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Select Comfort Corporation (NASDAQ:SCSS)

Q4 2010 Earnings Call

February 9, 2011 5:00 pm ET

Executives

Mark Kimball - SVP and General Counsel

Bill McLaughlin - President and CEO

Jim Raabe - SVP and CFO

Hunter Saklad - VP of Finance

Analysts

Chad Bolen - Raymond James

Brad Thomas - KeyBanc Capital Markets

Mark Rupe - Longbow Research

John Baugh - Stifel Nicolaus

Operator

Welcome to Select Comfort's fourth quarter and full year 2010 earnings conference call. (Operator Instructions) I'd now like to introduce Mr. Mark Kimball, General Counsel.

Mark Kimball

Good afternoon and welcome to the Select Comfort Corporation fourth quarter and year-end 2010 earnings conference call. Thank you all for joining us. I'm Mark Kimball, 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.

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 website at selectcomfort.com.

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

Bill McLaughlin

Good afternoon and thank you for joining us, as we discuss Select Comfort's recent accomplishments and highlight future opportunities for the company. As you can see from today's news release, the quality of our fourth quarter and full-year earnings represent a strong finish to an important year for us, a year, where we moved from stabilizing our financial position to achieving consistent profitable growth.

We accomplished two very important things during 2010. First, we delivered strong financial results with consistent sales and earnings growth throughout the year, including in the fourth quarter as we lapped a strong prior-year period. And second, we achieved significant operational advances that positioned us well for profitable growth in 2011 and beyond.

As it relates to financial performance, the fourth quarter marked eight consecutive quarters, two full years of consistent profit improvement in an uneven macroeconomic environment. Net operating profit in the year increased a 153%, with EPS of $0.57, $0.13 of that in the fourth quarter.

For the full year, net sales increased 11% and 21% increase in same-store sales. And we continued growing ahead of the industry in the fourth quarter. Our net sales increased 9% and same-store sales 12% versus the industry at 3%. Lastly, the company generated $71 million in cash flow from operating activities during the year and ended 2010 debt free with a cash balance of $81 million.

In 2010, we also made significant progress in our core operations, particularly in three areas. First, attracting more consumers to consider Sleep Number products. Unit sales and company channels increased by 11% despite reduced store weeks. Second, we better satisfy those who became customers. Referral and repeat increased approximately 15% in 2010. And third, we leveraged growth for greater margin and cash flow in order to fund investments for future acceleration.

Key contributors to our 2010 operating improvement included media investment. During the year we increased our media investment by 14% or $8.8 million, while achieving our second highest level of media efficiency during the past 10 years and brand focus. We also strengthened our brand focus and the consistency of the message around the Sleep Number beds unique differences.

We also converted all store marquees to Sleep Number and all of our advertising and consumer communications now have a consistent look and message. In distribution, we continued to restructure our distribution base of company-owned stores. Our focus for now is on productivity rather than a number of stores.

In 2010, among stores opened for at least 12 months, we increased the average revenue 24% and we did this by working on store locations and formats, local marketing programs and sales team selection and training. We also continued to enhance our unique end-to-end customer experience, which is critical to consumer adoption of a revolutionary individualized technology.

Investments over the years in product quality and customer care are paying dividends. Sleep Number customer satisfaction is measured by our net promoter score improved nearly fivefold in the past two years. And we are now firmly in the range of top performing companies and we believe we can advance even further to join the elite.

And our internal employee engagement reached a record high during the year, which is important as engaged employees lead to satisfied customers. Lastly, we increased operating leverage and built cash, which allowed us to begin investing in longer-term growth initiatives. These investments position us to accelerate growth in 2011, and beyond.

And before we move into our 2011 outlook, we want to touch on a transition in our marketing leadership. Our Chief Marketing Officer for the past two years Tim Werner, has decided to move away from the corporate world as a career path, in part to spend more time with his family. We respect his decision and appreciate his willingness to stay actively involved through the transition over the next several quarters.

Tim will continue to lead the development and launch of our revolving creative campaign. We will take our time to consider permanent leadership options, which includes a comprehensive external search. We are excited about the significant advancements in our marketing efforts and confident in the depth and experience of the team responsible for those advances.

Turning to 2011, we will build on what we've learned with a goal to accelerate profitable growth. Our primary focus is on increasing consumer awareness and consideration of the Sleep Number brand. This includes helping customers understand not only the unique individualized benefits of all Sleep Number products, but also the exclusivity of the Sleep Number sales experience.

We've learned that our opportunity to broaden awareness and consideration is both national and local. National to take advantage of our close-to-close distribution presence through online, direct and company-owned stores and the efficient media options to reach targeting consumer across the country, and local market development is also important.

Our local markets have different levels of brand awareness and store presence. This represents an opportunity to better leverage our retail presence as well as efficiently developed markets to achieve their full potential. Our approach will be to layer different levels of marketing, based on each market stage of development, coordinated with investments in real estate. Local market development also offers opportunity to manage risk, pilot a new creative or new concept before making national commitments.

We expect that by continuing to execute our proven programs from the past two years we will outpace industry growth again in 2011, and provide continued margin leverage to fund investment. Our plans assume a little revenue left in the year from these investments, as they are not yet proven. Some may in fact accelerate 2011 performance and others may take longer and require some modification.

Now, as I stated before, our opportunity is to broaden awareness and consideration of the Sleep Number brand and our stores. We're developing and executing several initiatives designed to advance growth in this area. First, media investment is expected to increase 15% or more in the year, which is a clear catalyst to increasing awareness.

Second, we will also evolve our Sleep Number advertising. We will continue the current focus on product benefits, but also capture the unique experience of our stores. That experience includes consumers interacting with our Sleep professionals in our stores, engaged in fun and excitement of discovering their personal Sleep Number settings. We expect to pilot this new creative at the end of the first quarter.

Third, over the course of the first half, we plan to also accelerate tests of incremental digital advertising as well as relaunch our website. Our digital efforts allow us to take advantage of the increasing number of consumers or research products and retail experiences online, when buying.

Finally, as mentioned on the last call, we expect to have approximately 29 mall stores opened by year end. Our objective is to understand the ability of high-visibility stores in high traffic areas to accelerate brand and store awareness. It will likely take a year or more to definitively understand the potential of this new format. Very early signs are encouraging.

As we shared in our news release, we are targeting an earnings per share increase of 20% to 30% in 2011, and further strengthening our balance sheet. We are planning on sales growth greater than the industry rate with high-single digit same-store growth. We are also planning to increase our profit margin and our cash balance, while funding the expense and capital investments of the programs that I've outlined.

Long-term we expect earnings per share growth of 15% to 20% with the opportunity for higher percentages of growth in the next few years. It is also important to note that we intend to double investment in R&D with those benefit expected in following years.

2011 is already off to a strong start and we look forward to an exciting and rewarding year. The bottomline is that we are very confident in our outlook and the priorities that we've chosen. We believe we struck the right balance in our planning with upside potential, should the macroeconomic environment improve faster than anticipated or we see earlier returns on our investments than planned.

I'll now turn it over to Jim, to provide additional context around our 2010 performance and 2011 opportunities.

Jim Raabe

Thanks, Bill. As Bill noted, we are very pleased with our financial performance throughout 2010. Sales growth has been consistent and operating margins continue to improve through leverage. Operating profits increased by 153% for the year and 53% in the fourth quarter. Net income per share increased by 137% for the year and 62% in the fourth quarter compared to as adjusted numbers in 2009, and reconciled in the attachment to our news release.

In the quarter, total sales grew 9% on 6% unit growth and a slightly stronger mix. Same-store sales increased 12%, as we lapped 23% same-store growth last year and continue to outpace mattress industry growth, even with 7% fewer store weeks this year. On a two year basis, same-store sales grew 35% and retail sales per store increased to approximately $1.3 million.

On macro level, our fourth quarter sales patterns indicate an improving consumer environment. Consumers continue to seek out value and response promotional offers that are company traditional shopping periods. Sales growth has lead to significant profit improvement, demonstrating our disciplined approach and the leverage potential of our business model, on a sales increase of $61 million or 11% in 2010.

Our operating profit improved by $32 million or 480 basis points to 8.6% of sales. Some of the improvement is the annualization of benefits from our restructuring efforts in 2009, but a good part of it is attributable to normal operating leverage.

For the quarter operating margins were 7.7%, 220 basis points better than last year. Operating margin expansion was primarily generated through the leverage and our selling expenses, where expenses as a percentage of sales improved 210 basis points to 26.5%. In addition, gross margins increased and G&A leverage improved, funding a 70 basis point increase in marketing as a percentage of sales to 19.6%.

The gross margin improvement, our cost of production benefited from fixed cost leverage and lower warranty costs. Our Six Sigma efforts are paying dividends in cost reductions as well as customer experience. Modest inflationary pressure offset some of these benefits.

Marketing costs include media spending of $18.5 million or 12.4% of sales in the quarter. This spend rate is slightly higher than recent quarters as we accelerated media investments in the last several weeks of the year to support first quarter 2011 sales. On a cash flow basis, our 2010 EBITDA totaled $69.7 million, $27 million increase compared to 2009.

One administrative note, before moving on to our outlook, historically we've reported comps for stores separate from direct in e-commerce selling channels. Beginning in 2011, we will combine all company-owned sales channels into a single same store growth number. We believe, this better represents our performance as a multi-channel retailer and simplifies our reporting and year modeling. The impact of this change on 2009 and 2010 comps is shown in the attachment to our news release.

Looking forward, we are issuing our 2011 guidance for earnings per share of between $0.68 and $0.74. This earnings outlook assumes company-owned comp growth of upper single digits.

Store count will decline slightly in the first quarter as we close some remaining unproductive stores, followed by an increase in subsequent quarters, getting back to around 380 stores by the end of the year. Longer term, we expect approximately 5% square footage growth on an annual basis.

As Bill noted, we are accelerating investments in new media creative, digital and local market development including local media tests, and we are significantly adding to our R&D efforts. Overall, we expect core growth and resulting leverage to more than offset the incremental spend, resulting in an increase in operating margins of around 100 basis points in 2011.

In order to provide a bit more context for those modeling our business, our outlook factors in the following; first, gross margin should improve by more than 50 basis points. This improvement factors in continued productivity gains in our manufacturing and home delivery operations, selective tactical price increases on a few sizes of mattresses and services. These increases represent less than a 2% increase to our customers. And finally, we are assuming some inflationary pressure. We factored in a 10% increase in the price of oil, which impacts the cost of foam, plastics and diesel.

We expect to offset any labor cost increases with productivity, and we predict that the cost of air will remain free, but we don't expect further inflationary pressure there.

We plan to increase our media spend by more than 15% in 2011. About half of this increase is the core media programs, and the other half will be focused on local market development. Media as a percent of sales is planned to increase to approximately 12.5% from 11.6% of sales in 2010.

As Bill mentioned, we expect to double R&D investments compared to 2010, while G&A in dollar terms should be roughly flat to prior year. Tax rates should improve to around 37%, while we estimate a modest increase to share count for EPS purposes.

And finally, we plan to increase our CapEx investments to between $25 million and $30 million, as we accelerate growth investment and catch up some of the deferred capital spending from the last two years when we spend a combined $10 million.

In summary, we're very pleased with our fourth quarter and full year results and we're excited about 2011 and beyond. We are confident that we're making the right investments for the near term and for the long term to allow us to continue to improve our year-over-year performance.

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

Bill McLaughlin

I'd like to wrap up our remarks on 2010 by thanking and recognizing the Sleep Number team for a great year. We worked hard with passion and persistence, execution of focused strategies was both disciplined and creative, and our customers appreciated our efforts. Importantly, we continue to learn and to evolve, making real and long-lasting advances to what matters to customers, and that reinforces our unique competitive advantages.

In 2010, our priority was to stabilize our financials and our core programs. Our priority in 2011 is the disciplined acceleration of profitable growth. We will continue to focus on our core business and maintain tight expense controls for leverage and margin improvement. We intend to selectively invest to advance consumer awareness and consideration of the unique and exclusive Sleep Number product and customer experience.

Next quarter, we expect to share with you more specifics about our programs and pilot and their potential impact on 2011 and beyond.

I'd now like to turn the call over to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Budd Bugatch with Raymond James.

Chad Bolen - Raymond James

Good evening everyone, this is actually Chad filling in for Budd from Raymond James. If I could, keeping with the theme of the housekeeping questions, you gave us a tax rate of around 37% for fiscal '11.

How should we be thinking about interest expense or potentially income in FY'11? Are you just modeling kind of, net it out to zero or will you actually see some interest income?

Jim Raabe

Probably net out to zero.

Chad Bolen - Raymond James

And you talked about a long term EPS growth bogie of 15% to 20% and longer term square footage increases of about 5%. So, I guess to get to the 15% to 20%, how do we think about the comp square footage growth, kind of operating leverage maybe, share with us some of the assumptions that get you to that number?

Bill McLaughlin

Well, first of all, I would say that our objective is to continue to grow share. So we are assuming in that kind of a normalized mattress industry growth, and that our comp growth would be above that industry growth. And then the square footage and the sales from new store would add on top of that.

With regard to the 15% to 20% that's a longer term number. I think our view is that we should be able to sustain a good healthy growth rate over the long term and we should be able to continue to grow our operating margins.

And as Bill said in his comments, there's certainly the potential to outperform that in the near years just based on where we are coming from, but longer term we look at 15% to 20%.

Chad Bolen - Raymond James

And would you mind repeating the commentary you made about the trajectory of the store decrease and then subsequent increase in the guidance?

Bill McLaughlin

We ended the year at 386 stores. We will be down about 12 or 13 stores in the first quarter and then it basically builds back from there to about 380 at the end of the year. And then that growth will continue into 2012.

Chad Bolen - Raymond James

And I noticed that inventory was up sequentially and year-over-year. Could you share with us a little bit, I guess what drove that and is that the right normalized number to work off of going forward, or how do we think about that?

Bill McLaughlin

The inventory closed the year just under $20 million. The year before that it was about $16 million. Some of that year-end was a little bit timing related; some of it is related to, we have a very large (TV show) right at the end of the year, so sometimes we end up building a little bit more inventory. But I would think about inventory in that $20 million to slightly less on a more sustained basis going forward.

Chad Bolen - Raymond James

Last one from me, the mattress AUSP was down about 3%. How should we think about that? Was it driven by promotions, driven by mix, maybe a little bit of both?

Bill McLaughlin

As you said, the AUSP is down a little bit. That has to do with a switch in mix in our foundation penetration. What we've historically measured ASP is with our traditional foundation. And we've seen an increase in the mix towards our FlexFit Adjustable foundation, and so the way we've traditionally measured ASP has seen less and less of the traditional foundation.

So we're in a transition to a more full mattress set, including Flexfit if that's what we have (inaudible). And on that basis we are actually seeing a little bit of an increase in ASP.

Operator

Brad Thomas, please state your company name, and you may ask your question.

Brad Thomas - KeyBanc Capital Markets

Brad Thomas of KeyBanc Capital Markets. I want a just a take step back and think about how you all are going to be approaching the growth investments and the capital allocation over the next couple of years. I mean it seems pretty obvious that there is still a huge opportunity for growth ahead of this company with less than 2% market share.

When you look at the areas of investment today, from a philosophical and practical standpoint, how do you think the company approaches the business differently than perhaps it did prior to the last period of growth for the company?

Bill McLaughlin

Brad, I'll give you my answer and then Jim can chime in having a little more time to think about it. But for me it's pretty straightforward that just as you said, we have a significant opportunity in front of us; we now have the fundamentals locked in. I think what's going to be primarily different is our more focus on leverage and productivity as a first step wherein, before we had average sales per store, we got it up to about $1.5 million, but we were adding a lot of stores and doors on top of that and was not increasing significantly.

Our first opportunity is to just leverage the heck out of the stores, and that we can. That's going to be done primarily on a local basis. So I would say some of the difference in our investment is going to be on a more market-by-market basis, combining the investment of marketing and real estate.

Beyond that, we are just getting into the product development ramp up again, and don't know really what the capital requirement will be in that area. But as you said, our first opportunity is just growth of the stores and the marketing programs to build that awareness. It's impressive, when you look at our market development spread in that we have some major markets where we have very, very low shares. So big opportunities to grow in those markets as we go forward.

And I'll turn it over to Jim with any other answers.

Jim Raabe

The only thing that I would add, and really just to reinforce Bill's comments, it is about really focusing on the core, and the being defined as our own company-owned channels and the sleep products, mattresses, bedding collection, where I think earlier, we expanded a bit outside of that. That doesn't mean there aren't opportunities around that, but the core growth is going to come from that core. And then the second piece is just being very focused on making sure that we are getting margin expansion along the way.

In our earlier growth cycle, we had a lot of very strong top-line growth with not a lot of margin expansion. And we're going to make sure we maintain that margin expansion at every step of the way.

Brad Thomas - KeyBanc Capital Markets

As we think about some of these investments on the immediate front and on the real-estate front, over the course of the next year, should we think of them as being still in sort of a testing phase where you would determine if they are suitable to be expanded to more of a national platform or is it a case where you are kind of going market-by-market in some of your maybe less productive markets and then would in turn roll that out to other markets?

How should we think about the scale and scope and timeline of some of these investments?

Bill McLaughlin

Well, let's would talk about our investments kind of in pieces. Some of the major investments that are most important here this year are on the creative evolution of our advertising, as well as the development of our digital platforms. Those will be developed, piloted, and then depending on their performance, rolled out more nationally.

The third area of primary focus is on market development, both media and real-estate. That'll be, just by the nature of it, it's going to be a little different market-to-market. So we'll have to prove a formula here in 2011, and then depending how that formula looks like, we'll judge the rollout of that in '12 and beyond.

Brad Thomas - KeyBanc Capital Markets

And then just one last follow-up on the investments in R&D. Bill, as you look at the current merchandize offering, do you think this would be more of a focus on mattresses, or is there an equal or greater opportunity in some of the accessories that you sell?

Bill McLaughlin

Well, I think there are opportunities in both, Brad. The bed though is our core. And the starting point is that we believe we have already the most advanced and differentiated product in the market.

So our first priority is to secure that technology and that competitive advantage. We have been doing that with reliability. We've been doing that with continuous improvement of that core product.

Incremental resources will then be allocated to broadening the features and benefits reach of individualized comfort, and we'll do that both in the bed, but we will also do corollary advances in the accessories to support that.

Operator

Mark Rupe, please state your company name and you may ask your question.

Mark Rupe - Longbow Research

It's Mark Rupe, Longbow Research. Could you give us an idea if there was any noticeable change in kind of the demand flow or trend during the fourth quarter, you know, in the exporadic amount, which will not be all, but it looked like it has slowed in December. I was just curious to see if there was any kind of noticeable change in your demand trends during the fourth quarter.

Bill McLaughlin

There have throughout the year been some ups and downs. It's never been just a straight smooth curve. I would say though that as we got closer to the end of the year, there seemed to be a little bit more positive feeling from the consumers as a whole. I think we recognized it and we would expect there will continue to be some of that volatility going forward.

But what we have seen is similar to what you've heard in the broader press about the macro, which is there seemed to be a little bit of an improvement in the consumer mindset overall.

Mark Rupe - Longbow Research

And then as we look into fiscal '11, the upper single-digit comp, thought process is definitely positive. Just curious to see as far as how it progresses through the year, on paper it looks like the first half is real hard. That said, I know that the first half in the prior two years was really weak. Just curious to see if you think that for modeling purpose is there any kind of difference in flow to the quarters on comps in 2011.

Bill McLaughlin

I wouldn't expect any dramatic swings from quarter-to-quarter. We felt as if 2010 worked much more normalized from seasonality standpoint than anything we've seen in a couple of years. So fourth quarter still feels a little bit lighter than maybe where it was four or five years ago. But overall, I think the seasonality last year was pretty normal.

Mark Rupe - Longbow Research

And then just a couple of housekeeping. Did you say 2X on R&D spend next year?

Bill McLaughlin

Yes.

Mark Rupe - Longbow Research

And then as far as the non-mall, you said 20 by yearend. Did you end up like in the 5 to 10 range?

Bill McLaughlin

We have about six, opened right now about four just within the last month in the new format.

Operator

(Operator Instructions) Joan Baugh, your line is open. Please state your company name and you may ask your questions.

John Baugh - Stifel Nicolaus

John Baugh, Stifel. On the stores, could you tell us what you're going to do in the mall? Will you shrink 20 or will you close some and open some somewhere else? What's going to be going on with the mall-based?

Bill McLaughlin

John, we are really looking at it at a market-by-market basis and what's the right distribution of stores in those markets. So a lot will depend on the market. And we are opening some new mall, we are relocating some mall, and then within market we're also relocating out of mall to these non-mall segments. But we are also improving our enclosed mall presentations as well. So we are just trying to find the right way to develop each market.

John Baugh - Stifel Nicolaus

I guess you've only had two of the non-mall-based stores open for a while. Is there anything you can give us either numerically or in terms of color about how those are going?

Bill McLaughlin

As I said, it's real early. We've got four of them that have just been opened a month or so, and it's going to take a good year to see the whole seasonal trend. And what we are watching for is the absolute traffic for both the store and the market impact of these. So again, early indications are positive in that we are seeing sales about in the area that we were looking for, but we will come at more in the next call as we got another quarter under our belt.

John Baugh - Stifel Nicolaus

Are any of the stores that you are opening either mall or non-mall, in any of the markets where you went dark, in the big markets like New York or Boston or Chicago, are these still in to leverage existing media spend?

Bill McLaughlin

They are primarily focused on markets that we have more of a presence in so that we can leverage our marketing efforts there a little better.

John Baugh - Stifel Nicolaus

And then on the attach rates, could you go over that commentary again, what you've done? It sounds like you have two adjustables. There is a price difference between the two you're seeing a mixed shift and then comment on attach rates.

Bill McLaughlin

What we have is we obviously have a mattress and then we have our foundation which is commonly referred to more as a box spring by the other spaces. But what we've always done is when we have quoted average mattress prices, it's been mattresses divided by bedding sales, which includes foundations and mattresses. But we haven't included in that number the FlexFit, which is the adjustable foundation.

More and more, we're seeing an increasing number of consumers that come in and choose the FlexFit rather than choosing the traditional foundation. And so what appears to be a decrease in the average selling price in the way we were measuring it before, it was actually just a migration from the traditional foundation to the FlexFit.

So we are not seeing a change in penetration of people buying a base to the bed. We're just seeing more of them take the foundation, which is a higher priced unit. And as a result, we are going to this more complete measure.

John Baugh - Stifel Nicolaus

Warranty liability dropped I noticed. What drove that number? Was there credit in the income statement anywhere in that result?

Bill McLaughlin

I think you are referring to the decrease in the balance sheet on the liability line. And just to clarify little bit, there is a line item that's actually broken out in non-current liabilities. That's warranty. There is also a warranty liability that's in current liabilities, but it's smaller. So it's buried in other current liabilities. So you don't get the full picture just looking at the balance sheet.

But to answer your question, we did see a reduction in our warranty liability as a result of trends that we've seen on improving warranty claims as a result of our Six Sigma efforts and our improved quality and manufacturing processes. There was a benefit in the P&L that is flowing through gross margin. And as I mentioned, that's part of the reason for the improvement in the gross margin rates in the fourth quarter.

Some of it is also due to the fact that we did reclassify some of the long-term liability into our current liability. So the decline is not as big as what looks like on the balance sheet. When we file the 10-K later in the month, there is a more complete breakout in that document.

John Baugh - Stifel Nicolaus

My last question is on guidance. There was some commentary in there about how you're not assuming benefit from some of the growth investments. You did announce you're going to increase media spend at least 15% or greater. So I'm assuming that that's incorporated in your thinking about sales guidance. But just clarify for me, what's assumed that's going to benefit verses not assumed.

Bill McLaughlin

So you're right, John, we did say that we're increasing our media at least 15% in our plan. As I said we're working on new creative evolution of our current spots, we're not assuming in our outlook that that has any significant increase or decrease.

We are working on a new website redesign, and we're not assuming that that has any significant upside. And we're investing in a lot of this local market development, and we're not assuming that that goes beyond what historic rates of return on investment would be. So we're not really assuming any significant lift from some of those investment.

That's what we were referring to. I think we've taken a pretty balanced look where we've built in the expenses and we haven't built in all of the upsides. It could occur.

John Baugh - Stifel Nicolaus

Bill, the timing on all those, the websites really was a Q2 event. What about the new creative and the local development?

Bill McLaughlin

That should be out in March.

John Baugh - Stifel Nicolaus

And then the local development?

Bill McLaughlin

Local development is kind of baked in quarter-by-quarter to the year depending on the market.

Operator

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

Mark Kimball

If there are no further questions at this time, then we will conclude the call. Thank you all again for joining us and we look forward to reporting further following the first quarter of 2011. 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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