Select Comfort Posts Strong Quarter
Select Comfort Corporation (NASDAQ:SCSS)
Q1 2017 Earnings Conference Call
April 19, 2017, 5:00 pm ET
Dave Schwantes – VP, Finance & IR
Shelly Ibach – President & CEO
David Callen – SVP & CFO
John Baugh – Stifel
Peter Keith – Piper Jaffray
Bobby Griffin – Raymond James
Brad Thomas – KeyBanc
Keith Hughes – SunTrust
Seth Basham – Wedbush
Michael Lasser – UBS
Welcome to Select Comfort’s First Quarter 2017 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 you have any objection, you may disconnect at this time.
I would like to introduce Dave Schwantes, Vice President of Finance and Investor Relations. Thank you. You may begin.
Good afternoon and welcome to the Select Comfort Corporation first quarter 2017 earnings conference call. Thank you for joining us. I’m 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.
Thanks, Dave. Good afternoon and thank you for joining our call today. My SleepIQ score last night was 72.
We’re very excited with the consumer’s positive response to our brand and differentiated products. Our investments over the past few years have made us a stronger competitor and this is evident in our first quarter results. We have built a more broadly relevant brand with an advantaged vertical business model. The investments we’ve made in R&D, technology, digital, and our store experience have strengthened our competitive advantages and established our innovation leadership.
We believe our Sleep Number 360 smart beds will set a new standard for what people should expect from their beds. We are now more efficiently delivering a superior customer experience as a result of our innovation, new technology platforms, and operational improvements.
Our first quarter results were ahead of our expectation. Net sales of $394 million increased 12% over first quarter 2016 and included 3% comp growth and 10% growth from net new stores. We had steady sales and traffic performance throughout the quarter and we are confident we grew market share.
Our first quarter earnings per share were a record $0.56, up from last year’s $0.27. EBITDA increased 49% to $56 million, while free cash flow increased 42% to $74 million.
We are delivering accelerated profitability and cash generation through the initiatives and investments we’ve made over the past few years. At our November Investor Day, I highlighted four areas that will drive sales growth for our brand all of which played a role in our first quarter sales growth.
First, we are expanding our brand reach with more efficient marketing including stronger digital capability. We’re also benefiting from the marketing initiatives we implemented during the fourth quarter and a steadier consumer environment. We increased media spending by 7% while leveraging 50 basis points over the prior year’s first quarter. Strong referral rates from customers were also a key driver of sales and contributed to our 10% mattress unit growth in the quarter.
Traffic, measured by online qualified unique visitors to our website, and leads per store per day, were both steady with conversion rate also ahead of our expectations. We are pleased with the results of our initiative to improve online consideration and transaction as well as customer traffic to our stores.
Our mid-year ROI was the strongest we have achieved since we began measuring it in 2013 using an econometric model. This efficiency and effectiveness is being driven by a combination of marketing efforts. We are now more efficient in our television buying and continue to advance our advertising content. We have strengthened our in-house digital capabilities resulting in faster and more effective media buying decisions and we are continuing to optimize the digital actions that drive higher quality storage traffic and higher conversion rates.
Our second driver of sales growth is our proprietary product which is also one of our competitive advantages. In the quarter, we experienced strong consumer demand for our life-changing innovations. Our average revenue per mattress unit was up 2% in the quarter as we continue to grow our FlexFit Bed adjustable base business with strong mix.
We are on track with our phased launch plans for the changeover of our product line to Sleep Number 360 smart beds. The first phase includes two of our beds in a plan for all stores in mid-second quarter. We have conducted numerous research projects for our 360 smart beds to inform the end-to-end customer experience. They include everything from testing, marketing, communication, pricing, design, and manufacturing to home delivery and customer service.
We are currently in pilot with the 360 smart bed in a small subset of stores and we are also in pilot with hub assembly of our 360 smart beds. We have a multi-year plan to transition that assembly from our customer’s homes to the hub. We expect this change to increase efficiency and provide a better in-home experience for our customers.
The investments in our brand innovations and direct-to-consumer distribution model position us for increased demand potential and pricing power. Our goal is to optimize these elements with our 360 smart beds and our pricing structure takes this into consideration. We expect to increase consumer value and therefore grow market share with our differentiated products that include improved comfort, connectivity, and other sleep benefits.
Our plan includes higher growth rate from attach rates of various features that will now be standard like SleepIQ technology. We expect this strategy to increase customer value, satisfaction, referral sales, and therefore market share. We are planning only modest price increases on ancillary items.
The third driver of demand is our highly engaged insiders. I mentioned that in our last call that we were gaining traction with our insiders and these results are evident in our first quarter performance. Our customer’s high satisfaction with their Sleep Number experience is resulting in increased referrals, which are our most efficient sale. In addition, our centralized data and loyalty initiatives are contributing to more effective personalized communications with our insiders. We are using predictive analytics and machine learning to optimize our customer segments and increase conversion.
Today we have a stronger ongoing relationship with our customers through SleepIQ technology which is one of our key competitive advantages. SleepIQ not only improves our customer’s sleep experience, it enables daily engagement with our brand. We continue to increase value for all of our SleepIQ community through software updates. For example, earlier this month, our software release improved individualized information about our customers nightly sleep, added simplified navigation and bed controls and more personalized helpful hints to get the best sleep of your life.
Our final driver of increasing demand is the extraordinary retail experience associated with our exclusive distribution model which is another competitive advantage. Our sleep professionals’ dedication to their customers leads to high net promoter scores, store productivity, and profitability. New stores contributed 10 percentage points of growth in the quarter as we benefited from 49 net new stores that we opened over the past 12 months.
Our same-store comp increased 3% in the quarter with average revenue per store for the trailing 12-months of $2.4 million. And 55% of our store portfolio is now in off-mall location. Our strategy is driving both positive comps and new store growth over the long-term. We continue to expect e-commerce sales to be a positive contributor to our comps sales in 2017 and future years with our direct-to-consumer distribution model.
We’re on the cost of delivering two new drivers of leverage for future years. The Sleep Number 360 smart bed and the evolution of our supply chain both of which are expected to contribute to higher profitability going forward.
We are focused on becoming a lean enterprise. Our productivity increases and manufacturing combined with lean opportunities we have identified across our business give us confidence in our margin expansion goals. We delivered a 350 basis points improvement in our net operating profit rate to 9.1% in the first quarter, primarily driven by gross margin expansion and media efficiencies. We are operating our business for the long-term and continue to expect increasing profitability through the use of all three of our EPS drivers: top-line growth, operating leverage, and capital deployment. We expect another record year of operating cash flows in 2017.
In the quarter we generated $87 million of cash from operations compared with $64 million the prior year. We continue to execute against our three cash priorities: investing in our growth, financial flexibility, and share repurchases. We repurchased $50 million of shares in the first quarter which was consistent with the prior year.
The investments we have made in digital capabilities, stores, products, technology, and infrastructure have made us a stronger competitor with superior products and customer experiences. We expect accelerated earnings growth, cash generation, and returns to shareholders in 2017.
With the strong results we posted in the first quarter, we have increased our full year 2017 earnings guidance to a range of $1.25 to $1.50 per share. We are confident in our ability to deliver on our plans and continue to make the necessary progress towards our 2019 EPS target of $2.75.
I want to thank our talented team for their dedication to our customers experience in their commitment to improving more lives. We are all excited about our revolutionary Sleep Number 360 smart beds and the opportunities we have in front of us to gain market share.
Now, David will provide more details about our first quarter performance and our outlook.