Select Comfort Announces First Quarter 2009 Results

Select Comfort Corporation (NASDAQ: SCSS), the nation’s leading bed retailer and creator of the SLEEP NUMBER^® bed, today announced results for the fiscal 2009 first quarter ended April 4, 2009. Net sales for the quarter totaled $139.6 million, a decrease of 17 percent compared to $168.2 million in the first quarter of 2008. The company reported first quarter operating income of $0.3 million, an $11.3 million improvement compared to the first quarter of 2008. First quarter net loss was $2.7 million, or $0.06 per diluted share, compared to a net loss of $7.1 million, or $0.16 per diluted share, in the first quarter of 2008.

"During the quarter, we achieved our goals of significantly improving operating performance and generating positive cash flow, despite continued difficult economic conditions and a weak sales environment,” said Bill McLaughlin, president and CEO, Select Comfort Corporation. "Our year-over-year improvement reflects the first steps of successfully implementing our key priorities, which include more closely aligning costs with anticipated sales, re-igniting the Sleep Number brand and preserving cash.”

McLaughlin noted that during the quarter, the company continued to take significant actions with respect to its stated priorities, including:

Cost Reduction

• Reduced general and administrative expenses in the quarter by $2.8 million on a year-over-year basis, and reported G&A expenses as a percent of net sales of 9.6 percent, flat with the prior year;
• Closed 30 stores during the quarter, with plans to close another 25 stores by the end of 2009. These actions, cumulatively, are expected to reduce fixed store costs by approximately $10.0 million in 2009;
• Made significant progress on 2009 supply-chain restructuring initiatives that drive savings of more than $6.0 million in 2009, including logistics resizing and closing the company’s Omaha, Neb., facility; and
• Reduced first quarter marketing expense as a percent of net sales from 24.6 percent in 2008 to 17.8 percent in 2009, a 6.8 percentage point improvement.

Reigniting the Sleep Number Brand

• Re-launched the entire Sleep Number bed line, which contributes to an annual product cost reduction of $10.0 million, improves product quality, and focuses on price points below $1,500 to provide a broader entry-level selection of products and a clear step-up strategy for consumers;
• Realized positive return on investment from the test of a new local radio campaign, which highlights the differentiated benefits of the Sleep Number bed and the location of the company’s retail stores; and
• Demonstrated the continued strength of the Sleep Number brand and value proposition through an extremely successful sales performance on a one-day QVC "Today’s Special Value” promotion.

Preserving Cash

• Significantly reduced capital expenditures in the quarter by suspending store openings and discontinuing major IT projects. Capital expenditures in the first quarter of 2009 were $1.2 million compared with $10.3 million in the prior-year period.

"Our progress during the first quarter affirms that we have the right strategies in place for 2009,” McLaughlin continued. "While we have accomplished a great deal during the past several months, the Select Comfort team continues to pursue incremental ways to reduce costs, sustain and build our brand, and preserve cash. We believe these efforts also will significantly strengthen the company’s prospects for future success when an economic recovery ultimately takes hold.”

First Quarter Summary
During the first quarter, retail sales declined 17 percent, with same-store sales declining 14 percent. First quarter e-commerce and direct-marketing sales each decreased 34 percent. Wholesale sales increased 14 percent in the period, driven by significantly higher sales through QVC.

First quarter gross profit margin was 58.6 percent, up 1.0 percentage point from 57.6 percent in the prior-year period and 2.7 percentage points on a sequential basis from 55.9 percent in the fourth quarter. The year-over-year improvement reflects improved efficiencies in manufacturing, offset by a more aggressive promotion strategy to generate store traffic and drive sales.

Sales and marketing costs in the first quarter of 2009 decreased by 26 percent to $67.3 million or 48.2 percent of net sales. This compares to $90.6 million, or 53.9 percent of net sales in the prior-year period. General and administrative expenses were $13.3 million in the first quarter, or 9.6 percent of net sales. This compares to $16.2 million, or 9.6 percent of net sales, in the first quarter of 2008.

Cash flows from operating activities were $24.1 million in the first quarter of 2009, which included a $23.0 million tax refund associated with prior-year losses. This compares to operating cash flow in the first quarter of 2008 of $14.6 million. The company reduced capital expenditures to $1.2 million in the first quarter of 2009, compared to $10.3 million in the first quarter of 2008. As of April 4, 2009, cash and cash equivalents totaled $3.1 million, cash restricted under debt agreements totaled $23.0 million, and outstanding borrowings under the company’s revolving credit facility totaled $74.3 million. Subsequent to the end of the first quarter, the $23.0 million tax refund that previously had been restricted was used to pay down debt, and current availability of debt under the company’s credit facility was reduced by $18 million.

Outlook
"We expect the economy and consumer confidence to remain weak for the balance of the year,” said Jim Raabe, senior vice president and CFO, Select Comfort Corporation. "Historically, the second quarter is the seasonal low point for sales, and we believe that our 2009 second quarter will be consistent with that trend. This will pressure operating income, and we expect a net loss in the second quarter that will exceed the net loss we experienced during the first quarter. We also expect negative cash flow performance during the second quarter. For the full year 2009, we continue to anticipate positive free cash flow and moderately improved bottom-line results compared with 2008, excluding the $61.4 million of deferred tax valuation allowance and asset impairments incurred in 2008.”

Financial Position
The company continues to operate under and rely on short-term waivers to comply with certain ongoing bank covenants. During the fourth quarter of 2008 and first quarter of 2009, it entered into amendments to its existing credit agreement and has continued to operate under its borrowing limits as a result of modifications to that agreement. The current amendment under which the company is operating remains in effect through May 8, 2009.

As previously stated, the seasonally low second quarter is expected to increase cash requirements, which will require continued support and future accommodations from the company’s bank syndicate. The company has worked closely and cooperatively with its bank syndicate over the past several quarters and expects to continue to do so during the coming months. The company also continues to pursue a range of strategic and financing alternatives to enhance both its short-term and long-term financial flexibility. While the company cannot provide assurance that it will be successful in these pursuits, any strategic or financing alternative has the potential to increase the company’s cost of capital and/or be dilutive to existing shareholders.

Conference Call
Management will host its regularly scheduled conference call to discuss the company’s results at 5 p.m. Eastern Time (4 p.m. Central; 2 p.m. Pacific) April 29, 2009. To listen to the call, please dial (888) 972-6711 (international participants dial (210) 234-0123) and reference the passcode "Sleep.” To access the Webcast, please visit the investor relations area of the Select Comfort Web site.

A replay will remain available until midnight Eastern Time, May 8, 2009, by dialing (402) 280-1657. The Webcast replay will remain available in the investor relations area of the company’s Web site for approximately 60 days.

About Select Comfort Corporation
Founded more than 20 years ago, Select Comfort Corporation is the nation’s leading bed retailer⁽¹⁾. Based in Minneapolis, the company designs, manufactures, markets and supports a line of adjustable-firmness mattresses featuring air-chamber technology, branded the Sleep Number^® bed, as well as foundations and bedding accessories. SELECT COMFORT^® products are sold through its approximately 440 company-owned stores located across the United States; select bedding retailers; direct marketing operations; and online at www.sleepnumber.com.

Forward-Looking Statements
Statements used in this news release relating to future plans, events, financial results or performance are forward-looking statements subject to certain risks and uncertainties including, among others, such factors as our ability to fund our operations through cash flow from operations or availability under our bank line of credit or other sources, and the cost of credit or other capital resources necessary to finance operations; the risk of non-compliance with financial covenants under our bank line of credit and the risk that we may not be successful in obtaining continuing waivers or other financial accommodations from our lenders; the potential need to obtain additional capital through the issuance of debt or equity securities, which may significantly increase our costs or dilute our existing shareholders, and the risk that we may not be successful in obtaining additional capital that may be needed; current general and industry economic trends; consumer confidence; the effectiveness of our marketing messages; the efficiency of our advertising and promotional efforts; consumer acceptance of our products, product quality, innovation and brand image; availability of attractive and cost-effective consumer credit options; execution of our retail store distribution strategy, including our ability to cost-effectively close under-performing store locations; our dependence on significant suppliers, and our ability to maintain relationships with key suppliers, including several sole source suppliers; the vulnerability of key suppliers to recessionary pressures, labor negotiations, liquidity concerns or other factors; rising commodity costs and other inflationary pressures; industry competition; our ability to continue to improve our product line; warranty expenses; risks of pending and potentially unforeseen litigation; increasing government regulations, including new flammability standards for the bedding industry and new safety standards for consumer products, which have or will add product cost pressures and have or will require implementation of systems and manufacturing process changes to ensure compliance; the adequacy of our management information systems to meet the evolving needs of our business and evolving regulatory standards applicable to data privacy and security; our ability to attract and retain senior leadership and other key employees, including qualified sales professionals; and uncertainties arising from global events, such as terrorist attacks or a pandemic outbreak, or the threat of such events. Additional information concerning these and other risks and uncertainties is contained in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K, and other periodic reports filed with the SEC. The company has no obligation to publicly update or revise any of the forward-looking statements in this news release.

⁽¹⁾ Top 25 Bedding Retailers, Furniture/Today, August 2008.

¹ For the three months ended April 4, 2009 and March 29, 2008, potentially dilutive securities have been excluded from the calculation of diluted weighted average shares outstanding, as their inclusion would have had an anti-dilutive effect on our net loss per diluted share.

¹ Trailing twelve months for stores open at least one year.