Sleep Number Corporation (SNBR) Q3 2012 Earnings Report, Transcript and Summary

Welcome to Select Comfort's Third Quarter 2012 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to introduce Mark -- Mr. Mark Kimball, General Counsel. Sir, you may begin.

Thank you, Jared. Good afternoon, and welcome to the Select Comfort Corporation Third Quarter 2012 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 Shelly Ibach, our President and CEO; and Wendy Schoppert, our Executive 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 set forth in our news release to access the replay. You also can access the latest version of our investor presentation in the Investor Section of our website. In addition, please 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 Shelly for her comments.

Good afternoon, everyone. Thank you for joining our call. Today, I will discuss the benefits of our differentiated business models and share highlights from the third quarter. I will then discuss how we plan to progress our strategy in the fourth quarter and beyond. It is an exciting time for us as we are just starting to unleash the potential of the Sleep Number experience. There are 3 unique attributes of our vertical business model that position us competitively for sustainable, profitable growth. First, as a manufacturer and retailer, we are able to lead on both product innovation and the overall brand experience because we control every customer touch point. This gives us the unique ability to hear directly from our customers each day, which keeps us grounded and focused on what is relevant to them. And our customers continue to respond enthusiastically to their Sleep Number experience as evidenced by our record third quarter sales of $247 million, a 24% increase over prior year and company-controlled comparable sales growth of 21%. Second, our model produces leverage to fund innovation and growth while expanding margin. This is apparent in the record 16.3% operating margin and 48% increase in earnings per share during the quarter, as well as strong quarter-end cash and securities balance of $193 million with no debt. Third, our growth formula is agile and integrated. The steadiness and progression of this formula have resulted in 12 consecutive quarters of double-digit comparable sales growth and 15 consecutive quarters of double-digit operating income growth. I'll now discuss third and fourth quarter within the context of 3 of our 5 long-term goals. Our first long-term goal is ensure everyone will know Sleep Number and how it will improve their lives. During the quarter, we continue to invest in our national and local advertising strategy to improve awareness. Specifically, we increased media investment by 33% over prior year, while testing and migrating spend to better reach our redefined target customer. Awareness is a key metric to measure this goal, and it remains our number one opportunity as we seek to increase our 20% unaided brand awareness. In the fourth quarter, we are advancing the scope of our media migration and testing. In addition, we plan to launch a new advertising campaign, just in time for the holiday season. This new creative was developed to more effectively communicate our unique brand experience and better reach our customer. The second long-term goal is Sleep Number will be easy to find, and customers will interact with us when and how they want. In the third quarter, we advanced our distribution strategy by opening 13 net new stores and executing remodel, expansions and relocations to further develop existing market. We continue to be pleased with how the new store design complements our product offering, resulting in a superior individualized customer experience. In fact, our average sales per comparable stores is now over $2.1 million on a trailing 12-month basis. This metric illustrates the exceptional productivity of our stores. And as reported earlier this year by retailsales.com, our average sales per square foot ranked number five behind iconic brands Apple, Tiffany, lululemon and Coach. With local market development including our aggressive growth strategy exceeding our expectations for profitable growth, we now plan to accelerate this development of new nonmall and mall location. In the fourth quarter, we intend to open 14 to 18 net new stores in existing markets, resulting in 408 to 412 Sleep Number stores in 45 states. We'll also continue to improve our customers' experience with additional remodel, expansions and relocations with nearly half of our 400-plus stores in the updated design format by year end. The third goal is innovative Sleep Number products will move society forward with meaningful consumer benefit. In the third quarter, we introduced the Sleep Number memory foam bed series and the new Sleep Number FlexFit adjustable base series. Consistent with our research and testing, our customers responded positively to these offerings. In fact, both of these introductions exceeded our expectations and contributed to another record average mattress sales per unit of nearly $2,700 for the quarter in our company-controlled channel. This metric indicates the relevancy of our products and consumer insight-driven approach to innovation. As we have been discussing for over a year now, we have increased our focus on the consumer and what she values. Importantly, our R&D team has advanced concepts and testing of breakthrough technology that will deliver new benefits for our customers, and our vertically integrated model means we can transform not only our product, but also our service and supply chain, which increases the total value of new offerings for our customers. Therefore, beginning in the fourth quarter, we are moving forward with our plans to accelerate investments to support these transformational concepts focused on individualizing sleep experiences. We expect the return on investments to build during the next 12 to 24 months, further strengthening our competitive advantage and advancing our long-term profitable growth strategy. Notably, there are many competitive shifts taking place in this large, dynamic mattress industry. These shifts accentuate Sleep Number's point of differentiation, specifically our ability to control the end-to-end customer experience. My comments today are a clear indication of our commitment to invest in the unique opportunities that advance our customer-focused strategy to the long-term. Yes, we remain committed to achieving our goal of delivering earnings per share growth of at least 20%. We are cognizant of the economic challenges facing consumers in our country today, so we will remain focused on what we can uniquely deliver: an unparalleled sleep experience that recognizes the individuality of our customers. This approach has allowed us to consistently achieve top-tier growth rates despite ongoing short-term fluctuations in the economy. Our strong cash position and advantage cost structure are competitive strengths that allow us to sustain profitable growth while investing in our long-term strategy. We remain committed to our stated goal of exceeding $1.5 billion in sales with greater than 15% operating margin by 2015. I will now turn the call over to Wendy, who will share more details about our third quarter performance and 2012 outlook.

Thanks, Shelly. Good afternoon, everyone. I will focus my remarks today on 3 key topics: First, our third quarter results and how they advanced us toward our stated longer-term financial goal; second, the strength of our balance sheet and how it supports our long-term profitable growth and third, our guidance for the remainder of 2012. I'll start by sharing some details about our third quarter performance. Earnings per share in the quarter grew 48% year-over-year to $0.46 on a 24% sales increase. Total sales of $247 million represented a third quarter record for the company. Sales on our company-controlled channels grew 25% with 6% growth in mattress units and 17% growth in total ASP. The company-controlled ASP increase was driven by mix and pricing associated with product innovation, as well as continued increases in both our FlexFit adjustable base attach rates and bedding collection sale. We shared previously that we expect our growth to come from both increasing productivity of our existing stores and the addition of new stores. In the third quarter, existing store productivity drove a 21% comp in our company-controlled channel, and we are continuing to set records in average sales per store, up 31% year-over-year on a trailing 12-month basis as we continue on our path toward at least $3 million per store by 2015. This performance is being driven by product innovation, the success of our advertising strategies and enhancements to our store experience including repositioning, expanding and remodeling existing stores. This is the first quarter in many years that we've materially increased our store base. During the quarter, we added 13 net new stores, and we expect the total number of net store additions for the year to be between 27 and 31. Nonmall stores, which continue to provide excellent visibility for our brand, are expected to comprise around 20% of our store portfolio by year end. Our operating margin performance was a record 16.3% of sales for the quarter and a record 13.9% on a trailing 12-month basis excluding the $0.06 nonrecurring charge in the first quarter. Operating margin in the third quarter grew 300 basis points with 210 basis points from gross margin improvement and 90 basis points from leverage in sales and marketing. Gross margin during the quarter was 65.1%. The 210-basis point improvement year-over-year was driven primarily by pricing and mix associated with product innovation. Additionally, the prior-year period included a $1.6 million charge related to customer experience reserve. On a year-to-date basis, gross margin is up 50 basis points year-over-year. My second topic is around the strength of our balance sheet. We have built significant cash reserve through the consistency of our earnings, as well as our negative working capital position that benefits us as we grow. We ended the quarter with $193 million in cash and securities, a $57 million increase year-over-year. As I've shared consistently on these calls, our first priority for cash is to invest in the growth of our business given the high returns we are generating on our investments. We have increasing clarity on these investments over the next few years. Specifically, we will be focused on expanding and remodeling our store base and continuing to strengthen our competitive advantages. We are also using cash to repurchase shares with a current goal to maintain share count. And unlike most other manufacturers and retailers, we have no debt on the balance sheet, which positions us well, particularly in our early growth position and uncertain macroeconomic environment. I'll conclude with a few words about guidance. We are increasing our full year 2012 GAAP EPS guidance from between $1.35 and $1.41 to between $1.45 and $1.47, including the $0.06 impact of the first quarter nonrecurring charge. This increases the midpoint of the range by $0.08 from $1.38 to $1.46. Our full year 2012 guidance includes fourth quarter EPS guidance of between $0.30 and $0.32, a reminder that last year's fourth quarter EPS of $0.27 included $0.03 of favorable tax adjustment. This year's guidance assumes total sales growth of at least 20% for the fourth quarter. As Shelly stated, we are moving forward with our plans to accelerate investment in longer-term products and service innovations and growth programs that have delivered favorable results in our ongoing testing. One example of this is the cost associated with our new advertising campaign. While we will likely benefit from the new campaign from multiple quarters, accounting rules require that we expense the entire $2 million production cost in the fourth quarter. We look forward to providing guidance for 2013 when we report our fourth quarter performance in late January. As we finalize our plans for next year, our focus is on prioritizing the investments that are most important to our customer and are aimed at delivering incremental, profitable growth in excess of our $1.5 billion sales target and 15% operating margin target for 2015. We also remain committed to delivering at least 20% annual EPS growth over the coming years. Clearly, an exciting time for Sleep Number. In summary, our success in the third quarter advances us towards our 2015 financial goals. Our advantage business model and strong balance sheet allow us to both deliver earnings growth and invest in our customer-focused growth strategy, and we remain committed to our long-term profitable growth opportunities. We are still early in our growth journey. Thank you for the interest you have in Sleep Number, and I'll now turn it back over to Shelly for final comments.

Thank you, Wendy. In closing, I'd like to express deep appreciation to our Sleep Number brand ambassadors for their passion to improve the lives of our customers. While we have consistently delivered many quarters of profitable growth, our low, unaided awareness in less than 5% market share indicates that our most significant growth is still ahead. In this rapidly changing, unpredictable world, customers have come to expect more than a great product. They expect an elevated experience and a relationship with the brands they love. And with the Sleep Number brand, we remain uniquely positioned to deliver an unparalleled sleep experience. To this end, as planned, we are accelerating investments in our growth opportunities, which include advancing our proprietary benefit-driven sleep products, exclusive distribution and relationship-based customer experience, all to improve the lives of our customers and create increased value for our shareholders. Thank you for your time and attention. Jared, you may now open the line for questions.

[Operator Instructions] And our first question does come from Brad Thomas.

Want to just ask about the composition of same-store sales. It looks like most of that increase was from higher average ticket. Could you just talk a little bit more about what's going on with the composition of the comp and that blend between ticket and traffic?

Sure. Well, we were very pleased with the combination of both units, as well as ASP growth in the quarter. And particularly, very pleased with the expanded ASP coming from our consumer-insight driven product innovation. Some of the examples there, Brad, would be the memory foam series, as well as our FlexFit adjustable bases and our bedding collection.

And I apologize if I missed it, but what was the unit -- how much were units up on a comp basis?

Sure. For our company-controlled channels, our units were up at 6% and ASP was up 17%.

Okay. And the units did seem to slow down some. Was there something going on in terms of how promotional you were that maybe -- caused a little bit of a deceleration in the unit comp increase?

Brad, this is Shelly. We were very pleased with all of our key metrics. Our customer is responding to our differences in product innovation. And as you know, awareness remains our number one opportunity. Both ASP and units continue to increment, and we do have quarterly fluctuations that I think one, a couple highlights from this year. If you think back to Q1, we had higher units driven by a closeout with our c series, and then Q2 pretty balanced. And then Q3, prior year, we had a fairly significant closeout on our p and i series, so we're just annualizing that closeout and we did not have the closeout this year. So I think it's a great example of how flexible our business model is, and the fact that we can continue to build performance year-over-year in both units and ASP. And we have a very consistent 2-year stack per unit growth between Q2 and Q3.

That's very helpful clarification. And if I could squeeze one more in on gross margin. It was just 2 quarters ago that we were all expressing our worries about gross margin. And obviously, this is a very strong quarter for gross margin. As we look ahead to the fourth quarter, any reason that some of the positive trends that we saw in 3Q couldn't continue into 4Q?

We were real pleased with our gross margins. As you've noted, our gross margin rate will fluctuate on a quarterly basis based on a variety of factors. As we look to the full year of 2012, we do expect a healthy increase in our gross margin rate. We certainly had good strengths over the last couple of quarters. Recall that in Q4, the -- a couple of things. One is that it's typically seasonally lower than Q3. We also have higher bedding collection sales during our holiday period. So all of that said, I will just remind that the group, as a vertically-integrated company, we are highly focused on maximizing overall operating margin. And we have a lot of our leverage opportunities in other lines for the P&L, particularly in selling and G&A.

Our next question is from Peter Keith.

I'm getting some questions here as the call is going on just regarding the characterization of your ASP growth. But I know you said -- I'm sorry to repeat this, because you just went through it with Brad. But you said the ASP growth was up 17%; however in the press release, if we use the figure that you gave us, myself and others are calculating about 19.5%. Could you help us understand what the difference is between that quantification?

Sure. The ASP that I'm speaking to is our total ASP in our company-controlled panels, which includes our bedding collection. What we report in our press release consists of a mattress as well as our adjustable basis.

Okay. And so the 17% is without the adjustable basis?

It's actually without the bedding collection.

Yes, right, okay. I got you, okay. And then...

Let me be clear on this. The 17% that I spoke of in my remarks is more of an all-in numbers. So it includes everything, it includes mattress, adjustable bases, as well as our bedding collection.

Okay, I got you. And then the other breakdown of ASPs you've given us in the past is the distinction between price increases and mix. Could you provide us for that as well?

Sure. Well, the 3 primary components; like I said, were our higher FlexFit adjustable based -- attached rate which was a very strong contributor. And the remainder of the increase was, again, in response to our product innovation and was split fairly evenly between both mix, as well as pricing.

Okay. And then just on one other topic, and then I'll turn it over to someone else. Some interesting comments about accelerating some of your consumer benefits in the fourth quarter. You did throw out there was $2 million advertising investment. Is there a total dollar figure you could give us that is being expensed in Q4 that perhaps wasn't in your original guidance?

Sure. Well, what we've built into our guidance for the fourth quarter is about $4 million, just about $0.03 of EPS and about 6 points of flow-through in incremental investment, above our run rate. And again, as Shelly stated in light of the very favorable results that we are having in our ongoing testing in these programs, and about half of that is related to the production costs associated with the new advertising campaign that I spoke of in my remarks. The other half is a combination of our R&D, as well as consumer insights to inform our products and service innovations.

Our next question is from Budd Bugatch. Budd Bugatch - Raymond James & Associates, Inc., Research Division: A couple things. One, do you have a penetration? Typically, you give us of the bedding collection. I think in the first quarter, it was 13%, on the second quarter, 11%. What was it in the third quarter?

Sorry, you're talking about penetration as it relates to our bedding collection, excuse me. Yes. What we shared during Investor Day is that on average -- and it will fluctuate quarter-to-quarter. But on average on an annual spend is about 12% of sales. And that's about where we have tracked this year. Budd Bugatch - Raymond James & Associates, Inc., Research Division: And you tire in the fourth quarter, though, right?

Typically, yes, it can be, given the fact that it's a holiday period, and we use our bedding collections as a great traffic attract during the quarter. Budd Bugatch - Raymond James & Associates, Inc., Research Division: And what's the kind of the delta [ph] in the fourth quarter versus other quarters in terms of...

Budd, it can fluctuate a couple of points quarter-to-quarter. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Okay. And the attachment rate looks like, if my math is right, it could scale almost 40% or somewhere between 35% and 40% on the Select sort of adjustable frame. Is my math wrong or...

Well, as you know, we don't share our attach rate on adjustables. It has been increasing several hundred basis points each quarter on an annualized basis. We continue to see great success out of this product just based on the relaunch of the product, as well as our merchandising and marketing efforts with respect to our FlexFit adjustable base. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Okay. And as I look at the contribution margin, it's, I think, 29% in this quarter, which is a significant drop -- jump, and it looks like most of that comes from a draw-through of gross margin. You said that was going to be pretty strong in the fourth quarter as much. Any commentary on that? Just the mix that's really driving it?

Yes. So we are -- we're really pleased with the leverage in the third quarter, and particularly how the consumer has responded to our product innovation and our growth program. Recall that in Q3, we are lapping the $1.6 million customer experience charge, which comprised about 5 points of flow-through. And as we look forward to the fourth quarter, we have, as I said earlier, built in some incremental investments associated with the growth programs that have tested so favorably for us. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Okay. And Bernie [ph], my last question kind of goes into the guidance. And I know that you use the modifier at least 20% in terms of sales. But what are you thinking in terms of comps in -- as you look at Q4? How many circle be [ph] in the comp phase 2?

Yes. So a couple of things there. So our path since 2015 calls for roughly 1/2 of our growth from new stores and 1/2 from existing stores. And so, what you're starting to see is that net new stores are beginning to be a larger and larger portion of the growth. Thus, our decision to, as we talk about guidance, really to talk about total sales and not just talking about one component or the other. And so what I'll say generally is that we continue to expect to achieve industry-leading comps. And as we further increase our sales per store, as we increase awareness and also through our product innovation, as well as optimizing our distribution through our expansion remodels, as well as our relocation. Budd Bugatch - Raymond James & Associates, Inc., Research Division: So no predicting the number that you want to help us with on that particular issue in the comp?

Yes, like I said because more and more of our growth will come from net new stores. Going forward, we will be focusing our guidance on total growth. Budd Bugatch - Raymond James & Associates, Inc., Research Division: I understand. I just don't want to be in a situation where, us, on the sell side, have so many different numbers that we can get caught up by a surprise.

Budd, one thing to add is to just note the comps that we just delivered, very steady comp performance. Our third quarter, we had another 21% comp increase. And as you know and you can look over numerous quarters and that's up against this significant comp of prior year that I think was 24% from the previous year and to come back and have another 21% comp. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Well, I understand that Shelly, and I just sense why that at least 20% is somewhat less than 21%, and that's kind of why I was trying to get a feel of where that goes. And you said steady. Did you mean steady during the quarter? Was it 21% in each of the month? Or each of the periods of the quarter?

But Budd, we don't break it down by month. But again, we are very pleased with the quarter performance, and especially in light of our last year's record performance in third quarter. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Okay. Can't blame myself from trying.

That's right, Budd.

Our next question comes from John Baugh. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: Let me just jump right into a couple of things. Could you comment on where you see the R&D budget going? And it sounds like you're going to be doing a little more -- I think you mentioned consumer insight. So kind of curious what you're doing on the consumer front in terms of getting research about what's working and what's not?

Our investment is very focused on continuing our path of innovation and individualization, which is critical to our future long-term growth. And it's important to our customers so therefore, important to us. Then, we plan to introduce our new technology advancements in 2013 and 2014, supported by increased R&D and the consumer insight that will continue to inform our plans. Obviously, our choice is to make our short-term investments for the longer-term growth in these areas. And we'll do so, while continuing to deliver at least the 20% EPS growth per year. And we anticipate the new innovations will result in higher future returns. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then, can you comment on the gross store opening? I assume they're going to be mostly off mall and in the closures they're going to be mostly mall. And any color around numbers for next year in particular on that front?

Yes. So starting at the top, we do expect about roughly 1/2 of our growth over the next few years from net stores additions as we fill in existing markets. And our non-mall strategy will continue to be a real important part of the strategy, provides us really increased flexibility to really make sure we can have stores that are where our target customer lives. And we have very good visibility on that data, as well as it's a great billboard for our brand as well. In terms of the numbers, we said 7% to 8% net store growth this year. So as we look to next year, we're having a really a lot of success with our real estate efforts. And what I'll share about next year is that, that number could be -- it could be as high as 10% next year. That said, we have -- we really do maintain a very disciplined process over our real estate selection, really ensuring quality location. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: And that's helpful, but could you -- would you be willing to comment on kind of how many are new and how many are closed in that 10% growth?

You asked about mall and non-mall. And as a starting point, we've been, historically, we were 100% mall. So while we are focusing on opening more non-malls, it's really more about rebalancing the portfolio. And we're pleased with the performance in both mall and non-mall. So in the mall location, we are either ensuring that we have the right location. We may be expanding or relocating within the mall or moving outside of the mall. But from a performance perspective and the modeling, it's probably more of -- the most important point is the number of stores. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: Good. And I give this the old college try as my last effort. Any more additional color on what you're seeing off mall and how that's influencing your thinking?

We're very pleased with the performance. As Wendy said, both the visibility that's in the non-mall locations are providing us in market. And obviously, that contributes to our awareness. And we will continue to aggressively pursue the right locations in non-mall, as well as consider the right mall. And for us, when we look at a market, and we have our real estate plans for 3 to 5 years laid out by market, we look at the market and we know we're a destination as an exclusive distribution retailer, and we are able to target the store locations where it makes sense for the demographics of our redefined broader target customer. And so in some markets, that means more mall. In some markets, that means more non-mall. And obviously, we're taking into consideration our installed base in doing so. But importantly, we're very focused on getting all of our stores on brand and by on brand, I mean in our new store designs along with incrementing net new stores.

And I'll just add, you're trying to get at a number, John, and relocations in non-mall will continue to be a key part of our real estate strategy next year. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: Relocations in malls, you mean?

From malls, as well as mall to non-mall.

Our next question is from Keith Hughes.

As you look at the, we have the projection here for the fourth quarter revenue, will there be as big as a disparity between a unit and ticket as we saw here in the third? Is that the trend that will continue?

With respect to the shape of the sales this quarter, we would expect to continue to see strengths in both units and ASP, Keith.

And the ASP has been increasing sequentially, it looks like. Is it the adjustable bases? Is that's what's the primary driver of that?

Yes. We are very pleased with our ASP. And you see, our ASP is as a sustainable number. And I think this really gets at the differences for us. With proprietary product in the exclusive distribution, it allows us to command pricing while selling the benefits of sleep. And the shopping experience allows the customers time to understand the value of our DualAir technology, as well as the entire Sleep Number collection. And this drives that store productivity greater than $2 million, and it also drives a higher ASP per transaction. And it's really this different strategy that we have, and we're very pleased with our customers voting on our innovations and on the entire Sleep Number experience.

And I'll add, Keith, that over the last -- in the first couple of quarters, we saw contribution from both the -- a higher, a FlexFit adjustable base attached, as well as pricing. And -- but one of the things that we're really beginning to see is some favorable changes in our mix, and specifically as we look at our Classic performance and then Innovation Series. And in the Innovation Series, we now include our Memory Foam series. And so those products are priced similarly to our Innovation. And what we're seeing is some nice progression up from the peak to this combined i and m series. So that's what you're really starting to see in the third quarter. And that's why you hear us talk so much about the favorable impact of the innovations that we've brought into the market.

Okay. And I guess final question, then. Can you give me the number of non-mall stores you ended the quarter with?

Yes. We had 60 at the end of the quarter.

Our next question is from Eric Hollowaty.

Most of my questions have been answered, but I wanted to go back just to clarify the answer to Brad Thomas' question starting off. Wendy, the 6% contribution to the total growth, was that in fact -- was that total or for comp stores?

The -- oh, the 6% increase in mattress?

Yes. In units, yes.

Yes. That was for total in our company-controlled channels.

Total. Okay, so that would include contributions from new stores that you opened during the quarter, correct?

That's correct.

Okay. What was the unit growth for the comp stores?

Yes. That's not something that we've shared, Eric.

Our next question is from Todd Schwartzman. Todd A. Schwartzman - Sidoti & Company, LLC: On the mall versus non-mall stores, what factors are you seeing that determine within a given market which format performs better? Is it an urban versus suburban thing? Is it population and traffic? Just what -- if you have enough data at this point to kind of make that determination?

Sure. Well, it really starts with -- we have the -- being a vertically integrated model in being both the manufacturer as well as the retailer, we have the luxury of knowing all of our customers, where they live, where they drive from, to visit what store and to make what purchase. And that helps us understand the great location for the store. And we evaluate the market based on our customer demographics and psychographics and how the layout of that city is, how the traffic flows, and place stores accordingly. In some cases, there may be a prominent mall there. In other cases, there may be a new retail area that makes sense for us to be very customer-driven based on where we see our target customer shopping. And also, to ensure that our stores are convenient and accessible. And in some cases, customers prefer the mall and some cases, the non-mall, and we really appreciate having the flexible real estate strategy to find the best location, find a highly visible, dominant location that gives us that awareness, contribution, as well as easy access for our customer. Todd A. Schwartzman - Sidoti & Company, LLC: Okay. And I know you mentioned that about 1/2 of the stores have been updated to the new format. Can you give us a timeline as to when you expect the remaining 50%?

We'll be at nearly half-year at the end of the year. And we do expect to be over 90% within the next two years. Todd A. Schwartzman - Sidoti & Company, LLC: Okay. Shelly, you spoke a lot about the accelerated -- the planned acceleration in Europe growth strategies. And you did quantify the ad campaign in the fourth quarter expansion, and I thank you for that. But in addition to that, can you maybe put some more numbers to that what we'd see as 2013 progresses?

Yes, Tom. This is Wendy. So as I mentioned earlier, and I'll be a bit more specific about Q4, we've built into the guidance about $4 million, which represents about $0.03 of EPS, about 6% -- or excuse me, 6 points of flow-through associated with this incremental investment that we've planned and moving forward with. And about 1/2 of it is related to advertising and about -- and the other half is both R&D, as well as our consumer-insight work. And as we look to 2013, our investments will continue to be focused on our consumer-focused growth strategy, strengthening our competitive advantages. And a way to think about it is that the current programs that we have in process today really set us on a path to our 2015 target of $1.5 billion and 15% operating margin. And so, these accelerated investments are designed really to provide the opportunity to exceed this target. We're also, as we said a few times, committed to our goal of at least 20% EPS growth per year while investing in the business. Todd A. Schwartzman - Sidoti & Company, LLC: Will the other...

Go ahead. Todd A. Schwartzman - Sidoti & Company, LLC: Will the other buckets of spending non-advertising with focused groups and such that you alluded to for Q4, will those year-over-year incremental dollars continue from Q4 into Q1?

Well, as I said, we'll obviously provide more guidance on 2013 when we're back together at the end of January. But you should expect to see us again because of the kind of results that we're seeing and the fact that we've really been exceeding our expectations on the success of our innovations and our growth programs. You should expect to see us to continue to invest in those programs and again, with the intent of really exceeding our targets for 2015. Todd A. Schwartzman - Sidoti & Company, LLC: Okay. And lastly, do you have any additional planned price increases?

We know we have price opportunity. And while we're focused on our number one opportunity of increasing awareness, we're being very selective about those price increases and waiting for times that we introduce new product with additional features that makes sense for our customer to take pricing at those particular times. But we do have room for pricing.

Our next question comes from Jessica Schoen.

In the quarter, it sounds like both comps and gross margin benefited from favorable mix and sales of higher priced products. I was wondering if you can share any observations or takeaways you have for us about consumer behavior in the current macroeconomic environment that they're facing? And what's been the impact of that on the premium bedding market?

We are very pleased with our record third quarter performance, and see it as a result of our strategy and disciplined execution. And as we have stated, the consumer is clearly selecting and choosing the innovations that we're providing, which is driving multiple quarters of record average sale price, at a time that you hear a lot of noise overall competitively in the industry. And I think that really speaks to our differentiated model and providing an environment where the consumer can focus on sleep and experience the real differentiated benefits of our DualAir technology and supporting products. We, regarding the macro, we specifically have and very carefully have built our integrated growth formula to deliver profitable growth regardless of the consumer environment. And we have seen that time and time again, that we've been able to sustain and continue to deliver our profitable growth numbers and incremental performance regardless of short-term movements that have happened in the macro. So again, it speaks to the flexibility as being both the manufacturer and the retailer, and having the broadly relevant products. And we listen to our customer every day and that helps keeps us very grounded on what's important to the consumer, and we're able to meet her need.

Okay, great. And then on -- it also seems that you've been able to drive the gap between your breakeven sales. And I was just wondering if there's any color you could give on the flexibility in light of your increased marketing investments and accelerated spending?

Great question. I mean, this is something that we track very closely. And really, it gives us a lot of flexibility, particularly as we talked about in the current macroeconomic environment. And it is this gap between sales and breakeven sales. It started when we really rebuilt the company coming out of the crisis. And we have continually increased that gap between sales and breakeven sales going forward, and expect to continue to do so.

Jessica, this gets right at the heart of why we are choosing to accelerate our investments at this time in our long-term growth strategy because we have been able to continue to widen this gap and this has been very planful [ph] as we rebuilt the model and honed our integrated growth formula. And this is the right time for us right now to lean into those opportunities that continue to drive that long-term growth while extending our operating margin.

[Operator Instructions] Our next question is from David MacGregor.

I wonder if you could just bring us up-to-date on your aggressive growth strategy? You've identified key markets that you're pursuing. I think you had 4 markets last year, 3 markets this year. Can -- are you tracking kind of that mid-60s growth rate? And maybe you could talk a little bit about how the 2011 markets are doing from a comp and a productivity standpoint?

Well, we continue to be very pleased with our aggressive growth strategy. And I'll just give a quick highlight of grounding us in the strategy, and then turn it over to Wendy. This strategy involves 13 markets, roughly 1/3 of the U.S. bedding sales. And the goal here is to double our market share in these large, underdeveloped markets for us in 3 years. And we did launch 4 markets in our pilot in 2011. And then in 2012, we launched another 3 markets and expect to launch the remaining markets over the next couple of years.

Yes. And David, now that we are 9 months into the year, we do have some performance updates that we can share. First is background. The 4 markets that we launched with our aggressive growth model last year did have sales growth that was 2 to 3x higher than our national average, as you noted. And we are really pleased to share that similar to last year's markets, the 3 new aggressive -- or excuse me, 3 new aggressive growth markets that we launched this year are also delivering year 1 sales growth that's 2 to 3x higher than our national average. So this really reinforces the consistency of the results of this program, and also just the confidence we have in our strategy for all 13 of the large, underdeveloped markets. And then secondly, the first 4 markets that we launched last year are on track with their year 2 target for 2012. And we are confident that we will meet or exceed our goal of profitably doubling market share within 3 years in these markets.

Just to tie this back into the earlier questions about the comps and pricing versus volume. In these markets, as they anniversary around the first time, do they have any kind of significantly different make-up to the comps than in terms of pricing unit volume that would be distorting the consolidated numbers?

No, no. I mean, we're seeing pretty consistent, consistent growth in our market in that regard.

Okay. Second question was just in on Slide 13 in your quarterly deck. You lay out your product series and the price points on them. You talked earlier about the mixed shift that's going on. I guess if I understood you correctly, you feel like you're succeeding in terms of getting consumers from sort of the p lines up to the m and the i lines? And so I guess what I wanted to get a sense of is just how volumes look down on your Classic Series and your lower price points and how growth there would compare with the rest of the line?

Sure. Well, just to get a little more specific on this one, David. If you look at the classic performance and then this combined innovation in memory foam, historically, we've talked about in terms of mixes of mattress units historically, we've talked about sort of a 30, 45, 25. And we've been pretty steady on the Classic. So what we're seeing, like I said, is this mix up from the p into this combined i and m. And that could be as high as a 10 point move as we look at 2012 over 2011. So a really nice progression in the mix.

At this time, we have no further questions. I will turn it back to the company for closing comments.

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

That concludes today's conference. You may disconnect your lines at this time.