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Select Comfort Corporation (SCSS)

Q2 2010 Earnings Call Transcript

July 21, 2010 5:00 pm ET

Executives

Mark Kimball – SVP, Legal, General Counsel and Secretary

Bill McLaughlin – President and CEO

Jim Raabe – SVP and CFO

Analysts

Brad Thomas – Keybanc Capital Markets

Budd Bugatch – Raymond James

John Baugh – Stifel Nicolaus

Joan Storms – Wedbush

Tony Gikas – Piper Jaffray

Operator

Welcome to Select Comfort’s second quarter 2010 earnings conference call. All lines have been placed in a listen-only mode until the question-and-answer session. Today’s call is being recorded. (Operator instructions) I would like to introduce Mr. Mark Kimball, General Counsel. Sir, you may begin.

Mark Kimball

Thank you, Kelly. Good afternoon and welcome to the Select Comfort Corporation second quarter 2010 earnings conference call. Thank you for joining us. I’m Mark Kimble, Senior Vice President and General Counsel. With me on the call today are Bill McLaughlin, our President and Chief Executive Officer; Jim Raabe, our Senior Vice President and Chief Financial Officer; and Hunter Saklad, Vice President of Finance, who now leads our investor relations efforts. 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 that this telephone conference is being recorded and will be available by telephone replay. It also will be archived on our Web site at selectcomfort.com. Please refer to the details set forth in our news release to access the replay on our Web site.

Please also refer to our new 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 the fiscal period just ended. However, our commentary and responses to your question 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.

Bill McLaughlin

Thanks, Mark, and thank you for joining us for an update of Select Comfort’s performance and outlook following the second quarter of 2010. We continue to execute our plan and are pleased with the results through the quarter. We entered the year with clear objectives; first, to improve financial performance in an uncertain environment; second to capitalize on opportunities as they arose as the market stabilized; and third, to advance our unique competitive advantages of individualized customer solutions, care and satisfaction to strengthen our foundation for continued growth and acceleration.

During the second quarter, we demonstrated solid execution and results against these priorities, which is indicated by strong financial performance. Revenue of a $139 million was 15% more than prior year despite 46 fewer stores and discontinued retail partner operations in the United States.

Net operating profit of 7.2% reflected continued strong gross margins and leverage of selling, marketing and G&A expenses. And second quarter performance is particularly impressive given the quarter’s seasonal softness, which historically has had a deleveraging effect on cash. Strong operating earnings and tight discipline on working capital allowed us to maintain our cash balance at the end of the quarter at $40 million, with no debt.

In the quarter, we also strengthened our competitive advantages and customer experience, which will have long-term benefits. And let me share a few metrics that we follow closely. First is our net promoter score, a measure of consumer satisfaction. This is a widely used gauge of owners’ strong willingness to recommend a product versus those who would not. Our rating has advanced 25% since the fourth quarter last year when we introduced programs to set new standards in store experience, product quality and customer care. Programs and execution are planned to continue advancing customer satisfaction, which is the cornerstone of long-term growth.

A second metric is average sales per store. This is an important indicator of leveraging sales growth and rebalancing our store portfolio in each market. Over the past three months, average sales per store increased $70,000 representing approximately $30 million of incremental annual sales. And the variable profit margin on incremental sales per store is more than 50% exclusive of increases in media investment.

To put this in perspective, if we were to sell two additional beds per week in a store that's averaging 10-bed to 12-bed sales per week, we could see a $300,000 lift in average annual sales for that store, and across our store base that represents an additional $120 million in annual sales potential and only reestablishes the sales per store level to which we experienced in 2008. We believe there is significantly more opportunity to surpass that goal.

The third measure to note is employee engagement. We measure company-wide engagement twice a year, and achieved an all-time high engagement score during the past quarter. This progress is also reflected in record retention in our stores, plants, home delivery and corporate office teams. Employee engagement is critical to our organization because it is our people who improve the lives of our customers through enhanced experiences and innovative solutions.

Customer satisfaction, store sales leverage and employee engagement are all key measures for the future on which we will continue to focus.

Throughout 2010, we've managed our top line expectations to a cautious outlook on the economy. We continue to prioritize execution to ensure both profit and market share growth. This approach has served us well as we have significantly strengthened our balance sheet. We will continue the same approach into the second half of the year.

We ended the year knowing that the second half comparisons would be more difficult as the lap last year’s economic recovery and that this year’s recovery would likely be uneven. Both expectations have been confirmed, with slowing macro and consumer indicators and periods of week to week choppiness in our own sales trends over the past few months.

Our outlook for the year remains unchanged. We expect to continue positive same-store growth now and into 2011 and with continued performance to increase selective investment focused on driving long-term impact. We are therefore maintaining our guidance for annual EPS of $0.45 to $0.50, a significant improvement versus prior year's $0.25, particularly in light of our larger share base this year.

Our strategies for the second half of the year also are unchanged, other than to be more aggressive with long-term investments. Let me provide you a little visibility to the types of investments we are planning. First, we are in the process of completing the changeover of the remaining store marquees to emphasize the Sleep Number brand over the Select Comfort brand. This conversion will be largely completed prior to Labor Day and is another important step in consolidating behind one consumer facing brand.

Also, we will pilot locating stores outside of our tradition mall locations. These pilot stores will be located in high traffic, easy access areas, some near other mattress retailers. We are seeking to learn about both, revenue potential and opportunity to reduce occupancy costs.

Third, we are investing incrementally in our digital strategy, an area that we underinvested in during our turnaround. We believe this is a significant opportunity to improve awareness of both our brand and store locations, as we better develop local search, our Web site design, and online customer care.

And finally, we are in the early stages of identifying additional product innovation opportunities to enhance the pipeline for next year and beyond. While we are not announcing anything specific at this time, our focus is on advancing current models and price points and on developing complimentary products that allow customers more individualized solutions and that also allow us incremental profit potential.

These selective investments plus the continued evolution of our marketing and unique total custom experience position us to compete effectively in the future. And again, we believe that we will sustain positive same-store growth through the year and into next year and believe that operating profit margin will continue to improve beyond 10% in the coming years.

We are positioning our company and our balance sheet to take full advantage of our long-term potential. Our commitment is to offer customers the very best in individualized sleep solutions, experiences and value.

And I will now turn the call over to Jim to provide additional detail about our second quarter results and outlook for the balance of the year.

Jim Raabe

Thanks, Bill. As Bill noted, our second quarter represents a continuation of our return to profitable growth with sales and sales per store growing and operating margins increasing in the quarter to 7.2%, a 640 basis points improvement to a year ago.

As most of you are aware, the second quarter is typically the low seasonal point of our year, reduce traffic is generally slower, and mattress buying did not normally kick in until August. So it is always satisfying to sustain profitability at a healthy rate during this time of the year.

As compared to year ago, sales in the second quarter were 15% higher or $139 million on mattress unit growth of 17% in company-owned channels and sales mix that was essentially unchanged.

Store closures and determination of our retail partner program reduced baseline sales compared to a year ago by an estimated $10 million. In other words, excluding closed distribution, total company sales increased by 26%. Same-store sales during the quarter grew by 28%. Q2 did benefit from a very strong close to Q1. An increase in March month-end orders were not recognized into revenues until the first day of April due to the normal lag time from when orders are received to when they are shipped which added about $3 million to $4 million to Q2 sales. This was partly due to the shift of the Easter holiday, which strengthened our quarter-end promotion in March.

On the cost side, we continue to maintain our cost structure at a level that will allow margin expansion with sales growth. The year-over-year comparison on a P&L line item basis shows significant improvement to a year ago, and is very similar to the first quarter.

Our gross margin rate was 62.2%, a 60 basis point improvement to a year ago. Input costs increases have been modest and additional increases are not an immediate concern as oil prices have moderated at least in the near-term. Therefore, we expect gross margins to remain in the 62% to 63% range for the balance of the year.

Selling and marketing expenses were 45.3% of sales, a 530 basis point improvement over a year ago. Marketing costs, which included 16% increase in media spend, were 18.1% of sales, or 40 basis points higher than a year ago, while selling expenses were 27.2% of sales, 570 basis points better than a year ago. The improvement in selling leverage reflects the benefit of closing underperforming stores and the improved productivity of sales per store.

G&A expenses were 9.3% of sales, 40 basis points better than a year ago. G&A continues to track a bit higher than our expected run rate as incentive compensation was again higher this quarter in line with performance.

Cash and cash flows were also in line with our expectations. EBITDA in the quarter totaled $13.9 million compared to $6.6 million last year. On a 12-month trailing basis, EBITDA totaled $61.6 million. Cash balances declined by $4 million in the quarter with positive EBITDA offset by approximately $13 million in changes in working capital. The change in working capital is consistent with prior years as a result of sales seasonality.

As Bill noted, we are reaffirming our full-year guidance. Overall, our guidance anticipates an improvement in net income adjusted for one-time items last year in the second half. While the nearly 20% year-over-year increase in share count will affect earnings per share comparisons.

Several factors affect our thinking on balance of the year earnings expectations. First is the macroeconomic environment. In the second half of this year, we will begin to lap the economic recovery and therefore more difficult comparisons. We have continued to drive same-store growth throughout the second quarter and expect same-store growth to remain positive throughout the balance of the year. However, we are cautious about recent macro indicators combined with the limited forward visibility as we head into the largest macro-selling holiday period of the year.

Second, we are committed to investing in improvements to our sales performance and expect to incur some incremental costs in the second half of the year. Some relate to tests and investments for the long-term that Bill refer to earlier, others for operational expenses, such as a refresh of our in-store merchandising, which occurs periodically and had previously been deferred.

In summary, with our second quarter performance we've now completed six consecutive quarters of year-over-year increases in profitability. During this time, we have proven our ability to adapt to a changing environment and improved our financial position, creating the flexibility to invest consistently against our opportunities.

We are confident in the long-term and are on the right track to sustained growth into achieving our goal of operating margins of 10% or more.

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

Bill McLaughlin

Thanks, Jim. And I'd like to congratulate the Select Comfort team for another solid quarter. Not only did they deliver impressive results, but they also advanced customer satisfaction and continued building the foundation of a new standard in individualized sleep experiences for years to come.

Select Comfort is clearly positioned to make the most of the short-term, and is selectively investing to take full advantage of sustained recovery when it takes place. We are sticking to our game plan to solid financial performance in an uncertain market. We are fortunate to have a unique and important product and a business model with opportunity to deliver an advantage customer experience and significant cost leverage.

Second half plans are in place, applying past learnings to major consumer holidays, with the flexibility to fine-tune as we retrend and continue to learn. In order to position Select Comfort to take full advantage of our potential and the economic recovery, we continue to strengthen our balance sheet and are advancing selective investments in products, distribution, customer experience, and our processes and people.

This is an exciting time for Select Comfort. We've learned a great deal over the past years, and are embracing the opportunity to advance priorities to both improve more people’s lives and our position as a leader in the industry.

We now like to turn the call over to Kelly for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Brad Thomas from Keybanc Capital Markets. Your line is open.

Brad Thomas – Keybanc Capital Markets

Thanks, good afternoon, Bill and Jim and congrats on a great quarter here. Sort of follow up real quick on the guidance. It seems like the second quarter really demonstrated some nice results, better than what we were expecting from both the sales and a profitability standpoint. So as we think about the guidance, Jim, you alluded to some of the new macroeconomic issues as well as some investments, how much do you think those would weigh on the guidance and how much do you think that's really changed your outlook for the back half of this year?

Jim Raabe

I think first I would say that I don't think that our outlook has changed. We basically kind of outlined our guidance expectations at the beginning of the quarter and I think the second quarter was better than analysts' expectations but we are basically on track to what we thought we would do for the year. I think with regard what I would say though is with the macro I don't think we are necessarily seeing a deterioration as much as maybe a little bit more choppiness on a week to week basis. Some of the macro trends have turned a little bit more negative and because we’ve got a limited visibility to our sales to no more than yesterday, I think we just feel it's appropriate to keep that guidance in place and see how the Labor Day holiday goes and then into the fourth quarter.

Brad Thomas – Keybanc Capital Markets

Okay. And then in terms of what you saw through the quarter and perhaps anything that you could share in July, is there anything that you've seen changing from a consumer standpoint as the stock market has pulled back, as the confidence numbers have been a little bit weaker and as we started to get a little bit weaker housing data points?

Jim Raabe

I wouldn't say that we've seen anything from a fundamental shift. I think we have seen a little bit of a slowing of the sequential growth curve, so when you adjust the trends for seasonality, that rate of improvement on a sequential basis has slowed somewhat, and as I said there has been a little bit more choppiness when you look from a week to week basis. But I think we continue to feel good about how we are performing, and as Bill said we are expecting to have positive same-store growth through the second half.

Bill McLaughlin

Hi, Brad, this is Bill. The only other thing I would add is that as I said, we are increasingly encouraged and excited by some of the investment opportunities that we are seeing for the long-term and many of those will have pretty immediate pay back, pretty short-term pay backs but not immediate pay backs and we also want to have some flexibility in the second half to make some of those investments.

Brad Thomas – Keybanc Capital Markets

Okay. Great. And just to follow up on that Bill, as we think about some of those investments that you are making, could you maybe help us think a little bit more about the timing with which you may need to test them and the point that we may be able to look forward to a wider roll out if the tests are successful?

Bill McLaughlin

I think most of the development would be in the – development and learning will be in the second half here. So things like those non-mall stores that I shared or talked about earlier, they will be in place in the second half. We will obviously be reading them then over the next couple of quarters, the marquees will be up by the Labor Day, so most of this activity will be happening over the second half of the year.

Brad Thomas – Keybanc Capital Markets

Okay. And then just lastly as we think about average mattress selling price, it looked like it was pretty flat sequentially, down a little bit year over year after two quarters in a row where it had been up a little bit on a year-over-year rate. Anything that you're seeing differently from a mix standpoint between sort of three different lines that you guys have?

Bill McLaughlin

We are seeing the mixes hold pretty steady there, Brad. I think what you saw in the earlier two quarters was more a function of year ago ASPs being down. As we said, we kind of learned how to work the value equation and the step up for marketing programs last year and now we are lapping that and so that’s why it’s more flat on a sequential basis.

Brad Thomas – Keybanc Capital Markets

Okay. Great. Thanks so much and congrats again on a great quarter.

Bill McLaughlin

Thanks.

Operator

Our next question comes from Budd Bugatch from Raymond James. Your line is open.

Budd Bugatch – Raymond James

Good afternoon, Jim and Bill, and also my congratulations as well. Couple of questions. One, you talked a little bit about the choppiness of comps. Any quantification you can give us on how comps progressed during the quarter?

Jim Raabe

Well, as you know, with a low transaction, high dollar ticket product like we have some level of choppiness is not unusual. And I think we are seeing, I would say, more week to week than anything. From a comp progression standpoint, we don’t really talk to month to month but we went into the year knowing that as we got into the second quarter and entered third quarter the comps increasingly get difficult and I think we are seeing a trend along those lines that comps are decreasing as we are lapping those more difficult comps, although there again remaining positive.

I would also say that second quarter is a little bit difficult to read because the timing of all of the holiday periods fell a little bit different this year on a monthly basis. So it was particularly hard, but the generally trend is really in line with kind of what we expected which is just a moderating of the comp rate.

Budd Bugatch – Raymond James

I understand. As we look for the balance of the year, just looking at the guidance and the revenues, what you've done so far and all the moving pieces which are fewer number of stores and the fact that the recovery began middle part of last year, you've done about $297 million in the first six months with about $0.25 worth of EPS on an adjusted basis or diluted basis, and your guidance at the top end is also for $0.25 additionally for the second half, if you go to the $0.50, yet the second half historically is a more seasonally robust half of the year than the first half in terms of revenues. How do we read that? With all the moving pieces where do you think revenues for the full year will come in?

Bill McLaughlin

A couple of thing with regard to the specific comments you made, first on the strength of the second half versus the strength of the first half. The second half has historically been a little bit stronger but not as much as the historical results will show because some that's been inflated by store growth.

Budd Bugatch – Raymond James

Correct.

Bill McLaughlin

The back half looks stronger than – but when you look at it on a sales per store basis they actually look very, very similar. So, we do have a – we have a further reduction in store count in the back half although most of that’s towards the end of the quarter. I think the other thing really just to kind of think through is, I'll just make two points, one of which is there are some incremental investments that we are making that we think will contribute but more to 2011 than they are going to contribute to 2010, and that is incremental to the first half. And then the second thing is, like I said, I think we are being cautious because Labor Day is a big period, the holiday shopping is a big period, and I don't think that we want to get ahead of the consumer confidence numbers and we’d like to see that play out before we’d start making revisions to that guidance.

Budd Bugatch – Raymond James

Okay. Well, as I recall, historically, and I'll go back and check, but I think the historical seasonality for the industry is typically about 48% in the first half and 52% in the second half, and I recognize the issue you have with growing store count, inflating that somewhat historically for Select. But I would have thought that if you have higher revenues or maybe I should ask the question this way, is the company plan to have higher revenues in the second half than the first half or is it about flat? And should we expect the margin opportunity of the margin performance to be about what it was in the first half?

Jim Raabe

Well, we don’t provide revenue guidance, but I think that generally speaking you're thinking through it appropriately. But here again, I'll just say we're being somewhat cautious just because of some of the uncertainties from a consumer standpoint and there could be some swings when we get into those selling periods, positive as well as negative. So I think more than anything we just feel it is best at this point not to raise expectations until we see how the second half plays out a little further.

Budd Bugatch – Raymond James

In terms of operating expenses, are there any higher incentive accruals we need to think about for the second half, any other accruals, any other operating expenses that might be a bit higher than normal?

Jim Raabe

Not other than what I referred to the investments as well as in my comments. The fact that we do have some in-store costs that we do incur periodically but we had been deferring so they're a little bit higher in the second half than you would normally see and a couple of million dollars higher than what they would have been in the first half.

Budd Bugatch – Raymond James

Okay. As you're talking about your program for your off-mall stores, have you already got some that are open already and like you’d tell us where some of those might be and how many there will be?

Bill McLaughlin

Yes. Budd, we have about five or six that have been opened over the past few years. And there's one in Corpus Christi, there is one in southern Chicago, northern Indiana, there are a couple in Philadelphia, and generally they were developed more out of necessity for how the market was developing. What we are doing here in the second half is a bit more conscious of strategy of picking locations more strategically and what we're trying to really understand is just how strong is our destination shopping, what's the trade-off on walk-by traffic versus drive-by traffic, and then also what’s the operating expense opportunity.

What we’ve seen to date in the four or five, or five or six that we have opened in the past is that the average sales per store is above our average, the profitability is above our average. So we like those two early indicators and we think we can do even better with some of these newer, more strategically placed stores.

Budd Bugatch – Raymond James

And the average size of the off-mall stores? Are they larger than in-mall?

Bill McLaughlin

Yes, they are a little bigger because they need to be bigger to get more of a billboard impact, but they're not huge stores. They're still in that like 3,000 square foot type range.

Budd Bugatch – Raymond James

Okay. Well, that is significantly larger than the average, right?

Bill McLaughlin

Yes. It's not that far off where our lifestyle center stores are.

Budd Bugatch – Raymond James

Okay, all right. Thank you very much. Good luck on the third quarter and second half.

Bill McLaughlin

Thanks, Budd.

Operator

Our next question comes from John Baugh from Stifel Nicolaus. Your line is open.

John Baugh – Stifel Nicolaus

Thank you. Bill, Jim congratulations as well. Everybody's honing in on this guidance and then the comments about incremental. Is there any way you could bracket if not be a more specific guess at what the dollars we're talking about of the strategies incrementally in the second half?

Jim Raabe

Not quite sure I understand your question.

John Baugh – Stifel Nicolaus

Well, you refer to four items I think, changing over the stores to the Select brand by Labor Day, the pilot stores, investing in the digital strategy and then the new product, all of those roll up to some cost number that sounds like you’re going to be incurring at some rate higher than the first half or in some cases maybe you weren't even spending on any of those in the first half, and I was curious if you could quantify the magnitude of that?

Jim Raabe

Sure. The kind of the direct expense cost of those programs in the second half is a $3 million plus number and from a capital standpoint it is about $5 million or $6 million. That $5 million or $6 million is included in our up to $15 million CapEx spend that we’ve got in our release. But we hadn’t indentified the specific projects yet.

John Baugh – Stifel Nicolaus

Great. That's helpful. And then refresh me on the wholesale, is that Canada? What's in the wholesale number again?

Jim Raabe

It's QVC and it is primary the international where we sell through other mattress retailers. Those are the biggest pieces, and that's Australia and Canada primarily.

John Baugh – Stifel Nicolaus

How should we think about that, Jim, in terms of modeling out going forward, door count is the same I assume?

Jim Raabe

Yes. I think you can model – the biggest swing really is QVC, so that number, the total wholesale number is going to be roughly in that 5% range for the year and it will deviate a little around that 5% depending on when the QVC shows are. We tend to have a little more in QVC in the third quarter and the fourth quarter.

Bill McLaughlin

Should be about flat year over year.

Jim Raabe

About flat year over year.

John Baugh – Stifel Nicolaus

And as we look at the – you made a comment about closing stores and I think it was your plan all along to close a fair number of stores right towards the end of the year if I'm not mistaken. Is that correct? And what would the sales impact of that be, roughly?

Jim Raabe

Well, the – that is correct. As we said we will be in – by the end of the year we will be in that 380 to 390 range, probably closer to 380, and as you indicated a good number of those will be towards the end of the year, but they are spread out a little bit. We gave the number of impact of store closures in the second quarter, and this is last year’s as well as this year’s of about $10 million. In the third quarter that number is roughly $8 million, maybe a little bit shy of that, and then in the fourth quarter that number is more like a $2 million to $3 million number. So the impact of closures certainly declined as we get into the back half of the year.

John Baugh – Stifel Nicolaus

Okay. That's terrific. And then just lastly, when we look at the big Labor Day event and then subsequent that the holiday season, any difference in terms of marketing spend, marketing message? You say you learned a lot from the APU is kind of flattened out. What, if anything, will be different year over year in your plans if you care to give that away to the competition at this point?

Bill McLaughlin

Yes. I don't think we will talk too much about that John. I think the good thing is that we had a very successful Labor Day and holiday season last year and we are taking many of those same components and just reapplying them, improving them a bit as we go forward. But it will be the same both promotional and media and in-store sales support behind them all.

John Baugh – Stifel Nicolaus

So nothing in terms of percentage spend going up or down dramatically or –?

Bill McLaughlin

The percentage will be going up but I would say, Jim, in line with the way we've been expecting here to date.

Jim Raabe

I think the dollar spend from a media standpoint is a little bit higher in the third quarter than it was last year and that does get concentrated a bit into the Labor Day period.

Bill McLaughlin

But as we said in second quarter, our media was up 16% versus prior year and we have some leverage on that.

John Baugh – Stifel Nicolaus

Yes. Great. Thank you. Good luck.

Bill McLaughlin

All right.

Operator

Our next question comes from Joan Storms from Wedbush. Your line is open.

Joan Storms – Wedbush

Hi, good afternoon. Great quarter, good comps.

Bill McLaughlin

Thanks, Joan.

Joan Storms – Wedbush

I just had a couple of, first a couple from the comments previously that I didn't quite get and I think Bill had talked about an average sales per store up $70,000 and so that would be on an annualized basis up $30 million incremental annual sales. And then there was a comment about gross margin dollars which I didn't quite catch, I think it was up 50%?

Bill McLaughlin

I think it’s just to say obviously our focus is on growing our sales per store because that’s where the greatest leverage potential of our business is to continue to drive sales increases through the same stores; so the 50% or the greater than 50% is just a flow through of that incremental sales, net of any advertising.

Joan Storms – Wedbush

And then previously you used to break out direct versus E-commerce. Is there any difference in those two businesses and how they're performing now or should we take it as pretty similar?

Bill McLaughlin

We have combined them because – both because they're obviously a smaller part of the business than they were a few years ago, and I think the second reason is this is just the acknowledgement that they are – they play a big part from a marketing standpoint and they are very much marketing vehicles that also have an opportunity for sales. We see the stores being really the where the primary driver of sales are going to be. But they're roughly the same size as you might imagine, we would expect that the Internet – sales over the Internet is going to grow faster than the direct business will.

Joan Storms – Wedbush

Okay.

Bill McLaughlin

And that’s the consumer trend, but nothing other than that.

Joan Storms – Wedbush

Okay. And then I was curious, too, about your comments about focusing on Sleep Number brand versus Select Comfort. I think for a long time we were sort of wondering whether you changed the name, the actual name on the stores or changed your stock ticker or something like that, that was just really – coordinate that, so I was wondering what you plan to do in order to do that.

Jim Raabe

Our focus is on taking the Sleep Number brand as the consumer facing brand and so what we are doing as I mentioned is completing the changeover of our store marquees to emphasis the Sleep Number store. It does stay in small letters by Select Comfort, so we don’t lose that set of customers, but Sleep Number is the primary consumer facing brand and that’s really what we’re focused on. Haven't really worried about other places that we use Select Comfort like with internal or with investors.

Joan Storms – Wedbush

So in the store, like on the store facing?

Jim Raabe

Virtually everything in the store, in all of our advertising, and this is the opportunity of getting it all in this Sleep Number. As I said, it’s more efficient with our marketing and we believe we can build the awareness more efficiently because we're not having consumers confused about is it Select Comfort or is it Sleep Number.

Joan Storms – Wedbush

That makes sense. Then on the remerchandising in the stores for the second half, that involves some of that change. Are there other changes going on, are you going to be introducing new beds then you'll have some clearance events or how will that work for the second half or updating beds, things like that?

Jim Raabe

There will be a continuation of the programming similar to what we have been doing which does include the normal promotion. There are no new bed introductions, although we do periodically do special edition beds that we introduced for a short period of time and then we did continue. We will have some of that in the back half similar to what we had in the first half.

Bill McLaughlin

But, Joan, remember this is a make-to-order model. So we don’t really have any kind of changeovers or clearances of that type. As Jim said, this is really about some of the things like the bed skirts and pressure mapping and some of those basic selling tools that we have we'll be getting some upgrades.

Joan Storms – Wedbush

Okay. Great. Well, thank you very much.

Bill McLaughlin

Thank you.

Operator

Our next question comes from Tony Gikas from Piper Jaffray. Your line is open.

Tony Gikas – Piper Jaffray

Thank you. Hi, great job, guys.

Bill McLaughlin

Thanks, Tony.

Tony Gikas – Piper Jaffray

A couple questions. I just want to follow up. On the costs you talked about perhaps the $3 million increase in the back part of the year to some of the new initiatives that you have. What line items, can you help us a little bit with where they'll fall on the P&L? Also, do you have a feel for how the premium category grew in the first half of the year? I know the data shows the overall category has grown about 11% through the end of May. Has premium grown faster than that? I'm trying to get a feel of what share it might be taking in the market.

My third question would be as we get into the New Year next year, do you plan more of an advertising ad campaign emphasizing the Sleep Number as you get through all of the stores, etcetera changed over? Is there a new ad campaign coming and will there be some expense related to hiring of ad agencies and that sort of thing in the out year?

Bill McLaughlin

I will answer the first question, which is the incremental expense will primarily fall into selling and marketing, so that sales and marketing line is where you will see it.

Jim Raabe

Second question is I don't think we have seen anything on from an update of the second quarter on premium sales that is I believe released on a quarterly basis. It was growing once a year. But we haven’t seen anything updated on it. And then in terms of emphasizing the Sleep Number brand and the advertising going forward, Tony, that’s really not been a change. That’s been the emphasis to date.

We already have an ad agency that is working on that. We’ve got new short from TV commercials and all that have been emphasizing Sleep Number all through this year and that will discontinue as we get into next. So there will not be any incremental costs around agencies. There may be around some productions over time, but I don't think that the creative production expense should be a significant difference going forward.

Tony Gikas – Piper Jaffray

Okay. Then just a housekeeping question for Jim, tax rate has just been a little under that 30% the last six months or so. Should we continue with 38% rate going forward or is it a little below?

Jim Raabe

It’s probably a little below, I mean at 37, 37.5, it's probably a little better spot.

Tony Gikas – Piper Jaffray

Okay. Thanks, guys. Good luck.

Jim Raabe

Thank you.

Operator

(Operator instructions) there are no further questions at this time. I would now turn the call back to Mr. Kimball for closing remarks.

Mark Kimball

Thank you very much. If there are no further questions at this time, then we’ll conclude the call. We thank you very much for your participation and we look forward to reporting following the third quarter. Thank you.

Operator

Thank you for participating in today’s conference call. You may disconnect at this time.

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Source: Select Comfort Corporation Q2 2010 Earnings Call Transcript
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