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Select Comfort (NASDAQ:SCSS)

Q3 2011 Earnings Call

October 19, 2011 7:00 pm ET

Executives

Mark A. Kimball - Chief Administrative Officer, Senior Vice President of Legal, Secretary and General Counsel

Wendy L. Schoppert - Chief Financial Officer

William R. McLaughlin - Chief Executive Officer, President and Executive Director

Shelly R. Ibach - Chief Operating Officer

Analysts

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Mark Rupe - Longbow Research LLC

Jason Campbell - KeyBanc Capital Markets Inc., Research Division

Todd A. Schwartzman - Sidoti & Company, LLC

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

Eric Hollowaty - Stephens Inc., Research Division

Operator

Good afternoon. Welcome to Select Comfort's Third Quarter 2011 Earnings Conference Call. [Operator Instructions] I would like to introduce Mr. Mark Kimball, General Counsel. Sir, you may begin.

Mark A. Kimball

Thank you, Angie. Good afternoon, and welcome to the Select Comfort Corporation's Third Quarter 2011 Earnings Conference Call. Thank you 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; as well as Shelly Ibach, Executive Vice President and Chief Operating Officer; and Wendy Schoppert, Executive Vice President and Chief Financial Officer.

This telephone conference is being recorded and will be available on our website at sleepnumber.com. Please refer to the details set forth in our news release to access the replay on our website. We also have posted an updated version of our investor presentation on the Investor Relations section of our website, which provides helpful information for investors and which management may refer to in the Q&A sessions of this afternoon's call. Please also refer to our news release for a reconciliation of certain non-GAAP financial measures included in the news release or that may be discussed on this call.

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

I will now turn the call over to Bill for his comments.

William R. McLaughlin

Thanks, Mark, and welcome to Select Comfort's discussion of our terrific third quarter performance and exciting plans for the future. Before I begin, I'd like to thank Shelly Ibach for joining us today.

Given the importance of understanding our growth formula and its sustainability, I thought it helpful for you to hear from the architect and leader of this position within our business. Shelly recently assumed the role of Chief Operating Officer, which includes consumer insights, marketing, sales and product direction. During her more than 4 years with the company, she has played a key role in developing and driving sales and marketing strategies that helped stabilize the company and are now sustaining a high level of profitable growth.

Today, we've organized our presentation as follows: I'll start with a high-level perspective of the business, Shelly will provide a more in-depth review of our growth formula year-to-date with emphasis on the third quarter and on sales drivers going forward, Wendy will follow with the financial highlights of the recent quarter, our outlook for the remainder of the year and updated long-term expectations. I'll then return for a quick summary and to open the call to your comments and questions.

We were thrilled with our third quarter and are increasingly confident in Select Comfort's ability to consistently advance our leadership position both in the industry and as an investment opportunity. In 2011, we prioritized sustainable earnings growth with goals to expand margin and to build our balance sheet. We've also focused on our growth formula, narrowing to a few core strategies and refining key tactics for greater consistency of performance.

Three highlights from the quarter include net sales of $200 million, 25% greater than prior year with company-controlled channel comp growth of 26%; earnings per share of $0.31, 63% greater than prior year and annual operating margin tracking to exceed our first milestone of 12%, which is more than 200 basis points greater than our previous average annual high; and a cash balance at the end of the quarter of $136 million while remaining debt-free.

We've been lapping relatively strong prior-year performance all year, particularly in the third quarter. The third quarter has historically been the industry's and our most developed sales period. Achieving a 26% comp during this quarter confirms the progress of our growth programs.

Margin expansion and cash generation further accelerated shareholder value creation. We achieved record profit margin by focusing on our core business and leveraging our fixed cost. Looking ahead, we believe we are well positioned to continue building long-term shareholder value in an uncertain environment.

As for industry outlook, we remain relatively positive. After 30 years of steady growth, our industry was reset at the end of 2007 and through 2009, dropping approximately 20% with little recovery since. The industry association's outlook for mid single-digit revenue growth led by premium and non-spring segments seems reasonable. The industry is not likely to see another major pullback and should benefit from any economic stabilization or recovery. SLEEP NUMBER's opportunity is to increase consumers understanding of the value of personalized comfort as well as the value of our unique store experience, and our focus on brand and store awareness is clearly working.

Looking at market share, you begin to understand our opportunity to continue expanding within our core U.S. consumer mattress and sleep products market. Currently, we have less than a 5% share of the U.S. mattress dollar sales. In our lead markets where our advertising store count and SLEEP NUMBER bed ownership are more established, both brand awareness and market share are as much as twice our national average and still growing.

On the other hand, the largest metro areas at mattress markets are among our least developed, which represents significant opportunity for both sales growth and further margin leverage. We see significant opportunity to continue increasing share and sustaining our growth in a profitable manner.

As we move forward, our immediate priority is navigating the fourth quarter and holiday season, which in recent years has been challenging and less predictable. Then in 2012, it sets up to be an exciting year for continued shareholder value acceleration. We will build upon our core foundation, importantly layering on initiatives with the potential to further accelerate sales and margin growth.

For example, in 2012, we expect to increase our store base while continuing to increase average sales per store. We expect to add additional weeks of national TV and also continue to accelerate local market development. Product enhancements will continue designed to sustain gross margin improvement and incremental sales per transaction. And after increasing capital expenditures to support store expansion, we'll consider alternative uses of cash to further accelerate shareholder value.

More stores, more sales per store, more marketing support and more product advances all focused on even greater customer satisfaction, that's our formula for continued profitable growth.

To share more insight into our growth formula and its sustainability, let me introduce Shelly Ibach.

Shelly R. Ibach

Thank you, Bill, and greetings to everyone on the call. I'm excited to speak about how we are growing the business. As Bill mentioned, our third quarter performance represented important and meaningful advancements in our consumer-focused strategy. We have been deliberate with our investments in order to solidify our predictable formula to accelerate profitable and sustainable growth. As the consumers only choice for adjustable personalized comfort in beds and beddings, we are focused on setting a new standard in the sleep industry and becoming the consumers' first choice in sleep. Today, you will hear how we are advancing our integrated strategy starting with the customer.

Our #1 opportunity is to broaden awareness and consideration of SLEEP NUMBER, which includes our exclusive product in-store experience. Over the past year, we've rebranded all consumer touch points from Select Comfort to our more recognize SLEEP NUMBER brand. In addition, we have redefined our target customer, broadening who we are speaking to, specifically, a younger, more affluent aspirational and active customer. Our results are encouraging, which has given us confidence in our outlook.

I'd like to highlight 3 important growth advancements during the quarter, which focus on product, marketing and distribution. First, consumer insight-driven product introductions. We learned that understanding our personalized dual comfort is one of the top 2 attributes correlated to our customer making a purchase decision.

To support this insight in our rebranding, we launched new performance in Innovation Series beds featuring our proprietary SLEEP NUMBER DualAir technology with an elevated signature look and feel that unifies our products and brands. As part of the launch, we increased the price of each bed by $100 to $200. Our sleep professionals and customers have responded positively to these new products. Our 12% company-controlled ASP growth in the third quarter represents the impact of these changes in addition to growth from adjustable foundations and bedding collection.

Second, marketing and advertising. As we previously shared, awareness of our brand product and where to find it is a significant opportunity. Earlier this year, we tested national TV advertising during key consumer mattress selling periods with consistent success. We applied our layered national advertising strategy to the Labor Day event, our biggest event of the year, leveraging our competitive advantage as the only national mattress specialty retailer resulted in record performance for our company.

We reached a broader consumer segment with our benefit-driven and exclusive SLEEP NUMBER experience. All markets responded positively regardless of the various economic climate or our stage of brand development in a given market. And our consistent value and urgency promotional strategy continue to deliver growth in our mid- to high-end products and steady performance in our entry-level offering.

Third, our market-based distribution strategy, which involves increasing our availability to the consumer and enhancing our personalized selling environment. Earlier this year, we introduced an accelerated growth pilot for underdeveloped metro markets. Our goal was to prove a cost-effective formula to double our market share in these key markets within 3 years. Our plan focused on building consumer awareness and scale in major markets to compete aggressively on a local level. We are now confident in our formula, and we expect to deliver over half of our 3-year expectations in year one in all 4 pilot markets.

We also introduced a non-mall store pilot to increase awareness in real estate flexibility. This new non-mall store has a billboard-like impact and it's positioned where our customer expects to find us and also near our competitors. We are on track to have 20 of these stores by year end.

Importantly, we implemented a unique and experiential store design in these new locations to support our relationship-driven customer experience in our SLEEP NUMBER brand vision. Sales and profit results are ahead of expectations. With specific consumer insight from this new non-mall design, we developed a scalable new design for our mall stores. In August, we remodeled 4 mall locations and although early, we are very pleased with the results.

In summary, our growth strategies are proving successful, and we are building a more profitable business model. Our 29% increase in average sales per store resulted in surpassing our historical high of $1.55 million per store. We now have 66 stores or 18% of our portfolio averaging over $2 million compared to just 6% a year ago. The selling expense leverage is funding growth and increasing operating margins.

As we move into the fourth quarter, we will continue to aggressively drive our profitable growth strategy and progress our sales per store with the following key initiatives. First, we are introducing a proprietary AirFit Adjustable Pillow, just in time for holiday gift giving. We are positioning it as the most innovative gift of the year, with a dominant store presentation to capitalize on holiday mall traffic. Our SLEEP NUMBER bedding collection continues to be a source of average sale price growth for us and a competitive advantage supporting our sleep expertise as well as building our repeat and referral sales.

Second, we will continue to speak to a broader consumer base with our national media strategy and advance our learning in the fourth quarter during in less developed mattress shopping period.

Third, we will progress our market-based development by strategically expanding our store base. During the fourth quarter, we plan to add 7 new stores and remodel 10 with our new SLEEP NUMBER design. This design elevates our brand esthetic, accentuates our key brand attributes and enhances our customers' experience. We have defined and executed a core growth formula for SLEEP NUMBER that demonstrates our ability to grow in an uneven economic environment with fixed cost efficiency that allows us to remain flexible.

In summary, our integrated strategy includes reaching a broader, national and local consumer base; accentuating our individualize customer experience in all aspects of our branding and product; and strategically increasing distribution. Our goal is to ensure everyone will know SLEEP NUMBER and how it will improve their lives. I am confident we will make important advancements against this goal in the fourth quarter and in 2012.

Thank you for the opportunity to share highlights about our consumer-driven growth strategies, and I look forward to future updates.

I'll now turn the call over to Wendy to provide more details about third quarter performance and our outlook going forward.

Wendy L. Schoppert

Thanks, Shelly, and good afternoon. My remarks today will focus on providing detail behind our outstanding third quarter results. I will also discuss our current outlook for the remainder of 2011, as well as our longer-term expectations for the business.

During the third quarter, we achieved earnings per share of $0.31, a 63% increase versus last year. This performance reflects continued success around our priorities in 2011 of expanding margins and building our balance sheet while also advancing top line growth and share. Total sales during the quarter increased 25%. Additionally, sales grew 26% in our company-controlled channels, including retail stores, our direct call center and e-commerce. This increase was driven by a 12% unit growth in our company-controlled channels.

We also continued to experience strong growth in our average selling price during the quarter, with company-controlled channel ASP also up 12% year-over-year. Our ASP increase was driven by a higher mix of adjustable foundations and bedding as well as the pricing actions we took between January and July of this year. In total, pricing contributed approximately 4 points to overall ASP growth for the quarter.

We enjoyed strong comp growth throughout the quarter as we benefited from the successful growth initiatives that Shelly just described. As expected, average retail sales per store on a trailing 12-month basis reached a record-breaking $1.6 million. And as you all are well aware, we achieved this performance against the backdrop of a still depressed macroeconomic environment.

We are pleased with the market share gains we are achieving. As a retailer, our top line results are not directly comparable to the estimated industry results reported by ISPA. That said, ISPA's industry growth of 8% year-to-date through August provides good context when looking at our sales growth of 21% year-to-date through September. As we project forward to the balance of the year, we expect to continue to outpace the industry and gain market share with fourth quarter company-controlled comp growth anticipated to be between 20% and 25%.

Again, our priority in 2011 has been margin expansion and cash generation, and we performed extremely well on both measures during the quarter. Our operating income during the quarter of $26.5 million and operating margin of 13.3% were both third quarter records for the company.

Gross margin during the quarter of 63% was 50 basis points higher than the prior-year period. During the quarter, we invested in enhancements to our customer service policies and without this $1.6 million charge, gross margin would have been 63.8% or 130 basis points higher than last year. This year-over-year improvement in gross margin was driven by both manufacturing efficiencies and year-to-date pricing actions. As we look to the fourth quarter, we expect gross margins to be between 63.5% and 64% as we continue to benefit from manufacturing efficiencies and price increases.

Selling expenses continue to be a source of leverage and margin gain with marketing a variable investment. Sales and marketing expenses as a percentage of sales improved to 42.1% from 42.6% last year. Selling expenses as a percentage of sales declined by over 200 basis points, and this was partially offset by planned increases in media and other marketing. Media increased by 38% during the quarter to $24 million or 12% of sales as planned. We remain on track for media on a full year basis in 2011 to be 12.5% of sales.

G&A was 7.2% of sales, which was 170 basis points better than the third quarter of last year and is the lowest quarterly rate we've reported since 2007. Currently, we expect full year 2011 G&A to be approximately $57 million to $59 million.

Moving to the balance sheet, we continue to benefit from our differentiated business model as we self-fund investments in growth. Our just-in-time supply chain and the showroom nature of our stores allow us to maintain very minimal inventory levels, and we enjoy an advantaged working capital position as a result of our negative cash conversion cycle.

Our trailing 12-month EBITDA now exceeds $100 million. Cash and marketable securities totaled $136 million at the end of the quarter, and we have no borrowings under our line of credit. I will note that our cash and marketable securities balance of $136 million now exceeds our previously communicated target minimum of $100 million to $125 million. We expect to end the year at a similar level as Q3 -- the third quarter and look forward to providing an update on our 2012 priorities for capital allocation during our fourth quarter earnings call in early February. Our priority is and will continue to be to deploy cash in a manner that maximizes long-term value for our shareholders while prudently maintaining sufficient liquidity to weather any future steep macroeconomic declines.

As expected, our year-to-date capital expenditures increased from $3.5 million in 2010 to $14.5 million in 2011 as a result of increased investment in stores and systems. We now expect full year 2011 CapEx to be approximately $25 million. Finally, given the strength of our third quarter and current short-term outlook for the business, we have raised our full year 2011 earnings guidance from between $0.90 and $0.96 per diluted share to between $0.99 and $1.01 per diluted share, which is approximately 75% higher than the $0.57 per share we reported last year.

To recap, our outlook assumes we end the year at approximately 380 stores with company-controlled comp growth in the fourth quarter of 20% to 25%, gross margin in the fourth quarter of 63.5% to 64%, media as a percentage of sales for the full year of approximately 12.5% and G&A for the full year of $57 million to $59 million. Our outlook assumes no further deterioration in broad U.S. consumer sentiment.

As we look beyond 2011, we are providing new growth goals for the next 3 years, including comp growth of at least 10% to 12% per year, net store growth of between 5 to 7% per year and EPS growth of at least 20% per year. We are also targeting at least 15% operating income by 2015 as highlighted in our updated investor presentation that was posted today. More detailed guidance about 2012 in particular will be provided in early February.

To summarize, we are very proud of our performance during the quarter, both the high-quality top line growth we achieved and the significant growth and profits and cash we generated. And as we look to 2012, we are encouraged by the success we are seeing in our growth initiatives in the areas of product, marketing and distribution, which are now ready to be fine-tuned and scaled as we progress with our longer-term growth plan.

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

William R. McLaughlin

Thank you, Wendy. 2011 continues to be a year of SLEEP NUMBER records. Sales per store has now passed historic peaks and is expected to continue to decline even as we add stores. Operating profit dollars and margins continue to set new records and position us to sustained growth investments as we realize the significant leverage opportunity of our business model.

Employee engagement, pride and retention are at record highs and are critical to delivering a unique customer experience and to continue to innovate. And we've achieved a new all-time record sales event in Labor Day of 2011, which we aim to beat next year. Congratulations are in order to our employees and our partners across the organization who made this happen. Thank you all.

We have benefited from simplifying and refining our focus, boldly developing our growth formula and its execution. Our performance has been more predictable, even as market conditions have become less so. We remain disciplined and committed to margin expansion and cash generation as we increasingly drive sales and share growth.

This is a rewarding and exciting time for Select Comfort and the SLEEP NUMBER brand. We are looking forward to advancing our proven strategies and advantages and to improving many more lives through the continued passion and innovation of our team. On behalf of the company and Mark, Shelly and Wendy, I thank you all for your time and your interest.

Angie, we'd like to now open the call for your comments and questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Budd Bugatch.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Raymond James. I guess my first question is can you talk a little bit about the mix of sales between mattresses and some of the accessory products, which I know that you beefed up lately? And maybe have the accessories started to move the needle, and can you kind of give us a feeling on that?

Shelly R. Ibach

Sure, Budd. Our bedding collection has increased about 1 point in penetration to prior year, year-to-date, and we saw a 20% growth in our ASP during Q3.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Okay. That's great. Secondly, if you think about the other selling and marketing expense outside of media, it looks like that grew about $10 million sequentially and it looks like the pull-through ratio grew a bit as well. Are there any particular items in there that may not be recurring? And how should we think about that going forward?

Wendy L. Schoppert

Well what I would say there, Budd, is that we continue to see leverage overall with our selling and marketing. We did increase our media expenses a bit higher, but that was per our plan and per our plan to achieve a 12.5% of sales for media for the full year.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

No, I understand media. I was looking outside of media, the other items, the other part of selling and marketing. Is there anything going on in there, accruals of incentive compensation or other items that might have been a little bit abnormal?

William R. McLaughlin

Budd, I don't -- there's nothing that comes to my mind, but let us look at it and we'll get back to you if we find something that [indiscernible].

Operator

John Baugh.

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

Stifel, Nicolaus. The price increases, were they fully in effect for the third quarter? And then are there contemplated increases on the classic line at some point in the future?

Wendy L. Schoppert

Yes, John, the bulk of the pricing increases came in late July, so we did see those for about half of the quarter.

Shelly R. Ibach

Great. And John, or I think it's Steve, we're really focused on building a consumer insight-driven bed and bedding product innovation pipeline. And as part of our growth formula, you will see more frequent product introductions. And obviously, the classic line would be a natural you'll see from us in the future.

William R. McLaughlin

But John, I'm not sure I would count on pricing as a given just when we have product news. We will be leading with product news and then if we see value opportunity there, then we'll look to take pricing. But pricing is not what we're going to base our growth on next year. It's really consistent media and sales effectiveness and store expansion. That's the core of our growth [indiscernible] bonus to that.

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

Super. And then the $1.6 million on additional customer service reserves, could you tell us exactly what's going on there?

William R. McLaughlin

Yes, I mean as we learn more about our customer, we're constantly looking for opportunities to further delight them in ways that are important to them. Our goal is obviously to generate more -- to satisfy customers, which leads to more repeat and more referral and that's the long-term payback on that. Basically the opportunities that we identified in the third quarter to significantly increase customer satisfaction are now fully reserved, and we don't expect any ongoing incremental expenses from those actions.

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

Okay. That's super. And then I heard, I think it was Shelly, you were commenting about some pilots, 4 markets delivering half of a 3-year plan. Did I hear you right that those were larger metro markets? And just explain exactly what you're doing. I don't know if you can care to discuss which cities to develop penetration into the bigger metro markets.

Shelly R. Ibach

Sure. Yes, the strategy here is an aggressive growth strategy for underdeveloped metro markets as you stated, and we've really unlocked the critical formula for us for the market share growth. It is a 3-year acceleration strategy, and we do have consistent performance in all 4 of the markets we put in pilot this year around sales profit and share growth. The strategy focuses on layered investments, optimizing store locations along with breakthrough local marketing consistent with what makes sense for that specific market for both type and weight. And you are right. I probably will not share these specific markets, but we're pleased with the -- very pleased with the pilot, confident in our formula and we'll look to progress it in 2012.

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

So the problem, as I understand before, has been to build out a market like in Boston or New York, to pick 2. The media spend required to blanket that area is so big, and you can obviously initially opened that many stores that quickly to get the benefit. So do I hear you saying you kind of found a way to locally target advertising and get into these markets without a lot of red ink?

Shelly R. Ibach

Yes, it is a very targeted strategy with layered investments, going in strategically between real estate and marketing investments and we have a formula that is a bit of the spend ahead of sales initially. It is profitable here in the first year even with the heavy out.

William R. McLaughlin

Yes, John, just to be clear, you're exactly right. That has been our challenge, we think, particularly about New York or a Boston. We've got a lot of other metro markets, though, that are underdeveloped and we're using those kind of as on our learning curve as Shelly says of getting that balance of marketing at stores and all learning our way what the incremental return is. And I think it's a really important part of our growth formula as we go forward.

Shelly R. Ibach

Another add to the strategy which has really helped us is our national media strategy and that's giving us some additional efficiency as we move forward with these big markets.

Operator

Brad Thomas.

Jason Campbell - KeyBanc Capital Markets Inc., Research Division

This is actually Jason Campbell standing in for Brad from KeyBanc. My first question is you've kind of talked about a roughly a 30-50-20 mix between your c, p and i series. And I was wondering with the price increases that you put through on certain models, has that kind of affected that mix or even the mix was in the different categories or the different lines?

Shelly R. Ibach

Yes, we're seeing a similar mix overall this year as we have in the past, so consistent with some growth, as I indicated, in the mid to upper, but a very stabilized entry.

Jason Campbell - KeyBanc Capital Markets Inc., Research Division

Great. And then just one other question, I know -- it seems like your -- you've talked about some new products being developed and that's more of a focus. It looks like your research and development cost will be about roughly twice what it was last year. How should we think about that going 2012 and forward? Is this going to be kind of a similar run rate to what we are at right now?

Wendy L. Schoppert

Yes, Jason, we will look forward, as I said, in our February call when we announce our fourth quarter earnings to get in a bit more detail about our assumptions. And so as we think about 2012, I'd really stick with the longer-term growth goals that I talked about previously.

Operator

Todd Schwartzman.

Todd A. Schwartzman - Sidoti & Company, LLC

Sidoti & Company. You seem to have really benefited nicely from recent price actions. But irrespective of that I'm just wondering, was there any trade down evident within the SLEEP NUMBER line during the quarter that was maybe offset by some of the hikes on the higher end beds?

Shelly R. Ibach

No. We did not -- actually, it's slightly the opposite direction. We continue to speak to an opening price point to broaden our consideration for the overall brand that has had steady to growing mix throughout the year.

Todd A. Schwartzman - Sidoti & Company, LLC

Okay. And for the quarter, for Q3, what can you say about the company-controlled comps by geographic segment?

William R. McLaughlin

We don't -- well first of all, as I believe it was Wendy said in her comments, we were pleased with the consistency of comp growth through the whole quarter and across all markets. So we saw consistent results from our, in particular, our national advertising in the quarter across the whole country.

Todd A. Schwartzman - Sidoti & Company, LLC

Okay. And looking to the fourth quarter, is there anything planned out of the ordinary with regard to promotional activity?

Shelly R. Ibach

As I indicated for the fourth quarter strategies, we will be progressing our national media strategy along with our aggressive growth at the local level in combination with introducing our AirFit Adjustable Pillow, which should serve us well during the holiday gift giving, particularly in malls to advantage us with the mall traffic.

Todd A. Schwartzman - Sidoti & Company, LLC

And just to refresh, how many initial -- initially, how many SKUs will there be of the air pillows?

Shelly R. Ibach

Of the AirFit Pillow, we have 3 different SKUs.

Todd A. Schwartzman - Sidoti & Company, LLC

Okay. A good, better, best kind of scenario?

Shelly R. Ibach

It's a -- yes, a CoolFit Foam, a Memory Fiber and a Goose Down, yes.

Todd A. Schwartzman - Sidoti & Company, LLC

Earlier on in the opening remarks, you alluded to additional ways, means of increasing shareholder value. Looking to 2012, what do you see -- how would you rank, if you will, your uses of cash for the year?

Wendy L. Schoppert

Yes, our first priority is to maintain, as I said in my remarks, a sufficient level of liquidity, like I said, to whether any future steep macro declines. But then after achieving that and certainly we have achieved that today, our first priority is investing in our growth. And you just don't see a lot of companies with our return opportunities. And that as I said in my remarks, eventually we will look to other ways to return value to shareholders and look forward to communicating those plans to you in our next call in February.

William R. McLaughlin

And within the growth, obviously first and foremost, it's store expansion and store remodel and then their systems and then there's a little bit of product and infrastructure.

Todd A. Schwartzman - Sidoti & Company, LLC

Got it. On the off-mall, non-mall stores, what have you learned thus far from that experience?

Shelly R. Ibach

Sure. So our real estate strategy as we've indicated is market-based and target to building market share. And the non-mall advances awareness, which aligns with our #1 priority, and it also provides us flexibility to achieve our market development goals. Often times in the past, we may not have been able to find a location or mall within a certain market, or possibly we were not able to procure the exact type of location we would want within the mall. So the non-mall really gives us that flexibility to target the quality locations that we're looking for, and also serving the market better to reach the broadened target customer from a demographic and psychographic perspective.

Todd A. Schwartzman - Sidoti & Company, LLC

Is there any meaningful difference in the consumer demos that the non-mall stores have attracted thus far? I realize it's earlier in the game and sample size may not be all that large at this point?

Shelly R. Ibach

Right. Well, not as much in the demos because I think it's tied also with us broadening who we're speaking to. So I think we're able to more effectively reach that broader customer. And we're also seeing minimal cannibalization with our mall stores, and in many cases, see the awareness helping contribute to a higher performance in nearby mall stores.

Todd A. Schwartzman - Sidoti & Company, LLC

Okay. Lastly, Wendy, I wonder if you could just tell us what tax rate your fourth quarter guidance assumes? And also, any outlook you care to offer with regard to raw materials going forward?

Wendy L. Schoppert

Sure. With respect to tax rate, as you know, we updated each estimated tax rate each quarter. So it can cause some fluctuation on a quarter-by-quarter basis. But as we look to Q4, really using that year-to-date 36% would be the best planning estimate. With respect to -- I believe your question was regarding commodities. I guess if you think about what happened in 2011, we've seen oil and other commodities go up but then back down and we've been managing those increases with our manufacturing efficiencies and working with our suppliers. So as we look to Q4, we would expect sort of a similar environment as we had in Q3.

Operator

Eric Hollowaty.

Eric Hollowaty - Stephens Inc., Research Division

Stephens, Inc. But all my questions have been answered. Thanks.

Operator

[Operator Instructions] Mark Rupe.

Mark Rupe - Longbow Research LLC

Longbow Research. Relative to kind of what you're expecting, I know there's a lot of factors where you guys tended to perform very well on. But is there maybe a couple of the items that maybe stood out as maybe surprised you during the quarter to the positive side from a demand standpoint?

William R. McLaughlin

Well to be honest, the first surprise in the quarter was how low our stock and how volatile our stock. But more to your question is, Shelly talked a lot about formula-driven business approach and that's what we've been working hard on all year. And the result of getting the formula right is that it actually minimizes surprises. It gives us a much more predictable model going forward, even in an uncertain world. And so I think that's one thing that we learned in the third quarter is that it applied to -- the third quarter was choppier in the economic sense than the previous 2 and our formula still held, and I think that was an important learning. And second, when related to that was just the level of growth that we had but also that others had in the quarter from what we've seen in some of the other reports coming out here lately, which is potentially really good news in terms of underlying strength of the consumer in a certain segment.

Mark Rupe - Longbow Research LLC

Okay. And as it relates to the kind of the media strategy, you indicated that looking into 2012, there'd be additional weeks on national TV and I guess more expansion of the local market strategy. Any anecdotes on specific numbers you can provide or maybe if not, maybe from a mix standpoint? I know you've moved some of the local reach from, I guess the high 30s into the 40s and national from 0 to 20. It's there maybe an optimal kind of mix you want from, I guess a media budget standpoint going forward?

Wendy L. Schoppert

Yes, so you're right that we're not prepared yet to talk about 2012, but I'll let Shelly answer the second part of the question regarding the evolution of the media.

Shelly R. Ibach

Well, you can see from the investor deck that was posted on Page 9, it indicates that evolution and directionally what it will look like and you'll see some solidification as we move forward, strengthening our national. So I would expect the national to increase along with the local, again, speaking to a broader based consumer target customer and doing so with more vehicles, more high profile targeting of our media spend.

Mark Rupe - Longbow Research LLC

Okay. So is it fair to say then that the national kind of media spend in local albeit maybe it's a little bit more expensive than the direct response is more than effective?

Shelly R. Ibach

Right, yes. And it really speaks to some of the previous historic DRTV that we had been very focused on to deliver the lower reach and some inefficiencies against our expanded target. So we're seeing the efficiencies and the growth overall with the media migration that we have executed this year.

Operator

At this time, I'd like to hand the call back to our speakers for closing comments.

William R. McLaughlin

Well, if there are no further questions at this time, then we will conclude the call. We wish to thank you all for your support, and we look forward to reporting further to you following our fourth quarter. Thank you very much.

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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