this past weekend. We've now improved the lives of more than 8 million people with our revolutionary Sleep Number bed.

Thank you for your attention. Angie, would you please open the line for questions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jessica Schoen.

Jessica Schoen - Barclays Capital, Research Division

Company is Barclays. I was wondering on the guidance you have for the rest of the year, the low-to-mid single digit comp, you mentioned that -- the context of a softer industry. And I was wondering if you could maybe give us some color as to how much that played into the performance in the first quarter relative to the impact from the media buys?

Shelly R. Ibach

We focused on the first quarter on what we can control. And when we look at the quarter, we have clear evidence of our media challenge, which had a significant impact. There may be some industry softness underneath that, but we're focused on the part that we know and can control for sure.

Jessica Schoen - Barclays Capital, Research Division

Is there anything in particular that you would call out that gives you reason to believe that the industry will continue to be soft in the rest of the year?

Wendy L. Schoppert

Well, I'll provide a couple of data points from -- I'm sure you've seen from ISPA. For the last 3 months, December to February, ISPA sales were down 4%. In addition, as you may know, ISPA recently cut its 2013 outlook for mattress sale, cut it in half from 6.3% to 3%. So we were cognizant of that as we created our outlook for the back half of the year.

Jessica Schoen - Barclays Capital, Research Division

Okay. And then just one last one on the aggressive growth markets. I was wondering if, do you have the same media buy -- were those markets also impacted by the same change in the media buy strategy that the rest of the company saw?

Shelly R. Ibach

Yes, they were also impacted.

Operator

Peter Keith.

Peter J. Keith - Piper Jaffray Companies, Research Division

It's Piper Jaffray. I was hoping you guys could provide some concrete examples on the media buying. Maybe where you made the missteps in Q1 with shifting some of the buying and then where that's being shifted back to because I think there's a lot of investor confusion out there. So maybe some more specific examples would give some people some comfort on how might -- things might be getting better.

Shelly R. Ibach

Sure. The fact is, we did not execute our media strategy and formula that we have proven over these past few years. So we had many moving parts. I'd somewhat call it the perfect storm. We transitioned multiple agency buys to a new large agency. And at the same time, we moved our in-house media planning to the same agency. Frankly, we moved too much too quickly, and we lost the day-to-day visibility during the transition; we did not have the appropriate management oversight. It involved all aspects of our media buying formula, so the changes impacted media type, as well as weight, as well as the spend. So for example, our hard-working national, which we really introduced in 2010 and have refined over many quarters was under-bought by 30%, and that had a significant impact on our business. So since then, we have taken quick and decisive action to correct the situation, including getting back on formula, and we have moved our national buying back to a prior agency that has proven ability to execute consistently and effectively on this important portion of our buy.

Peter J. Keith - Piper Jaffray Companies, Research Division

Okay. So that's...

Shelly R. Ibach

Go ahead.

Peter J. Keith - Piper Jaffray Companies, Research Division

That's interesting. So I guess when you're talking about your national was under bought by 30%, is that just your national TV commercials were in a sense down 30% overall for the quarter?

Shelly R. Ibach

Not speaking for the exact quarter. The buy was initially placed with a down 30% on national. And this of course was -- became very apparent at the beginning of the President's mattress shopping event, which started with the beginning of February. And we reacted very quickly, but we were -- and we did -- went back in to rebuy and start to build that up, but with all the pieces and parts and the lead times and with all the other components not being on track, it was chasing the media formula, and it really in fact is not until here in the second quarter that we're back on formula, so we expect to see the results of being back on formula for our upcoming market share event.

Peter J. Keith - Piper Jaffray Companies, Research Division

Okay. And then I guess I know you don't want to talk about the near term trends, and it sounds like Q2 will still be pretty challenged. But have you begun to see any improvement on the top line or on the traffic trends as you've shifted back at this point or something that gives you confidence in that improving trend from the media strategy?

Shelly R. Ibach

We have. And as I said in my comments, it's slow and steady, and it's what we would expect based on the time period that it has taken us to get on track. And obviously, we cut some media spending in this transition too, not wanting to spend the dollars until we were fully on formula. So it's a combination of all the issues coming together as we resolve. That's why we have confidence in the upcoming market share event to be back on the formula. So we have been seeing the improvements that we hoped we would at this particular point and as each week unfolds, in both our leads and sales.

Operator

John Baugh.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Stifel, Nicolaus. I was wondering if there were any other changes other than going back to, I guess, one of the agencies you were buying. In other words, are you happy with the agency, the work they've done on both the creative and confident that they can buy the rest of the media or is there a change in thought process given the events?

Shelly R. Ibach

Yes, on a couple of things. First of all, the media buying is different than the creative agency for us. And so my comments have really been around the media buying and the consolidation from multiple agencies to one large agency in media buying. As I stated, we have moved a portion, about 35% of the media buying to a former agency just to mitigate the risk and to ensure and have confidence and to have this most important portion back on formula with the agency who's been buying it for the last 10 years. The newer larger agency is in charge of the planning, as well as the rest of the buy. And we have always, the planning has always been done internally for us. And so, we have started that planning again internally. So we're really dual-passing our planning to be very iterative and slow and have the inspection mechanisms in place, all the operating mechanisms that we did not have ample coverage of to begin with. And so we're being very careful as we work through and progress our business together.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

And Shelly, I understand the impact, the lingering impact of what transpired in Q1, but has the media buying and the programs you're on and all these things more or less been fixed by April 1? Or is there commitments to certain media strategies that don't expire until end of April or May or help us with that.

Shelly R. Ibach

You bet. Well, that's part of what was so frustrating in the first quarter, John, because we had visibility to this issue and were very quick to identify the root cause, but there were many media tactics that we could not get out of fast enough. But as of April 1, we were able to get out of all of those lingering issues in the media that we were not confident and certainly that had not been proven. So we are there as of the second quarter buy. However, as I stated and you acknowledged, there is a lag time to build back the base of the business and the awareness to be able to get back to our proven formula results. And with...

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

And 2 last ones, really quick. What are you referencing when you say market share event, number one? And number two, I haven't looked at the video yet of the new product, but is that a layer that can go on top of all your beds or a mattress? Any clarity there.

Shelly R. Ibach

Sure. Thank you, John. First of all, market share event. The first quarter market share event was the President's event and here in the second quarter, we have the Memorial Day coming up, and that would be the next market share event. Regarding the DualTemp layer, yes, indeed it is a bed -- or a layer that will go on any and all beds, can be purchased for all -- use with all beds.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

And when does that roll out?

Shelly R. Ibach

Our national launch will be in June, and we have an insider launch. We call our Sleep Number owners insiders, and we have a private launch for them. So it will be in store in May.

Operator

Budd Bugatch.

Chad Bolen

It's actually Chad Bolen from Raymond James pinch hitting for Budd tonight. I guess first question for me, ASP was up very nicely year-over-year, but I noticed that it was down, I think about 4% sequentially, which may be the first time I've seen that in a while. Can you give us a color on what you saw sequentially in ASP and what were the big moving parts there?

Wendy L. Schoppert

Yes, our ASP for our company-controlled channels was up 14% in Q1 versus 16% in Q4. And as Shelly referenced, our ASP growth is driven by our product innovation programs. And in Q1, we continued to see strong results from our FlexFit adjustable base attach, as well as mix in pricing, as well as bedding collection. There was not a significant sequential difference.

Chad Bolen

Okay, fair enough. And I guess if the ASP kind of continues to hover around where it was in Q1, you have some pretty stiff prior year comparisons that you'll be going up against, I think really especially in Q3 and beyond. At the same time, your comp guidance assumes that you get back to positive high-single digits. So I guess given some tougher ASP comparisons, how do we get comport with how you get to that high-single digits in the back half of the year?

Wendy L. Schoppert

Well, as we communicated at the start of the year, we anticipated that ASP would be a larger growth driver for -- or sorry, less of a growth driver for the balance of the year, and we expect it up more mid-single digits as we begin to lap some of the drivers of that last year, like the adjustable attach and pricing. But I'll point out that this could be offset by additional innovation in the form of DualTemp. We're not building that into our outlook at this point. And just a reminder that DualTemp is a great example of an ASP driver for us because it's not -- we don't consider it a mattress unit. So that will show up in ASP for us this year.

Chad Bolen

Okay. And I guess you guys seem to be very adamant that the media issue was really the primary driver of the negative comp in the quarter. I guess it makes perfect sense that it's going to take a little while to -- that there's a lag time between the changes that you've made and the improvement that you'd expect to see in traffic and sales, but I guess what gives you the confidence that the lower sales and traffic wasn't in part at least due to something else like a more intense competitive environment or product or execution in some other respect?

Shelly R. Ibach

Yes, a couple of things. First of all, the media formula directly impacts our awareness, and we could see in our ad awareness very clearly the correlation going on here, along with all of our other metrics that we closely monitor our media buying with. Also we do have 3 parts of the business that are not impacted by our media and our events, our wholesale and our repeat business, which are all really driven by other tactics other than our media formula. And they all exceeded plan and grew greater than 20% over prior year, which is very consistent with how we would have expected them to perform in the first quarter. And then finally, our sales execution remained solid as evidenced by our consistent conversion rates, as well as our ASP growth in the quarter and our Net Promoter Score overall with customer engagement.

Chad Bolen

Okay. And last question for me. There was a fairly significant jump in accounts payable days in the quarter. Could you give us a little color on kind of what drove that? And I guess should we expect that to revert to a more normalized level for the balance of the year in 2Q?

Wendy L. Schoppert

Sure. There were 2 key drivers to the increase in accounts payable, Chad. One was we had some improved terms with some of our key vendors. And secondly, second driver is related to increased business activity; specifically, the fact that our CapEx is higher year-over-year. Now within -- in terms of the remainder of the year, yes, there may be some similar increase, again, because of those continued drivers.

Operator

Keith Hughes.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

It's Keith Hughes from SunTrust. A couple questions. I guess first, with the national ad buy down as much as you had referenced earlier, I always considered those ads more brand building versus week in, week out driving traffic, and so I'm so surprised it slowed down so much. Can you sort of speak to why you think that impact occurred and is my assumption correct?

Shelly R. Ibach

Yes, for us, all of our advertising is very much focused on both brand awareness, as well as driving traffic. Being an exclusive -- having the exclusive distribution means that we need to not only make people aware of the product, but drive to store. So we tag all of our spots and have a compelling value urgency strategy, so it is our -- we call it internally actually our promotional advertising, and it is focused on driving traffic and has been effective that way, particularly when we went to broad reach a few years ago.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

And the rapid decline associated with that, is it literally the national ads didn't drive enough traffic to the stores that it slowed down in this case?

Shelly R. Ibach

Absolutely.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

That's it, okay. What were the units in the quarter, the unit change in the quarter?

Shelly R. Ibach

Yes, the units were down 15%, which I think is a great example of the impact of awareness on the unit growth. And we were also up against a closeout of the Classic Series a year ago, so we did have significant unit growth at that time.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Okay, final question. How many non-mall stores did you end the first quarter with?

Shelly R. Ibach

It was about...

Wendy L. Schoppert

At the end of the first quarter, 21% of our stores were in the non-mall format.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

That's about 87?

Wendy L. Schoppert

It was 87. You're correct.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

87, okay.

Operator

Brad Thomas.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Brad Thomas with KeyBanc, and wanted to just ask kind of another big picture question here. Obviously, there were marketing issues during the quarter that we've talked about at length. But if we do continue to see some softness in comps, perhaps that's related to the industry or competitive landscape, what are the potential levers in your business that you think you might pull, whether it's something different on the marketing side or the spending side. What would be the next arrows in your quiver, if you will, that you could look to?

Shelly R. Ibach

Yes. Well, there's no doubt about it, Brad, that number one is the media formula and utilizing the media formula to drive our awareness and traffic as it so successfully has done for many quarters now. That's where our time and attention is focused. In addition, we've continued to advance some work on our creative advertising. That's another one that is very important from a persuasion and traffic-driving perspective. Next would be our exclusive distribution and the advancements we're making this year. We are now -- in the back half of the year, you'll see net store growth to the degree that we haven't had in the past for many, many years. And we do see this as a source of unit growth as we move forward. And then finally, the product innovation. The product innovation is the third big anchor of our growth formula and one that we're just now starting to tap. And we've had some successful product introductions here over the last 18 months to 2 years to a fairly small degree, upgrading certain aspects of our current beds, et cetera, but we're now getting into some significant product innovation that will drive, not only ASP, but we think will be a source of traffic.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Okay, great. And then just with respect to growing stores again, I think this is now the second consecutive quarter where your store growth was up about 8% from prior year, what are you seeing in the markets where you're starting to do a little bit more of the fill in? Are we starting to get a drag from cannibalization and just any update on that impact of growth would be helpful.

Wendy L. Schoppert

Yes, and the store growth is really very important to us as we're building out our national footprint with only -- just over 400 stores. From a performance standpoint, Brad, as we mentioned, our new stores are averaging $2 million in year 1 with minimal cannibalization. As we've shared in the past, less than 15%, very much on target with our expectation. Year 2 of our new stores are also comping favorably. They're actually comping better than the balance of chain, and we saw that in Q1, consistent with our trend.

Shelly R. Ibach

And then, Brad, looking at those specific markets as we fill in store count, it's actually efficient for us because we are national, as Wendy said, and we're underdeveloped. As we layer in the stores, we do not need to spend more media each time we add a store because we're already supporting the nation and the local markets. And so it is a source of efficiency for us as we move forward too.

Operator

David MacGregor.

Joshua Borstein - Longbow Research LLC

This is Josh Borstein in for David MacGregor of Longbow Research. Do you get the sense that as more of your mix switches to the off-mall locations that you're leaving perhaps some mall traffic behind and that may require some more ad dollars to generate the same amount of traffic for you?

Shelly R. Ibach

No, we are not seeing that. And we have quite a few variations of markets out there. We have a couple markets where we're all non-mall, many markets where we've moved from mall to non-mall. And in fact, we are not seeing any indicators of that.

Joshua Borstein - Longbow Research LLC

Okay. And does your media strategy, does it have to change or has it changed at all to account for that change in mix between mall and off-mall?

Shelly R. Ibach

It has not. What we believe is that the non-malls are contributing positively to our awareness. We have a low store awareness, and we've continued to see improvement in our store awareness. We tie some of that to how we're executing our media, but we also tie some of it to the non-mall, and we can see that in specific markets.

Joshua Borstein - Longbow Research LLC

Okay. And then in relation to the new product launch here in 2Q, is the investment that you recently made in Comfortaire, in the product development company and any products that might come out of those investments, are those incremental to this dual layer product that's coming out here in 2Q?

Shelly R. Ibach

Yes, they are.

Joshua Borstein - Longbow Research LLC

Okay. And just a last one from me. I've come across some news articles a while ago about Sleep Number negotiating some leases in and around New York City. Can you discuss all your plans to move into the New York market, if at all?

Shelly R. Ibach

We have presence today in the New York market in a very small way. So it is one of those great examples of being under-stored and underdeveloped with a lot of growth potential left. And you can see how media could be much more efficient with more stores in a market like New York.

Operator

Todd Schwartzman.

Todd A. Schwartzman - Sidoti & Company, LLC

Sidoti & Company. A quick question on the guidance, citing partly the slowing industry trends for the reduced guidance. Could you speak to the components of that? Whether it primarily is this forecast or is it the comps that you're facing, that the industry faces? Any color on that would be greatly appreciated.

Shelly R. Ibach

Yes. I'll just start, Todd, with we are coming off this issue in Q1 that we're still correcting in Q2. So we know that Q2 is still not going to be up to our prior expectations and that combined with the reported slower trends that ISPA has spoken of for the remainder of the year, we took a conservative approach to the back half.

Todd A. Schwartzman - Sidoti & Company, LLC

Okay, so it really is primarily the media buying issue, correct?

Shelly R. Ibach

Yes. Yes, it is.

Todd A. Schwartzman - Sidoti & Company, LLC

Okay. On that front, I don't want to beat a dead horse, but just trying to get a sense of culpability, responsibility, did your newer ad agency or your lead agency unilaterally make purchase decisions that you guys did not authorize?

Shelly R. Ibach

As I said, we moved too much too quickly and lost day-to-day visibility during the transition, and we did not have appropriate management oversight. And specifically to that end, one of the key actions that we have taken is, not only tightening the operating mechanism, but strengthening the leadership and oversight. And so we have a stronger internal structure to support the media. We have dual-passed our planning with the agency, working much closer with the agency in collaborating each and every day with our shared operating mechanism and brought back a former media consultant who I worked with in the past in building this media formula. And we strengthened our internal team with the departure of our CMO and my direct involvement with the media team and oversight.

Todd A. Schwartzman - Sidoti & Company, LLC

Okay. Wanted to follow up on a question I think Keith asked. In the past couple of years, how immediate was the benefit, the payoff on your advertising effort? Is this something that you've tracked?

Shelly R. Ibach

Yes, we have a fairly immediate response from our media, particularly in the mattress market share events, the large events like the President's event.

Todd A. Schwartzman - Sidoti & Company, LLC

And with that in mind, is it difficult to kind of allocate to what extent maybe you should have or typically did benefit in the past from the cumulative effect of successful ads of prior quarters' marketing efforts?

Shelly R. Ibach

Can you repeat your question? I'm sorry, I'm not sure…

Todd A. Schwartzman - Sidoti & Company, LLC

Sure. Sure. You get immediate impact, the payoff on a current quarter ad, but ads are, in theory, running nationally throughout the quarter. So folks that are purchasing Sleep Number in the first couple of days or week of the quarter may be responding more to cumulative aggregate goodwill built up by the effective ads that you've placed in Q4 of '12 or earlier in 2012. Just trying to get a sense of how important that current quarter advertising is with respect to that same quarter's delivered sales?

Shelly R. Ibach

No, I believe I understand what you're asking, and it is exactly why we call it a formula. Media buying -- and we've had this down to such a science, which is part of the reason why it's so frustrating that -- and I'm so disappointed that this has happened, particularly on my watch when it's such a formula for us, and we have refined it so carefully over these last few years because it's all of those things. It is a combination, and that's part of the reason why it's taking time. And the minute that – I was very clear on the issue right at the start of the President's event and could tell right then and there that okay, this is going to take until mid-second quarter to resolve for the reasons you're stating because it is a combination, yes.

Todd A. Schwartzman - Sidoti & Company, LLC

Okay. And lastly, I had not looked at the website for the info on the DualTemp layer, but just real quickly, how does that attach or fix to a generic mattress?

Shelly R. Ibach

You will be able to see that when you look at the interactive link. It's on the right side of the page and it actually lays right on a regular mattress.

Todd A. Schwartzman - Sidoti & Company, LLC

Okay, so there's no fastening. There's no real work required by the consumer?

Shelly R. Ibach

No. It's very simple and intuitive, and you will want to own it. It's fabulous.

Operator

[Operator Instructions] Joan Storms.

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

Wedbush Securities. On marketing, what's the longer-term picture once you return to your formula? Do you intend to hire another senior marketing person? Or Shelly, will you stay involved as part of that oversight process? What's the longer-term picture once we get out through the third quarter or into 2014, if you can talk about that at all?

Shelly R. Ibach

You bet. Well, Joan, I will stay involved. This is such a critical area of our business, and we are in search right now for a Chief Marketing Officer and are looking for an experienced marketing leader who has a track record of executing consumer-focused strategies, and we have a business, this vertically integrated model, where as a senior team, we are integrated and accountable to one another and we all run the same business together. And so we can't help but be involved with one another. And this is definitely an area of expertise for me and an area that I've been so heavily involved in since I joined the company in 2007. And quite frankly, stepped away from a little too much in this last transition and I will stay involved in an appropriate way that's additive and close enough to certainly not repeat what we just experienced or anything like it.

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

And you talked or mentioned a little bit about on the creative side of the advertising, what are your plans there? I mean, the newer commercials have been, I think, very effective with selling the Sleep Number brand in the stores and the customer-centricity, can you give us any hint what you might want to add there?

Shelly R. Ibach

Yes, we've been doing some iterations on our creative and have recently made some informed changes with some testing that we feel very strongly, well, the results tell us very strongly that they're more -- even more effective than where we are now. And so we're anxious to get them up and running as well. And we'll hear in the second quarter.

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

Okay, and then...

Shelly R. Ibach

And then continue it -- and continue to advance from there, especially with the product innovation that we're introducing.

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

Okay. And then on the -- you had talked about, while you can return to some of the old reiterations of the formula, you still lost some, you're still playing catch-up on the lead time, how does that work?

Shelly R. Ibach

Yes, we are. And that's why we've taken the second quarter for rebuilding our lead base and being back in full functioning mode, and we'll see the clarity. We believe we'll see the clarity of the various actions for the upcoming market share event.

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

Okay. So for Labor Day, potentially maybe you'll be caught up there and things will be sort of back on...

Shelly R. Ibach

Yes, we expect to be, Joan, by -- certainly by mid-second quarter. We've given ourselves second quarter, and expect to be back rolling here in the third quarter.

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

Okay. And then, Wendy, just to -- I missed the number that you gave on the G&A cut because you're obviously, you're not going -- the G&A is not going to stay down year-over-year for the whole year, so what can we anticipate there?

Wendy L. Schoppert

So what I shared is, we've been very disciplined about our discretionary expenses. And in the first quarter, our discretionary G&A was $1.5 million less than what we had planned. Now as we go forward, we -- I said I expect modest G&A leverage for the full year.

Operator

At this time, I'd like to hand the call back over to the company for closing remarks.

Dave Schwantes

If there are no further questions at this time, we will conclude the call. Thank you again for joining us today. We look forward to discussing our second quarter 2013 performance with you in mid-July. Thank you.

Operator

Thank you. That does conclude today's conference. Thank you for your participation. You may now disconnect from the audio portion.

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