Select Comfort Corporation's (SCSS) CEO Shelly Ibach on Q4 2015 Results - Earnings Call Transcript

| About: Select Comfort (SCSS)

Select Comfort Corporation (NASDAQ:SCSS)

Q1 2016 Earnings Conference Call

April 28, 2016, 05:00 PM ET

Executives

Dave Schwantes - Vice President of Finance and Investor Relations

Shelly Ibach - President and Chief Executive Officer

David Callen - Senior Vice President and Chief Financial Officer

Analysts

Brad Thomas - KeyBanc Capital Markets

Budd Bugatch - Raymond James

John Baugh - Stifel

Peter Keith - Piper Jaffray

Seth Basham - Wedbush Securities

Jessica Schoen Mace - Nomura

Keith Hughes - SunTrust

Curtis Nagle - Bank of America Merrill Lynch

Mark Rupe - Longbow Research

Operator

Welcome to Select Comfort's Q1 2016 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. If anyone has any objections, you may disconnect at this time.

I would like to introduce Mr. Dave Schwantes, Vice President of Finance and Investor Relations. Thank you, you may begin.

Dave Schwantes

Good afternoon and welcome to the Select Comfort Corporation first quarter 2016 earnings conference call. Thank you for joining us. I am Dave Schwantes, Vice President of Finance and Investor Relations. With me today are Shelly Ibach, our President and CEO; and David Callen, our Senior Vice President and CFO.

This telephone conference is being recorded and will be available on our website, at sleepnumber.com. Please refer to the details in our news release to access the replay. Please also refer to our news release for a reconciliation of certain non-GAAP financial measures and supplemental financial information 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. Please also note that we have posted an updated investor presentation on our website at sleepnumber.com.

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

Shelly Ibach

Good afternoon and thank you for joining our first quarter earnings call. My average SleepIQ score in April is 78. Today, I will update you on our ERP implementation and highlight our growth initiatives for the balance of 2016. Our first quarter results were on track with our internal expectations. Net sales were $353 million, up 1% from the prior year’s quarter and earnings per share were $0.27.

These results reflect the completion of our ERP implementation in the quarter. We are on target with our plans to deliver earnings per share of $1.25 to $1.45 for 2016. In the back half of the year, we expect significantly more contribution margin as we grow sales, operate the system more efficiently and delivery supply chain leverage.

Customer online sentiment referrals, traffic and related sales trends are improving consistent with our expectations. We are operating in a more sluggish economic environment, but we were still able to achieve our first-quarter sales and profit goals. A few weeks ago, we started our outreach program to customers who were negatively impacted by our service levels during the ERP implementation.

Our objective is to rebuild trust with Sleep Number and ensure our customers understand that our issues have been resolved. Overall, we are very pleased with the progress we made in the quarter and while we still have efficiencies and more work to do, these are opportunities in front of us. Sleep Number’s transformation has been monumental and necessary to be able to lead and adapt to the changing expectation of consumers.

We are emerging from a period of deep investment that strengthened our competitive advantages and marketplace differentiation. We have fully evolved from a 1800 direct marketing mattress company for people to a national consumer innovation company and the leader in sleep technology. We are now well positioned for accelerated earnings growth in improved shareholder returns as we only realize the benefits of investments in our stores, products, marketing, and ERP system.

To this end, our current initiatives support each of our three drivers of earnings per share growth. Increase in demand, leveraging our model and deploying capital efficiently. Here are the highlights. Increasing demand by attracting new and existing customers the Sleep Number.com and to our national store base is a key part of our growth strategy.

From a media perspective, our econometric model has consistently led improved returns on our investments in a rapidly changing media environment, building our digital media platforms to optimize individualized content message and audience in real time is our top priority. Early success includes improving our social ad effectiveness by more than 25%, which is now our highest performing digital media.

National television advertising remains our most productive form of media and we continue to advance our no better sleep campaign. You will soon see our next ad featuring our differentiated benefit knowledge and adjustability to support the Memorial Day selling period. Our innovative products deliver higher quality sleep and customers have responded strongly to our technology.

Third party consumer satisfaction awards and our own research all demonstrate our sleep leadership position as does our repeat and referral business. We expect to bring new customers to our brand through the launch of our technology driven It Bed by Sleep Number. Our digital go-to-market strategy will be focused on value and engage a younger tech savvy customer who is more apt to purchase online.

We will share more details on our next call. Exclusive distribution has been our top area of investment over the past five years. We have a very healthy store portfolio with about half of our stores in non-mall locations and the other half in productive malls across our market. In 2016, we will open nearly 50 incremental stores. We have opened 14 stores since the beginning of the year and will open our 500th store in May in the Minneapolis market.

We also plan to launch our eleventh aggressive growth market later this year. This strategy is designed to double market share in three years in large underpenetrated markets and has consistently delivered results. Our retail productivity of approximately $1000 per square foot is driven by differentiated store experience with a moderate store design.

For the second year in a row, we were just recognized with a silver outstanding international store design award from the Association of Retail Environment. We continue to focus on improving our online experience and the connection between mobile and the stores. One of our significant advantages is the individualized sleep experience, our sleep professionals deliver to their customers.

I just returned from our Annual President's Circle Event with more than a 100 of our top sales performers. Their passion, talent and commitment to building relationships in improving life through our sleep innovations is stunning. The new customer relationship management system we now have in each of our stores will help our sales team be even more effective.

Our new system also means we can now schedule home deliver in the store at point-of-sale. This capability was implemented in two-thirds of or stores in March. It will be available in the rest of the stores in the coming months. This is game changing for us on several level, starting with the convenience for our customers. They leave the stores knowing when their bed will be delivered and in some cases delivery occurs within a week from purchase. There is no need for a discussion about lead times and multiple phone calls to schedule delivery.

Later this year, when we launched the It Bed in our next iteration of SleepIQ Technology, our customer will be able to track their delivery right on their SleepIQ app. This is a good illustration of how our ERP and SleepIQ technology platforms will complement and support one another for a seamlessly efficient and connected customer experience.

Our future innovation and value to the customers will build off these platforms. This leads me to our second EPS driver leveraging the business model. Our new ERP system unlocks opportunities throughout our operation. In addition to scheduling deliveries at point-of-sale we expect to cut our delivery time in half in 2017 to seven days. This is the result of our made to stock inventory initiative and the simplification of our logistics network.

Last month, we announced that Suresh Krishna has joined us to lead operations and supply chain. He brings extensive experience in manufacturing and supply chain operations lean initiatives and ERP transition. Suresh is focused on driving operational efficiencies while evolving our supply chain to better support product innovations and expedited delivery.

We also announced a promotion of Andy Carlin to Executive Vice President and Chief Sales and Service Officer. Home delivery will now be highly integrated with sales to support our customers. We are streamlining our process in execution form first contact at scheduling all the way to in-home installation. Andy has successfully led our sales and real estate operations for the past 8 year reinvigorating our retail store portfolio and delivering significant selling expense leverage.

Our third EPS driver is deploying capital efficiently. We have Bed executing against all three cash priorities investing in our growth, financial flexibility, and share repurchases. Last year, we made significant investments in our two technology platforms SleepIQ and ERP, and we are now focused on leveraging these investments to deliver return.

Our acquisition of BAM Labs now called SleepIQ Labs is helping us accelerate innovation and delivery efficiencies. Specifically, we are able to use aggregate biometric data to deliver increase benefits at a lower cost. We expect this acquisition to be accretive to earnings in 2017, due to sales growth in reduced product and data storage cost. This platform is a source of daily interactions with our customer which will play an increasingly important innovation role.

In conjunction with our strategic transformation, we have evolved our capital structure to a position of financial stability and investment. We can now accelerate profitability through top line growth and margin expansion driving to an ROIC of more than 13% by the end of the year. In the first quarter, we improved our financial flexibility by expanding our revolver to $150 million and increased share repurchases to $50 million versus $20 million the prior year. We continue to see strong value in our shares and expect to operate with lower cash on hand returning excess cash to shareholders through share repurchases.

Our consumer innovation strategy is our path to long term value creation for our shareholders. Leading this transformation to position the company for sustainable profitable growth has taken clarity, alignment and results by the management team and the board of directors, and strong governance has been a part of this foundation. To this end, we recently appointed two new board members, Vicki O'Meara and Barbara Matas. Vicki has deep supply chain and big data expertise and Barbara has more than three decades of experience at capital markets and risk management.

We are pleased with the trajectory of our business in an industry that has average growth rates of nearly 6% over the past five years. During that same period, we have achieved a compound annual growth rate of 15% because of our innovative fleet solutions, store experience and marketing efforts. I want to thank our Sleep Number team for their dedication to our strategy and passion for our mission to improve life by individualizing fleet experiences. We are on pace to reach a milestone later this year of improving more than 10 million lives since our inception as a company.

Now, I will turn it over to David to provide additional details.

David Callen

Thank you, Shelly. Net sales of $353 million for the quarter were up 1% on top of 27% growth in the prior year’s first quarter. The operational metrics we use to track are ERP recovery advanced largely as expected during the quarter. This performance according to plan is an important call up. It signals the containment of ERP launch risks and improved line of sight to operating metrics post ramp up. We estimate the ERP implementation effects on sales and costs impacting Q1 earnings per share by approximately $0.25.

As expected, net sales in Q1 benefitted from shipments of the high Q4 ending backlog, partially offset by lost sales we attribute to ERP challenges. Sales orders were down mid single digits as expected for the quarter. We made solid progress improving customer delivery execution during the quarter resulting in about 1% more volume delivered than planned, and an ending backlog in line with the prior year. This pull forward approximately $4 million in net sales from Q2 into Q1. Specific sales metrics for the quarter include a comp sales decline of 4% yet reflect 18% two year stacked comp growth. ARU of $3,978 was up 1% for the quarter while units declined 1%. Our trailing 12 month average comp store sales of $2.4 million declined 3% versus the prior year due to ERP impacts in Q4 2015 and the first quarter this year.

Our gross margin rate of 59.2% improved 300 basis points sequentially from Q4, but was 250 basis points below the prior year. Appeasements, labor inefficiencies, and excess freight and material cost accounted for the bulk of the year-over-year decline. Operating expenses of $189 million, up 10% versus the prior year came in slightly favorable to plan as we managed our spending. Sales and marketing cost were up 7% in line with the 7% increase in our total store portfolio which ended at 497 stores. As expected, we incurred incremental IT depreciation of $3 million primarily through our G&A expense line and $4 million of incremental R&D cost for the SleepIQ LABS and the advancement of our innovation pipeline in the quarter.

We generated $64 million in cash from operations in the quarter, up 31% from $49 million in Q1 last year. Inventories were $81 million at the end of the quarter as expected. With the strong cash generation and value of our shares, we invested $12 million in capital projects and repurchased $50 million of our common stock during the quarter. Although we ended the quarter with nearly $30 million in cash and securities, we continue to expect to operate with less cash on hand during the year. This will likely include temporary draws from our $150 million revolver during seasonally low cash periods like the second quarter.

We are reiterating our 2016 guidance for full year earnings per diluted share of $1.25 to $1.45. This includes approximately $0.30 per share of ERP implementation impacts which is the high end of the range we provided on the last call. The guidance continues to assume low teen growth and net sales for the year with low single digit growth in the first half. While we don’t normally fund quarterly guidance, we recognize there are several shifts in our business year-over-year due to our strategic investments and ERP recovery efforts. Our sales and cost assumptions are expected to result in essentially breakeven EPS for our seasonally low volume second quarter. This is in line with our previous expectations for the first half of 2016.

Here is a reminder of other specific 2016 guidance call outs. We expect approximately 6 to 8 points or $40 million to $50 million of pressure on net sales in the first half largely in Q1 to be partially offset by the delivery of the elevated backlog coming into the year. We plan to deliver 50 basis points to 100 basis points of gross margin improvement for the year. Margin declines in the first half are expected to be more than offset by gains in the second half driven in part by ERP enabled operational improvements. While we pursue efficiencies throughout the company, we still have work to do to reduce excess operating labor and freight cost particularly in plant order fulfillment, third party logistics integration and home delivery route density. We expect to be a pre-ERP implementation efficiency levels as we exit Q2.

Sales and marketing costs are expected to be 44% to 45% of net sales for the full year with approximately 250 basis points of deleverage expected in the first half, more than offset by leverage in the back half of 2016. We are forecasting approximately $60 million of depreciation and amortization in 2016, an increase of $12 million year-over-year. The bulk of this is due to the new ERP system and flows through our G&A expense line. Our commitment to continued innovation is reflected in approximately $12 million higher R&D cost largely from the labs acquisition, and we are forecasting an income tax rate of approximately 34.5%.

With more than 100 basis points improvement in our EBITDA margin, we expect to generate record cash from operations in 2016. We plan to reinvest $70 million in high ROI capital projects including approximately $40 million on our retail stores in digital platform. This includes adding 47 net new stores to reach 535 by year end and to continue advancing the productivity of our website. We expect ROIC to exceed 13% for the year and expect share repurchases for the year to somewhat exceed full year free cash flows.

Finally, our outlook does not contemplate a decline of consumer spending the balance of the year. We are well positioned to deliver on our commitments to improve margins and deliver accelerated profits in the back half of 2016 as well as our $2.75 EPS commitment for 2019. I will close my prepared remarks by adding my sincere gratitude to our highly dedicated and motivated Sleep Number teams.

With that, Cary, please open up the line for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Brad Thomas of KeyBanc Capital Markets. Your line is now open.

Brad Thomas

Hi, good afternoon and thank you for all the details. My first question was just going to be around the cadence of the business. Obviously there are moving parts with ERP disruption that you are working to remedy. I think David you referenced overall orders in the quarter being down mid single digits. Any more color around may be the trend in same store orders and how you’re feeling about orders as we move into the second quarter would be very helpful.

Shelly Ibach

Hey, Brad, we are very pleased with the progression of our business both with the ERP implementation and the corresponding trends from a operating, technical and service metrics. And we saw the correlation with our consumer and sales progression through the quarter. As I indicated in my remarks, we do see a sluggish environment but we are able to work through that and deliver on the performance. The consumer is a bit more resistant, but we’re positioned well with our direct to consumer model, sleep innovation, leadership focused on benefit driven features. And then, also having to support J.D. Powers and consumer reports and those confidence builders for the consumer. We did see some increase with ARU in the quarter and we’re continuing to progress our marketing to be able to support the increase of sales as we move into the second quarter along with our store actions. For us, it’s been progressive as we’ve continued through the first part of the year.

Brad Thomas

Okay. Thank you. And if I could have a second question on ARU 1% in the quarter, I think this is the smallest that we had see in a while obviously the number of things you all can do to keep driving that higher in the future, but as we think about the puts and takes on ARU, what was it that has resulted in kind of the moderation growth that we’re seeing here in this most recent quarter?

Shelly Ibach

Yeah. The ARU growth I mean, just overall Brad, I mean this is the quarter we expected coming. If you think about where we were at the start of the quarter, we weren’t even up running on the system. It wasn’t until the end of January that we were fully operating this system and then early in February where we delivered our first week of our 7000 units. We operated with extended lead time all the way through the quarter until the very end of March when we return to normal lead time.

So we are pretty pleased with delivering the quarter that we did and certainly right on where we expected it to be and still getting some ARU growth. We stayed at as we went into the quarter that we expected most of our growth to come from units this year with some from ARU, but we look at this on an annual basis year-over-year and we’re excited about being able to deliver some unit growth too.

Brad Thomas

Great. Thank you, Shelly.

Operator

Thank you. Our next question is from Budd Bugatch of Raymond James. Your line is now open.

Budd Bugatch

Good afternoon, Shelly good afternoon David and David. If I could let’s just go through the second quarter David, I think you said you’re going to be breakeven in the second quarter, just want to make sure or kind of get where the moving parts are? The G&A looks like it’s what $30 million a quarter or so, is that still at the right place 30, 31?

David Callen

Yeah. That’s directionally correct, but if I can give you a few other points, just keep in mind that Q2 is a seasonally low sales point for us. I talked about the expected $0.05 of ERP pressure in Q2. I also highlighted that we expect about $0.07 pressure year-over-year from ERP depreciation and the labs acquisition combined. And then, I highlighted in my prepared remarks as well some deleverage in selling and marketing as we support our initiatives that’s contributing to about $0.06 year-over-year change. Those are the big element.

Budd Bugatch

Okay. And did you expect revenues to be up, you’re at 7000 and that would imply something over 90,000 units a quarter, are we still at 7000 units a week or we are better than that?

David Callen

No, our second quarter is the smallest quarter Budd, so we don’t normally talk about our weekly shipment volumes, but the point is that we still expect about $10 million of sales pressure related to the ERP implementation challenges as we rebuild our referral business. But this is exactly the kind of first half that we were expected.

Budd Bugatch

Gotcha and lastly from me, inventory at $81 million is up nicely year-over-year, I realize that’s because you want to be able to have that in stock. Is that about where you want inventory to end quarter-to-quarter and how about the end of the year?

David Callen

Yeah, Budd I would - the initiative that we have underway we’d make to stock etcetera. We landed where we thought we would for the end of the first quarter. We expect Q3 to have a little bit of a bump maybe $3 million to $5 million-ish and maybe and about this kind of range by the end of the year.

Budd Bugatch

Okay. All right, Dave. Thank you very much and good luck Shelly. Good luck on the balance of the year.

David Callen

Yeah, thank you so much Budd.

Shelly Ibach

Thank you.

Operator

Thank you. Our next question is from John Baugh of Stifel. Your line is now open.

John Baugh

Thank you for taking my questions and it’s nice to have UPS behind us. If I could just maybe ask a few things, anything you’re seeing in mix changes in your business?

Shelly Ibach

You know, during the first quarter; we did have a little bit of mix movement. We primarily associated with the fact that we were delivering our UPS ship orders on time on normal lead time, but yet home delivery was extended 6 to 8 weeks and so we saw a little bit of movement towards the low end of our line related to UPS shipments.

John Baugh

Okay. And Shelly, you can be in the position by Memorial Day, I don’t know be back for full bore on promotions marketing, advertising etcetera.

Shelly Ibach

Absolutely John and we’re really excited about this next ad that we’re introducing to support this time period. I would say the drag we have as we go into second quarter is around our referrals and some on line sentiments that’s still out there on some site that we just need more time in volume to be able to overcome that. But, we’re making great progress and we’re actually ahead of some of the metrics that we thought we would be internally when we look at various satisfaction and approval referral type metrics from our customers.

So we have some more building to do, but we’re - where we thought we would be and that gives us great confidences as we head into the remaining quarters of the year.

John Baugh

Great. My last one just the share count at the end of the quarter and or maybe stick guidance where you think that falls for the year. Thank you.

Shelly Ibach

Great, thank you John.

David Callen

Yeah. Hi, John. We ended the first quarter with about $49 million diluted shares. I’m expecting the pace of repurchase to be aligned with as I said our cash flow generation in total little bit, we planned a repurchase total slightly more than our free cash flows for the year, ending in $47 million to $48 million or 47 million to 48 million share range.

John Baugh

47 to 48 by year-end, okay and it was 49 you said at the end of the quarter. I’m not sure that works with your weighted average at 48.8 for the quarter, if I miss or something.

David Callen

Yeah. We can take that offline.

John Baugh

Okay. No worries. Thank you very much, okay. Good luck.

Operator

Thank you. Our next question is from Peter Keith with Piper Jaffray. Your line is now open.

Piper Keith

Hi. Thanks for taking the question. Just a few things just to clarify the numbers you run at ERP disruption. So, David last quarter you thought the gross margin would be impacted by about 150 basis points, you guys were down 250, was that just from some of the access rate transportation?

David Callen

Yeah. Really was. We had a range of expected ERP implementation of $0.25 to $0.30. We operated at the high end of that range and that impacted largely the margin rate more than we’d expected.

Piper Keith

Okay. Very good. And then, just kind of backing into what the sales impact was - it looks maybe it was about $35 million to $40 million in Q1 and that would be about 10% impact from last year sales. Is it fair to say that you guys think you should have been tamping more like mid-single digits, if there have been no disruption?

David Callen

Yeah. That’s about right.

Piper Keith

Okay, very good. And then, last question I have is, you guys have indicated a few times in call here, about a sluggish environment. Could you just give us some feedback on what you’re seeing out there on the retail front and maybe do you think the mattress industry has been a little bit soft for the last couple of months?

Shelly Ibach

Yeah. I would - overall you read about in retailing and I think there are few things contributing to it certainly the macro economic factors, all of them have some drag on them right now. But also the way the consumer is changing and I think in retail in general there is a fair amount of commoditization with the broad ability of online purchasing and this is where our direct consumer model with exclusive distribution is a real competitive advantage and we look forward to continuing to compete in this industry sector and the broader marketplace around Sleep and health and wellness with the model that we have. For us, internally our probably biggest pressure is referral, which we’re building back, but we do see a more resistant consumer. You do have to fight for every sale and where we have a passionate committed frontline who has gained a lot more confidence in the last few months with the ERP implementation behind us and they build relationship with their customers and that’s really needed right now because of the customers taking a little bit longer in their decision making. So those are some of the indications. Just it’s not easy, the fish aren’t jumping in the boat, but we have the model and the initiatives and strategy to be able to compete in a variety of different marketplaces and we are prepared for this.

Piper Keith

Okay, I appreciate it. It’s good feedback. Thank you very much.

Operator

Thank you. Our next question is from Seth Basham of Wedbush Securities. Your line is now open.

Seth Basham

Thanks a lot and good afternoon. My first question just around the promotional environment. You talked about the sluggishness, but can you talk about how you are reacting promotionally, whether you guys are doing anything different?

Shelly Ibach

Yeah, hi, Seth. Overall, for the quarter, our promotions, our discounts financing really netted out to be very similar to the prior year. We do always managed these buckets slightly different. Year-over-year, week-to-week and the variation of promotions and we do test different tactics as well to see if during this type of environment just financing or dollars off, which one is more effective, and how do we lean into that, but we managed the total bucket between finance and discount dollars as we approach our promotion strategy. We also operate with contingencies and we utilize different contingencies at different times, that’s very much a part of our normal business practice.

Seth Basham

Got it. So as you look forward to Q2, Memorial Day, do you expect it to become more promotional or do you expect to have the same level of promotional impact year-over-year?

Shelly Ibach

We expect to be same very similar year-over-year.

Seth Basham

Got it. Okay. And then I may have missed this, regarding the second quarter, did you guys specific what you think sales will be guidance-wise, you are looking for flattish year-over-year or what’s the right number we should be shooting for?

David Callen

Yeah, Seth. We are talking about a low single-digit first half and about a low single-digit for second quarter as well.

Seth Basham

Got it. Okay, thank you very much.

David Callen

Yeah, thank you.

Operator

Thank you. Our next question is from Jessica Schoen Mace with Nomura. Your line is now open.

Jessica Schoen Mace

Hi, good afternoon.

David Callen

Hi, Jessica.

Jessica Schoen Mace

My first question is just a follow up on comments on ARU and I want to make sure I understand what your guidance for units to be a bigger driver of sales growth than ARU through the year if lead times in the home delivery have returned to normal and is no longer impacting some of those higher price products and your promotions are the same. What are the factors that’s may be keeping that ARU growth lower than it has been in years past?

David Callen

We are really pleased with our ARU overall and the ability to pull on the levers both for ARU and for units and we’ve had a great run with ARU. We continue to see opportunity there. We just have stated in our guidance that we are expecting more of our growth in the back half of the year to come from units rather than from ARU.

Jessica Schoen Mace

All right, understood. And then you mentioned customer outreach, I was wondering if there was any recent metrics understanding there’s been some noise with ERP, but any recent metrics on sales among existing versus new customers and if there is any kind of margin implication we should be thinking about as you outreach with those customers?

Shelly Ibach

Yeah, great question. With the outreach, this is the combination of both a personal note from me along with a phone call from their sales professional and it does include a $150 offer as an expression of our apology. Our number one goal is to rebuild the trust and assure them that our issues are behind us. We have that considered in our forecast and guidance and planned it into our full year when we set our guidance.

Jessica Schoen Mace

Great, thanks very much.

Operator

Thank you. Our next question is from Keith Hughes of SunTrust. Your line is now open.

Keith Hughes

Thank you. I had question on the bed in a box launch. You referred to more information on the next call. Will we get definite launch date at that time?

Shelly Ibach

Yes.

Keith Hughes

Okay. And just conceptually, we’ve seen other established companies launch bed in a box [indiscernible] and there really hasn’t been a lot of promotion, a lot of push on those so far by those players, while you have a separate and specific marketing campaign around your launch?

Shelly Ibach

Yes, we will Keith and it will be digitally focused. This is the It Bed by sleep number and ours is fully technology. We have adjustable firmness, comfort and supports through active comfort technology. It quantify sleep and make suggestions with our SleepIQ and it connects with the outside world there, exercising, nutrition, environment, SleepIQ API. So it is very different than your typical bed in a box in that it has technology. It is focused on tech savvy customer who uses technology as their go-to for health and wellness. Very simple, easy to order, easy to set-up, delivered in five days and we are very excited about what this will mean for the overall industry. And having this level of technology and value equation in this bed in simple execution, we are excited about the customers it will bring to the Sleep Number brand.

Keith Hughes

Okay, great. And second question, in your prepared comments you talked about recently two-thirds of the stores getting the ability to schedule delivery day, which is fantastic. Is that the first real benefit we are seeing from the ERP installed despite all the issues you’ve had with it?

Shelly Ibach

It is Keith. And it’s a benefit that we pull forward with the system. So it’s – the beginning of many.

Keith Hughes

Okay, thanks very much.

Shelly Ibach

Yeah, thank you.

Operator

Thank you. [Operator Instructions] Our next question is from Curtis Nagle with Bank of America Merrill Lynch. Your line is now open.

Curtis Nagle

Thanks very much for talking the call. So just a quick question on coming back to It Bed, I guess how should we think about A) I guess the market potential for the product and B) what the impact could be on overall ticket and do you think there is any risk of cannibalization or is it just completely incremental customer for you?

Shelly Ibach

Great question. We do have a slide on the It Bed in our new IR deck and it’s slide 13 and we specifically call out the size of our target of $43 million customers. We do see this bed bringing in new customer. At the same time, we understand that we could experience some cannibalization from part of the line and I think you will see that as we advance our innovation pipeline and introduce our next innovations that we thought this through very carefully and we are excited about where we are, we are excited about being on the other side of ERP and the continued advancement of SleepIQ technology.

Curtis Nagle

Okay, thanks very much.

Shelly Ibach

Thank you.

Operator

Thank you. Our next question is from Mark Rupe of Longbow Research. Your line is now open.

Mark Rupe

I’m sorry if I missed, did you clarify what the first quarter media spend was?

David Callen

No, Mark. We didn’t say it on the call yet, but it was flat for the prior year.

Mark Rupe

And dollars?

David Callen

Dollar is $45 million.

Mark Rupe

Okay, perfect. And the pacing for the second quarter, for the full year, do you have any color that you could provide on that please?

Shelly Ibach

On media, we stated on the last call that we expected about 100 basis points of leverage for the year.

Mark Rupe

Okay. And then just lastly on R&D spend, obviously, it’s picked up this year with the acquisition and everything, but what would be the – maybe the right level of R&D spend on a kind of go-forward basis? I think you said this year it’s going to be up $12 million or so, is that getting up to the level where you need to be or is it going to be continue to increase in 2017 as well?

David Callen

Well, we expect there to be some leverage as some of the innovations flow through. We’ve been spending ahead on some the innovations to make those happen. But I think 2% of net sales with some leverage over time is probably in the right level – way to think about it.

Mark Rupe

Okay, perfect. Thank you. Good luck.

David Callen

Thanks very much. I appreciate it.

Operator

Thank you. There are no pending questions in queue. I would like to hand the call back to our speakers.

David Callen

Thanks again for joining us today. We look forward to discussing our second quarter 2016 performance with you in July. Sleep well and dream big.

Operator

Thank you. And that concludes today’s conference. Thank you for participating. You may now disconnect.

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