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Executives

Mark Kimball – Senior Vice President, General Council

William McLaughlin – President, Chief Executive Officer

James Rabbe – Senior Vice President, Chief Financial Officer

Analysts

Budd Bugatch – Raymond James

John Baugh – Stifel Nicolaus

Bradley Thomas – Keybanc Capital Markets

Joan Storms – Wedbush Morgan Securities

Joel Havard – Hilliard Lyons

Evan for Anthony Gikas – Piper Jaffray

Select Comfort Corporation (SCSS) Q4 2009 Earnings Call February 10, 2010 5:00 PM ET

Operator

Welcome to the Select Comfort Corporation’s fourth quarter 2009 earnings conference call. (Operator Instructions) I would now like to introduce Mr. Mark Kimball, General Council.

Mark Kimball

Good afternoon and welcome to Select Comfort fourth quarter and year end 2009 earnings conference call. Thank you all for joining us. I’m Mark Kimball, Senior Vice President and General Council. With me on the call today are Bill McLaughlin, our President and Chief Executive Officer and Jim Rabbe, our Senior Vice President and Chief Financial Officer.

In a moment I’ll turn the call over to Bill. Following our prepared remarks, we will open the call to your questions. Please be advised this telephone conference is being recorded and will be available by telephone replay. It will also be archived on our website at selectcomfort.com.

Please refer to the details set forth in our news release to access the replay on our website.

Please also refer to our news release for a reconciliation of certain non-GAAP financial measures included in the release or that may be discussed on this call. The primary purpose of this call is to discuss the results of 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 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 Bill for his comments.

William McLaughlin

Good afternoon and than you for your time and interest in Select Comfort. As you can see from today’s news release the quality of our fourth quarter achievements represent a fitting end to a remarkable year and a new base upon which to project an exciting future.

Without a doubt 2009 was a year of significant challenge and substantial progress at Select Comfort. Specifically, costs were restructured allowing us to be profitable on lower sales. New messaging around the Sleep Number brand’s uniqueness and value was developed which restored consistent growth in units, revenue and share. And, we addressed our capital structure for increased flexibility and business continuity.

Not only do our fourth quarter results demonstrate the progress that we’ve made against these strategic priorities but they also underscore the significant leverage that exists in our business. In the fourth quarter total company revenue was up 4% versus prior year, and increased 9% when adjusted for the incremental week in last year’s quarter.

This sales growth was achieved with 14% fewer company owned stores and approximately 700 fewer wholesale partner doors as we repositioned our distribution to our core strength. On a same store basis, revenue increased 23% and units were up more than 22%. This strong performance built upon third quarter same store revenue comps of 9%.

Margins improved due to our restructuring efforts. Gross margin was 62.9%, up 700 basis points versus prior year and cash from operations in the quarter was $14 million, and we raised $26 million in equity financing. This completed a year long effort to strengthen our balance sheet and improve our capital structure.

Within the context of a more restrictive credit environment, we successfully paid off close to $80 million in debt and ended the year debt free with a positive cash balance.

In 2009 we established a base of learning to build upon in 2010 for continued profit improvement and preparation for growth. Specifically, as it relates to the brand, we proved the importance and the power of our core brand message, media and distribution strategies.

The Sleep Number brand has a distinct competitive advantage that consumers find important; the ability to experience truly individualized comfort. Sleep Number beds are uniquely designed and clinically proven to provide people with better, pain free sleep that is personalized to meet each individual’s unique needs.

Also important to today’s consumer is value which we stressed in 2009, re-launching our entire bed line and adopting new promotional strategies in an effort to help our customers to understand the affordability of our products.

As we refined the message, we also took steady and more efficient approach to our media plan, consistently supporting consumer awareness throughout the year with incremental spending around key consumer shopping periods emphasizing value and urgency.

Lastly, we focused on our company owned distribution channels. Select Comfort sales professionals are best able to demonstrate the unique value of our products to consumers. We also reset the density and spacing our stores within markets to drive higher same store sales, profits, productivity while reducing capital deployed.

Next, we re-established the leverage potential of our business model both in margin and in cash. In 2009 we realigned our distribution to the most productive core. In doing so, we demonstrated the ability to drive significantly higher sales at existing stores, increasing average annual sales per store to just over $1 million, still with room to grow and surpass our historic sales productivity peak of $1.500 million per store.

Also pertaining to leverage, we were careful to preserve infrastructure and capacity to grow as we restructured in 2009. We believe we are now positioned to achieve margins above historic levels in the next several years.

And finally, we improved our capital structure and our intention is to further strengthen it in the coming year.

As we look ahead to 2010 we believe the environment remains uncertain particularly in the second half of the year. While January sales have continued the strong momentum we saw in the fourth quarter, we are being careful not to get out in front of ourselves in our plans for 2010.

Our preference in this environment is to spend behind proven growth, taking advantage of our business model’s responsiveness to capitalize on new opportunities as they are identified. If the economy demonstrates sustained recovery and/or if our programs perform above our plans, then there is upside potential for this outlook.

With this backdrop, we have three primary areas of focus in 2010. The first is to accelerate profitable growth and improved consistency of performance. As I stated, we will build upon the success and learning’s of 2009 with continued emphasis on optimizing our message, our media and our sales channels.

Second, we are focused on delivering a new standard for individualized customer experience in our industry. Our current level of customer satisfaction and referral is strong. We do though, believe we can go further because of our unique product and integrated business model from product design and performance to customer insight and each owner’s lifetime experience with our company, we have unique advantages and opportunities and we are committed to making them even better.

By doing so, we will ensure more consistent and powerful growth and even greater share in the years to come.

And third is to further strengthen our financial position, increasing our cash balance and remaining debt free.

To summarize, 2010 marks a new beginning for Select Comfort. We have taken valuable learning’s from the past and applied them to drive growth into the future. We are well positioned to increase profit performance under today’s uncertain market conditions and are also ready to capitalize on market recovery whenever it takes place.

Now, I’ll turn the call over to Jim who will provide additional perspective about the economics of our business model and on our outlook for next year.

James Rabbe

Thank Bill. As Bill noted, we’re very pleased with our results which demonstrate continued improvement in sales, profits, cash and balance sheet strength and flexibility.

We’re reported both GAAP and adjusted earnings numbers for 2008 and 2009. The adjusted numbers normalized our results by excluding items specific to the economic crisis and our turnaround.

We believe that the adjusted numbers are the best starting point for evaluating our progress from 2008 to 2009 as well as setting a base line for how to assess our performance going forward.

On an adjusted basis, we reported 2009 fourth quarter earnings of $0.08 per share as compared to a net loss of $0.26 per share in 2008. For the year, adjusted earnings were $0.25 per share compared to a net loss of $0.51 last year.

Two notes about our financial results that I would add to Bill’s highlights; first, one of our most significant accomplishments is the return to sustainable cash generation with EBITDA in the year totaling $42 million.

As per our credit agreement, EBITDA is equal to net operating profit plus all non cash charges including depreciation, amortization, non cash compensation and asset impairment. While a number of actions contributed to the elimination of $80 million in borrowings over the last 12 months, our ability to return to solid EBITDA performance demonstrates we can generate the cash necessary to fund future growth without additional external financing.

Second, the actions we took during the past 12 months effectively reset our core business. Our fourth quarter financial results are largely representative of our cost structure going forward and provide the base line against which we expect to improve margins.

One item that is not representative is a $1.6 million charge for contingent liabilities which were accrued in the fourth quarter.

From a distribution standpoint, we have realigned our store base and eliminated our resell partner program in markets with retail stores to improve productivity of our stores. From a product standpoint, our supply chain is operating efficiently with gross margins at sustainable levels.

While we’ve eliminated a significant amount of cost during the past 12 months, our business model has the flexibility and available capacity to grow and requires only minimal cost additions as sales increase.

Our manufacturing process is largely variable with 10% of cost of goods fixed. This model allows us to maintain gross margins in a high range and while the low cost base does not provide significant gross margin leverage with growth, we have consistently delivered lower cost of goods and higher gross margins by controlling the supply chain from product design to customer delivery and by working closely with our supply partners.

Further, while oil is our largest commodity input, the impact of changes in oil prices has not been significant despite the volatility of oil costs in recent years.

The remainder of our cost structure is largely fixed or discretionary and does offer leverage with growth. Variable selling and marketing costs represent 12% of sales. Unlike most retailers, our stores are showrooms and we have relatively low transaction volumes, so increases in sales do not require proportionate increases in inventory or staffing.

Overall, we normally see a variable margin flow through of more than 50% on incremental changes in sales. The offset against this margin in expansion is investment in media and growth in the store base. Media is a discretionary item but we manage it as a variable cost equal to 12% of sales.

The bottom line is that we believe we can flow through 30% of incremental sales on a near term and long term basis inclusive of store growth and increases in media investment.

For 2010 our focus is on improving operating margins and earnings per share while assuming a difficult economic environment. Our goal is to improve EPS on an adjusted basis by 30% to 50% to between $0.32 and $0.38 per diluted share.

From a sales perspective, our visibility to longer term sales trends remains limited, so we have taken what we feel is a prudent approach to planning for 2010. As a starting point, our base line for sales from 2009 is $509 million which excludes the annualized impact of store closures and retail partner termination.

From there we expect to grow our business primarily through positive same store growth throughout the year.

Early 2010 sales trends have been encouraging although comparisons get more difficult as the year progresses. We expect to improve profitability assuming this outlook on sales while positioning our business for profit leverage should sales growth be more robust.

We plan to increase operating margins by more than 150 basis points as compared to 2009 as adjusted margins even if sales were to be slightly less than in 2009. Gross margins in2010 should be in line or slightly higher as compared to 2009 and we will lower our sales marketing and G&A expenses as a percentage of sales.

2010 results will benefit from the animalization of 2009 cost restructuring while we generate additional productivity by continuing to rationalize our store base around larger trade areas. Media spend will be slightly higher than a year ago and we are prepared to further increase media investment as sales and macro economic conditions dictate.

A few additional data points that may be helpful for those modeling our business; first interest costs are projected at $2.5 million on little or no debt as we amortize costs under our existing credit facility.

Second, we expect an income tax rate will approximate 38% and finally our share count for EPS purposes will be approximately 56 million shares.

Admittedly, others in the industry are predicting a more robust recovery, particularly for mattresses. We hope their predictions are correct and we’re prepared to take advantage of that recovery whenever it occurs.

We are operating the business for the long run and are excited about our potential to exceed historical sales and margin levels as growth returns.

I’d now like to turn it back to Bill for final comments.

William McLaughlin

Thanks Jim. I think I speak for most of my colleagues when I say that 2009 was one of the toughest years in my career. However, it was also one of the most satisfying as we overcame many significant hurdles to get to where we are today and we wouldn’t have overcome these hurdles without the dedication of our employees, the cooperation of our suppliers and vendors and the support of our other partners.

Thank you. You all were absolutely essential to the tremendous success of 2009. And Select Comfort is well positioned for 2010 and beyond. We are committed to improving profitability in the near term, to enhancing our core competitive advantages for longer term growth and to continuing to strengthen our cash position.

More important, we are motivated to advance our mission to improve more people’s lives by increasing the number of people sleeping on our bed and benefiting from individualized comfort and better sleep.

Again, that you for your time and interest. We believe this is an opportune time for customers to learn about Select Comfort, given the power of the turnaround that we’re driving, the strength of our business model and the profit and cash flow that can result from even moderate increases in sales trends.

I’d now like to turn the call over to our operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Budd Bugatch – Raymond James.

Budd Bugatch – Raymond James

Congratulations on the turn around. It’s nice to see and nice to see the operating performance on the balance sheet, so congratulations on that.

You told us positive comps throughout the year. I know that as you get to the second half comparisons get more difficult. Can you give us a feel of where you think overall for the year and how that does progress for comps?

William McLaughlin

Sure, but we’re not providing specific same store growth guidance, but what I would say is that our goal and our expectation is to exceed market trends and market growth throughout the year. We do see the market a little bit more cautiously than I think some of the predictions are, but I think that we still are confident in the things that we’re doing and actually the performance that we’re seeing right now so that we’re confident that we can exceed those market trends.

Budd Bugatch – Raymond James

If we pin kind of mid single digit for the full year would that be kind of in the range of what your thinking would be for comps?

William McLaughlin

I think the market, if the numbers are at 7% or 8% like they said, we would say that maybe that’s a little bit aggressive but I think we think we can outperform whatever that market is.

Budd Bugatch – Raymond James

The numbers go from 2% to 7% if you look at various predictions that are out there from the media side. When you look at an average selling price per bed right now, what are we looking at? What did we come up with in the fourth quarter? How did that look?

William McLaughlin

We ran pretty consistently with where we were in the third quarter $1,755.

Budd Bugatch – Raymond James

I didn’t get that. Again, per bed?

William McLaughlin

Three month number in the release is $1,755.

Budd Bugatch – Raymond James

A couple of questions on tax to make sure I understand it. Right now the tax accounting will be normalized going forward at 38%. Is that what you’re telling us?

James Rabbe

That is correct.

Budd Bugatch – Raymond James

Are there any store closures planned going forward or have you got all of that done?

William McLaughlin

No, there will continue to be some store closures. We’re continuing to rationalize the store base and as much as anything I would say get the distribution in that store base correct on a market by market basis, which means there will be some store closures. There will be some store closures by the company, some store openings in some stronger retail locations.

I think our expectation for the year is that net we would end up in that 380 to 390 stores by the end of 2010.

Operator

Your next question comes from John Baugh – Stifel Nicolaus.

John Baugh – Stifel Nicolaus

I’ll add my congratulations as well. You mentioned a $1.6 million charge relating to continued liabilities accrued in Q4. What line item did that show up in and is that buried in the $0.08 as well? In other words it would have been higher than that if you exclude that?

James Rabbe

That is correct. The $1.6 million shows up in G&A expenses and we accrued contingent liabilities related to some supplier situations that we have, nothing that impacts us on a go forward basis, and that we’re fully reserved for now. But it is kind of exclusive to Q4 of ’09.

John Baugh – Stifel Nicolaus

So that would put you closer to $11.1 million in the G&A line. I recall the first quarter of ’09 had an outliner in it as well of $13.3 million of the year ago first quarter so are we looking at that G&A number in the $11 million to $11.5 million a quarter range or will it be higher than that? Where do bonuses fall, etc.

James Rabbe

It would be in that range, $11.5 million to $12 million roughly and bonuses fall into that number, but obviously bonuses can have an impact on quarterly and an annual basis depending on how the performance is overall all. But I think as a starting point that $11.5 million is a good number.

John Baugh – Stifel Nicolaus

Could you comment in the fourth quarter on the mix of what you saw going out the door? We see the average selling price so that looked very solid. Were you still discounting very aggressively at the high end? Just some flavor on what you did in the merchandising and discounting and promotion in Q4.

William McLaughlin

I’m going to back up and just talk about our value strategy for the year and I’ll bring it forward to the fourth quarter. We’ve understood that the consumer in this marketplace is very motivated by value and we understood at the beginning of the year that consumers did not understand the value that we offered in general. They thought we were a $3,000 to $4,000 bed product.

Early in the year about a year ago this month, we revised the whole product line, re-launched everything in the product line and renamed everything which allowed us to better communicate value, and then we accompanied that with a promotional strategy that allowed us to focus on the entry level price points but then have reasons for customers to move themselves up through the line.

That strategy really has not changed through the year, so in the fourth quarter we continued to promote about the same way as we had through the year with a strong entry offer and then some trade up offers as well.

John Baugh – Stifel Nicolaus

Is that more or less the strategy for the coming year? Will there be any major changes to that?

William McLaughlin

I think it will be an evolution of it but no major changes. It has been successful. We believe there are still a lot of consumers out there who will benefit from understanding the value of our products and as we move them into our stores they get the full selection of our offering. So yes that strategy will continue.

John Baugh – Stifel Nicolaus

If I calculated right, the media spend in the year just ended was around 11% or 11.2% of revenue. You mentioned you want to pick it up to the 12% number. Just confirm that I heard that correctly. And then what about the sales and marketing piece? You made a comment about that I think being lower as a percentage of revenue. If so, any color on how that can get leverage going forward particularly with a high first quarter of ’09 spend in that line item as well.

William McLaughlin

Media last year was closer to the 12% and that’s about where we’ll continue to peg it for the year to come. I think that the reference to sales and marketing was in Jim’s where the concept is that we will be particularly leveraging the selling costs as we drive same store growth on a lower store base.

James Rabbe

I would add to that, on the media side, in the first quarter in particular a year ago, the media rates were very favorable so we did get a little bit more benefit in the first quarter a year ago which now we’re lapping, but it was only a first quarter event. But that does take the percentage up a little bit this year.

John Baugh – Stifel Nicolaus

I hate comps but we’ve got to talk about them because everybody focuses on it and obviously the first thing it hinges on what happened in the year ago quarter and the quarters compare very differently the first half of this year versus the first half of last year compared to the second half. Any way to think in light of a 9 and a 23, you still had negative comps in the first and second quarter last year compared to the prior year, of how if you continued at the same rate if you will from where you were in December quarter and/or January, where that comp number would fall out on a year over year comparison.

William McLaughlin

I think it’s safe to say that to your point the comps are much easier in the first half of the year and therefore much easier to see a strong comp in the first half. As we said earlier, January in early 2010 trends have continued from what we saw in the fourth quarter so we are seeing a good strong continuation of sales trends into 2010.

It obviously gets a little bit more difficult to predict when you start lapping a little bit more difficult comps as we go through the year and then layering on top of that some of the uncertainties in the economic environment around interest rates and those types of things.

But I think you’re thinking about it the right way. We would expect to have a continuation of good strong comps but at a decreasing rate throughout the course of the year.

John Baugh – Stifel Nicolaus

Where were fully diluted shares outstanding at the end of the quarter.

James Rabbe

The fourth quarter number was about 51 million weighted average and then the actual shares outstanding at the end of the fourth quarter I think was like 53.9 million so it was right at about 54 million share count.

John Baugh – Stifel Nicolaus

Why did we go to 56 million?

James Rabbe

The 56 million is just the impact of the diluted effect of outstanding options under the Treasury method, so it’s going to be dependant on where the stock price falls out, but there will be some increment to that 54 million share base.

Operator

Your next question comes from Bradley Thomas – Keybanc Capital Markets.

Bradley Thomas – Keybanc Capital Markets

Let me add my congratulations as well. Nice job of turning things around this year. Bill, I just wanted to follow up on your point of focusing accelerating profitable growth this year. You alluded to your message, media opportunity and sales channels. Are there initiatives that are going to be really new and incremental or is this really a continuation of what we’ve seen over the past several quarters?

William McLaughlin

I would say it’s more of a continuation or evolution of the learning that we got from last year. We believe that we have the right message around the Sleep Number brand and its uniqueness, unique features and benefits. We do believe we can continue to improve upon that base though.

For example, we’re working on how to really leverage the store experience and the store locations more because as we get people interested in the product, we can do a more effective job I believe driving them to our stores.

Similarly our selling team has improved through the year and is doing a great job capitalizing on those inquiries that come to the store. So it is more of the same but with continuous improvement and evolution along that way both on creative and media.

Bradley Thomas – Keybanc Capital Markets

Just to follow up on sales trends with different price points, can you give us a bit of color on how the C versus the P versus the I line performed or are those kind of price points versus a year ago?

William McLaughlin

I think we’ve seen good strong performance across the product line. With a specific comparison to the fourth quarter a year ago, we were extremely aggressive at the entry level as we were developing this promotional strategy, so the mix was a little bit lighter a year ago than it is today.

As we’ve gone through the year, we’ve adjusted the promotional strategies to not only maximize the volume but also make sure we’re maximizing step up where appropriate to the higher price points and that’s a good part of the margin improvement that we’ve seen over the course of the year. But we really continue to see good strong reception across the product line.

Bradley Thomas – Keybanc Capital Markets

As we think about that average point, the $1,750 range do you have goals or thoughts about where that could go next year?

William McLaughlin

It’s been pretty consistent at that point for the last three quarters and we’re focused on driving gross margin dollars which in some cases will drive that price point down and at other times of the year will drive it up, but I think we feel pretty good about that average selling price generally speaking.

Bradley Thomas – Keybanc Capital Markets

You obviously alluded to gross profit dollars. I think you mentioned gross margin probably at sustainable levels as we look out to 2010. I think you still have another quarter or so of anniversarying some of the initiatives that you put into place to help drive gross margin improvement. Would you bias be perhaps there could be some upside here or do you think you would maybe take some savings, reinvest those and driving in more of the gross profit dollars?

Is that how we should think about things?

James Rabbe

I would think about for full year gross margin rate I would expect it to be a little bit better in 2010 than it is in 2009 for exactly reasons you’re speaking to which is first quarter margins were a little bit lower and we had not fully implemented all the things that we have now.

So we should see some improvement on a year over year basis in Q1, but sitting in that 62%, 62% plus range is where we’ve been running I think is kind of how we’re thinking about it at least for the near term.

Bradley Thomas – Keybanc Capital Markets

I think in your release your broke out it was $35 million in sales in ’09 from stores that were sales to retail partners. What’s the breakdown of the sales between the stores and the retail partners and what does that recapture rate look like between the different channels?

William McLaughlin

It’s about 60% stores, 40% retail partners for the year. Of that number, from a transfer standpoint, we continue to get of our retail stores in the range of 30% to 40% transfer of sales from those closed stores.

It’s a little bit difficult, more difficult to read on our retail partner basis because there is a much heavier number of stores that are out there and it’s just a lot harder to read. But our focus is trying to make sure that we capture at least those sales dollars and hopefully better, but it’s not a number that’s really easy for us to calibrate.

Bradley Thomas – Keybanc Capital Markets

You ended the year with very strong cash balance and it seems to be positioned to drive strong cash flow in 2010. What’s the cash level that you think you would feel comfortable with at which point you might think about other alternatives for your cash?

James Rabbe

I think our focus right now is continuing to increase that cash balance. It continues to be a difficult credit environment and our balance sheet isn’t necessarily suited well to the type of lending that’s out there right now, so our view is to continue to grow that cash balance. I would say that we’ve got at least another 12 months of cash growth before we really are in a position to answer that question specifically.

Operator

Your next question comes from Joan Storms – Wedbush Morgan Securities.

Joan Storms – Wedbush Morgan Securities

A question just on the sales and marketing efforts, obviously the media spend you’ve had pretty fixed but as your sales have come down that has adjusted as well, but what exactly and those numbers are down overall, so what exactly have you changed as far as what you’ve allocated either to certain markets where you’ve closed stores or certain forms of media whether it’s on the television with the infomercials or the print ads. How are you doing that in order to still drive efficiencies and drive the sales to the stores?

William McLaughlin

Our media strategy reflects our business strategy which is a national strategy primarily. We do have some targeted local media in markets that we’re looking to accelerate growth in, but in general we’re spending still about 80% on a branded basis, 20% on a promotional support basis.

Within that branded spend, the vast majority of it still is on the direct mediums be it TV or print, and then the balance is a little bit online and more traditional radio TV as we work on local markets.

Joan Storms – Wedbush Morgan Securities

And the 20% on the promotional basis, that’s around the big selling weekends?

William McLaughlin

Exactly. That’s to increase value and urgency around the consumer holidays.

James Rabbe

I would say relative to what we changed, we were doing a little bit more of that local and not all focused on the big selling periods so we kind of pulled back from those non major selling periods local spend, and then from a national standpoint we just got very focused on those things that we could really read good strong performance and just pulled back on those things that we felt were less efficient.

Joan Storms – Wedbush Morgan Securities

So for example, last Sunday’s newspaper on the Parade Magazine insert on the back cover was final close out sale pricing. Is that really just something you would do ahead of this President’s day weekend?

William McLaughlin

Yes. That would be in what I would call promotional support.

Operator

Your next question comes from Joel Havard – Hilliard Lyons.

Joel Havard – Hilliard Lyons

First of all with the 20 or so that you may be closing next year net, would those all be lease run downs or do you think you might be willing to sell rate a couple and would there be a potential charge hanging out there next year for that purpose?

James Rabbe

There should not be any significant charges. We do have one store that we will probably buy out but the majority of them will be early termination, or I should say termination within the normal end of term.

Joel Havard – Hilliard Lyons

Does that one then show up or do you just absorb that in costs or G&A or something?

James Rabbe

It gets absorbed into the selling expense.

Joel Havard – Hilliard Lyons

Does wholesale kind of continue at least on the QVC side without any major changes and what’s left? I think it’s 140 something on the retail partners. Do those remaining stores just kind of stay distinct but not as important channels, clearly not a focus anymore, or does that run down over the course of the year as well.

William McLaughlin

The QVC should stay as it has been. You’ve got a little bit of OEM business with some, like Winnebago involved, and then the remaining retail partner doors are in markets where we don’t have stores, so like Alaska and Hawaii. A bigger number of those stores is Canada and Australia. Mainly Canada is the biggest.

Operator

Your next question comes from Evan for Anthony Gikas – Piper Jaffray.

Evan for Anthony Gikas – Piper Jaffray

I know you mentioned you haven’t seen a large impact from oil volatility just yet but maybe you could provide a little bit of color around the timing and direction of input cost trends over the next year. And then I know you mentioned that January has trended pretty solid. Maybe you could talk a little bit about consumer sentiment, how that’s recovered relative to your expectations and maybe some of the things you’re watching as key items that are going to drive the top line going forward over the next year and really let some of that leverage show through whether it’s the housing recovery or just general sentiment improvements.

James Rabbe

I’ll start with the oil piece. The oil affected us in a number of different places, but none of which are individually significant. Where we get a direct and kind of immediate impact is in diesel costs relative to our home delivery, and so that’s pretty much an immediate and direct pass through.

The majority of the rest of the costs are really product input and we generally have kind of contracted prices for three or months out. So when there are fluctuations in oil, they’ll go into input in those suppliers and then we’ll negotiate new pricing going out and that kind of lags to when the oil prices occur. It gives us an opportunity for both the supplier and us to identify ways to offset or mitigate it or find new efficiency.

So there is a little bit of a lag, probably a quarter or so related to some of those fluctuations and then there is a piece of it that comes through pretty immediately, but we’ve done a pretty good job of really offsetting those swings at least within a quarterly basis.

Our outlook for oil as a whole is that we do expect some pressure. We do expect some increase in oil prices over the course of 2010 and we’ve built that into our expectations.

William McLaughlin

In terms of that consumer sentiment question, we do believe that consumer confidence is a factor in driving consumers’ willingness to buy or even shop. We don’t know really the balance today between what the environment is doing and what our programs are doing but what we tend to track is consumer confidence as measured by particularly existing home sales.

In terms of how is it tracking to what we were projecting, we’re responding to trends after they’ve happened in a way. So we’re supporting the business. We’re measuring the results and then we’re investing behind proven success and I think our business model is responsive enough to do that and take full advantage of those opportunities.

Operator

Your next question comes from Joan Storms – Wedbush Morgan Securities.

Joan Storms – Wedbush Morgan Securities

On the mattress industry projections that are out there are you talking primarily about IPPA or a combination of other sources?

William McLaughlin

It’s mainly IPPA that I’m referring to which is I think is the 7% or 8% number that’s there projecting for 2010.

Joan Storms – Wedbush Morgan Securities

Have you provided or will you provide a percent change in your unit growth for the quarter?

William McLaughlin

We did provide a unit comp was 22% versus the dollar comp of 23%. So the units were pretty much in line with the overall growth.

Operator

I’m showing no further questions so I’d like to turn the call back over to the speakers for closing comments.

William McLaughlin

If there are no further questions at this time we will conclude the call. We thank you all very much for joining us and we look forward to speaking with you again after the first quarter. Thank you.

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Source: Select Comfort Corporation Q4 2009 Earnings Call Transcript
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