Sleep Number Corporation (SNBR) Q2 2013 Earnings Report, Transcript and Summary

Good afternoon. Welcome to Select Comfort's Second Quarter 2013 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I'd like to introduce Dave Schwantes, thank you, the Senior Director of Investor Relations. You may begin.

Thank you, Angie. Good afternoon, and welcome to the Select Comfort Corporation's second quarter 2013 Earnings Conference Call. Thank you for joining us. I am Dave Schwantes, Senior Director of Investor Relations. With me 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 in our news release to access the replay. Please also refer to our news release for a reconciliation of certain non-GAAP financial measures included in the news release or that may be discussed on this call. The primary purpose of this call is to discuss the results of the fiscal period just ended. However, our commentary and responses to your questions may include certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties outlined in our 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 and thank you for joining our call. Today, we'll discuss our second quarter financial results, as well as the advancements we've made on our customer-focused growth initiatives, which strengthen our 3 most significant competitive advantages: proprietary products, exclusive distribution and the end-to-end customer experience. I'll begin with second quarter results. Net sales were $207 million, up 1% versus prior year, with a 6% company-controlled comparable sales decline. Earnings per share were $0.18 versus $0.30 in second quarter of 2012. Results reflect the gradual and steady progress associated with reestablishing our media-buying formula, combined with continued investments in our growth priorities during our seasonally lowest sales quarter. Our media-buying formula was back on track in April. In May, we returned to prior-year media spend levels and began to increase spending mid-month and into June. Therefore, for the quarter, our media spend was up just 6% to prior year and with 14.1% of sales. As expected, results in June were consistent with this progress, including positive lead growth from TV, radio and digital investments; positive sales and cost growth; and positive mattress unit and ASP growth. During the quarter, we made significant advancements in product innovations and important initiative and investment priority for long-term growth. In June, we launched our DualTemp layer, an exclusive product with proprietary ActiveAir technology that evenly distributes each sleeper's desired temperature. This benefit-driven layer can be used on all mattress brands. This innovation addresses one of consumer's most significant sleep issues, sleeping too hot or sleeping too cold. 75% of consumers say temperature is a problem. In fact, feedback via our retail stores, validated by additional research, led to the development of the DualTemp layer. In support of this launch, we executed a national marketing strategy across all media types between the Memorial Day and July 4th events. While early, results are promising. They included a 120% increase in web traffic during this period. A balance of sales from both new and existing customers indicating a role our DualTemp layer can play in driving traffic and reengaging existing Sleep Number customers. A high bed attach rate more than 1/3 of new customers who purchased our DualTemp layer also bought a Sleep Number bed the same day, which means this innovation contributed to both ASP and mattress units. Equally important, our DualTemp layer demonstrates how we are benefiting from and strengthening our 3 big competitive advantages for proprietary products, which I just reviewed, and exclusive distribution in the end-to-end customer experience. Our exclusive distribution of this unique product makes our stores a destination for customers. In our relationship-based retail experience that focuses on our customers' needs results in high rates of conversion and increased average transaction size. Our vertical model, which includes the end-to-end customer experience, allows us to seamlessly introduce a proprietary product, like the DualTemp layer, nationwide in a single day fully supported by national marketing and customer service. The next in our series of product innovations also combines high function and design with a simple, intuitive remote. On July 29, we will introduce the new m & i series Sleep Number beds that feature our advanced DualAir technology with a sleek modern wireless remote, which has an interactive display that will guide our customers to their ideal comfort and support, their Sleep Number setting. This remote also will communicate each individual's name. It's literally a simple touch of a button for an individualized experience. Developed during the past 18 months, these research-intense products are designed to provide a customer's optimal comfort. Our technology is combined with proprietary foam and layer combinations that have proven comfort benefits. You can view this new DualAir technology that is inside the memory foam and Innovation Series beds by going to the Investor Relations section of sleepnumber.com. To fully experience all of our new products, I hope you will visit a Sleep Number store in August. As an important part of our growth formula, we also continued to prioritize investments in local market development. While we have national distribution with stores in 45 states, we have significant opportunities to optimize our real estate portfolio in filling gaps in existing markets. To that end, year-to-date we've executed 55 store actions including adding, relocating, remodeling and expanding stores, and we have over 60 store actions planned for the balance of the year, which will result in over 70% of our stores in our new productive design by year end. New stores continue to generate approximately $2 million in their first year with less than 15% cannibalization. Relocations continue to deliver double-digit growth over balance of chain in year 1, and new stores and relocations performed consistently with balance of chain in year 2. To summarize the quarter, we made important progress to position ourselves for strong, short and long-term growth. With our media formula back on track, the introduction of meaningful new products and local market development advancements, we are increasing our media spend in the back half to build continued awareness for Sleep Number and to support our planned growth. Therefore, we are maintaining our 2013 full year EPS guidance of $1.30 to $1.45, which assumes a high-teens growth in total net sales and high single-digit comps for the second half. Wendy will now provide additional details about our quarterly performance and outlook for the year.

Thanks, Shelly. Good afternoon, everyone. I'll review the financial details of our second quarter performance followed by the assumptions behind our 2013 outlook and close with an update on cash. Second quarter EPS of $0.18 was roughly in line with our expectations and consistent with prior communications that second quarter year-over-year profit performance would be lower relative to other quarters this year. As planned, to support our long-term growth initiatives, we continued investing in our top priorities, product innovation and infrastructure during our seasonally lowest quarter. Total net sales in the quarter increased 1% to $207 million. Comparable sales within company-controlled channels were down 6%. The recoveries from our first quarter media situation was apparent in the steady sequential improvement in monthly sales since March. On a 2-year stacked basis, comps were up 19% during the quarter. Net new store additions over the past 12 months contributed 7 points of sales growth during the second quarter and our local market development strategy continued to drive favorable returns on investment. We remain on track to end 2013 with 435 to 445 stores with distribution growth heavily weighted as planned in the back half of the year. In the quarter, we added 17 new stores and closed 15, which included the relocation of 11 mall stores to new non-mall locations within the same trade area. We remodeled 20 mall stores with our new store design, and most of these were also improved relocations and expansions. The 1% growth in company-controlled channel sales during the quarter included a 3% increase in ASP, driven by product innovation; specifically, prior-year pricing actions and the introduction of DualTemp. As planned, this was lower sequentially from the 14% ASP increase in Q1, primarily due to lower growth in adjustable based attached rates as we left an adjustable base close out in the prior year. On a 2-year stacked basis, ASP was up 16%. Mattress units during the quarter declined 2%, a 13 point sequential improvement from Q1. On a 2-year stacked basis, mattress units were up 11%. As discussed previously, both mattress units and ASP are important contributors to our long-term growth. Through our vertical model, we drive growth with new product introductions and closeouts, which means we will experience quarterly fluctuations between mattress units and ASP. The Memorial Day event is a good example. Last year, we promoted the silver limited edition bed at the high end of our line and this year, we closed out of a classic special edition bed at the low end. This resulted in sequential improvement in mattress units versus Q1, while ASP growth declined versus Q1. Importantly, over the longer term, we expect growth from both units and ASP. Operating margin in the second quarter was 7.3%, compared to 12.6% in the prior year. This year-over-year decline included a 440-basis-point increase in sales and marketing expenses, a 70-basis-point decrease in gross margins and, a 60-basis point increase in R&D, partially offset by a 50 basis point decrease in G&A. Sales and marketing expense delevered primarily due to a 320-basis-point increase in selling expenses, 80 basis points of which was incremental depreciation associated with new, relocated and remodeled stores. The remaining 120-basis-point increase was in marketing. The decrease in gross margin to 63.4% was driven by the lower margin special edition product offering during the memorial event and a higher penetration of lower margin bedding collection sales, partially offset by supply chain efficiencies. The increase in R&D reflected our sustained focus on product innovation consistent with our strategy. And deleverage in G&A reflected lower performance-based compensation, partially offset by investments in infrastructure including 30 basis points of incremental depreciation associated with growth-related capital spending. As part of our cost-reduction efforts, we cut over $2 million of planned discretionary spending out of G&A. Moving to our 2013 outlook. We continue to expect full year EPS in the range of $1.30 to $1.45 versus 2012's adjusted EPS of $1.43. Our outlook for the second half assumes high teens growth in total net sales and high single digit comps. Specific to the quarters, we expect EPS growth to resume in Q4. As we communicated in January, we expect higher sales growth in Q4 versus Q3 in light of prior year's Q4 performance. For full year 2013, we expect operating margin deleverage, primarily associated with our first half sales decline. We expect sales and marketing expense to be approximately 45% of sales as we communicated last quarter. Our 2013 outlook also assumes a tax rate of 35%. Regarding the balance sheet. We ended the quarter as planned with $140 million of cash and securities, down $37 million from year end. This reflected year-to-date operating cash flow of $36 million, which was more than offset by year-to-date CapEx of $37 million, strategic investments of $19 million and stock repurchases of $20 million. Note that second quarter is typically our low point for cash due to working capital seasonality, and we expect to end the year with a cash and securities balance well above our minimum target of $125 million. Our capital allocation strategy in 2013 continues to prioritize investments in growth. We expect 2013 CapEx of $70 million to $80 million, including new stores, relocations and remodels; technology, as we continue to enhance our customer information systems; and infrastructure needs associated with product innovation. We also continue to repurchase shares with the objective of maintaining share count at or below current levels, and we expect our balance sheet to remain debt free in 2013. I'll now turn it back over to Shelly for final comments.

Thanks, Wendy. We remain focused on delivering an exceptional experience for our customers by advancing our growth formula. Therefore, we are well positioned to grow in the back half of the year and further strengthen our competitive advantages. In the quarter, we returned to our media-buying formula, which sequentially improved traffic and sales. We executed the first in a series of product launches that are designed to improve the lives of our customers. Here's what just one customer had to say about our DualTemp layer. "My wife had suffered from hot flashes for years. We had to sleep with a fan, and the room temperature had to be around 70 degrees. I had on an electric blanket and she would be covered in just a sheet. So when we saw the DualTemp topper, we bought it. No more hot flashes. It has been great. Also no electric blanket and no fan. So needless to say, we love your company. My wife thinks you're cool, and I think you're hot, and we are both right." With this kind of customer response, we're excited about the role of product innovation relative to experience, traffic and sales, and we remain on track with local market development initiatives improving Sleep Number availability for our customers. We'll drive growth in the back half through increased media to build awareness and consideration, new product innovation and advancement of our local market development. Our long-term goals, growth formula and competitive advantages all support a Sleep Number experience that improves our customers' lives. I'm confident this dedication to our customer will enable continued growth and increase shareholder value. Thank you to our employees and partners for your commitment to our customer-focused strategy, and thank you to our investors and analysts for your continued interest and support. Wendy and I now welcome your questions.

[Operator Instructions] Our first question comes from Peter Keith.

It's Piper Jaffray. There's a, I guess, a lot of puts and takes with the guidance with regard to some of your margin targets and the high single-digit comp guidance for Q3, Q4. I guess it sounds similar to what you said in the last quarter call, but I guess what we'd like to know is did your back half of the year outlook change at all relative to how things trended in Q2?

Peter, it's Wendy. Yes, so as I said, Q2 was roughly in line with our expectations, and we have incorporated into the back half our current run rate of DualTemp sales, and we are maintaining our full year guidance of $1.30 to $1.45. So to answer your question, very similar to the prior quarter.

Okay, on the DualTemp and I guess in relation to a high-single digit comp guidance, there does seem to be some investor concern on building back up to that. Is that -- before it was only I guess incrementally factored in. Are you factoring that in more now? And with DualTemp, I would think with the timing of deliveries maybe of a couple of weeks have missed on some of the Q2 sales, is there sort of a catch-up period in Q3 from some of that initial demand?

Peter, this is Shelly. We have early results on DualTemp. As I stated, we're very pleased with the results they're promising. Our ship time on this product has ranged from 2 to 4 weeks since we launched, and will be at 2 weeks here by August. That will not affect any financials as we carry into the third quarter because of when we recognize our revenue. So we do have a short period of time with selling in DualTemp and we have taken that short period of time and incorporated it -- this run rate into our guidance.

Okay, and then lastly, I guess I'm curious on the lead generation aspect of DualTemp as you're getting, it sounds like, a fair amount of new customers into the store. Has your lead generation picked up, do you think, as a direct result of DualTemp or is it the DualTemp and the marketing? I guess, could you give us an idea how of how that lead generation is looking for June and July relative to maybe last year?

Yes, specifically for June, and I'll speak to the period of time where we had the national launch. We had the national launch of DualTemp in June post the Memorial Day event, and we did experience a healthy, as I stated, 120% increase in our web traffic during this period and the corresponding appropriate lead generation to our store. So we did experience increased leads from both DualTemp and the media. Hard to tease apart one from the other, but certainly it was a noticeable increase in our performance.

John Baugh. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: John Baugh with Stifel, Nicolaus. I've wanted to follow up, Shelly, I guess, you made some comments in the prepared remarks on June specifically. Could you just run through those again?

Sure. The June relative to the DualTemp or in general, probably? John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: Well, both.

Okay, great. Well, first of all, June results were consistent with the progress of the media recovery and spend. And so in June, we experienced positive lead growth from the TV, radio and digital investments, and positive sales and comp growth and positive mattress unit and ASP growth. Specifically, to the DualTemp, which was also in June in between the Memorial Day and the July 4th event, we shared the results of 120% increase in our web traffic during this period and then a balance of sales from both new and existing customers and also a high bed attach rate to those new customers purchasing the DualTemp, over 1/3 of those customers purchased a Sleep Number bed. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: So the results, which were presumably a lot better than April or May, were driven somewhat equally hard to tell between being where you need to be with media and DualTemp?

Yes. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Terrific. And then I think, Wendy, you mentioned the working capital seasonality. I think I calculated -- were use of $15 million for the first 6 months. Where do you think that goes with the latter 6 months?

Yes, so I'll just repeat that our -- in Q2, it is the typical low point due to this working capital seasonality. And I want to walk through the Q1 to Q2 first, John, and the reduction this year in cash was, from Q1 to Q2, $41 million. Last year, it was $26 million and when you look at that difference, most of that is due to higher CapEx year-over-year. And so we should expect to see some similar types of trends as you look out at the back half, reflecting the same type of seasonality that you've seen in prior years. John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division: Good. And then may last question I guess relates to the second half. I mean, what are we -- you mentioned -- it seems to be such myopic focus on quarters and units and margins and all these things. So is there any kind of help you can give us as we look either at Q3 and Q4 or maybe the second half in general in terms of what you're lapping a year ago in terms of a clearout or -- and how that's going to influence units and margin -- gross margins going forward?

Sure. We'll start with EPS, and I want to just repeat that. As we look at the quarters, we expect EPS growth to resume in Q4. And as we look at the comparison to prior year, we do expect a higher sales growth in Q4 versus Q3 because recall that our performance or in light of our performance in Q4 of last year. When we look at a couple of the different drivers, John, you mentioned units and ASP, you mentioned margins, as we look at units and ASP, which are important contributors to our growth, our media, our increased media investment and product innovation should drive growth in both units and ASP.

Budd Bugatch. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Raymond James. I guess I'll make sure I do understand this. June comps were positive in the stores, is that -- I heard that correctly? I just want to make sure I got that.

Yes, that's correct, Budd. Budd Bugatch - Raymond James & Associates, Inc., Research Division: And would you -- there's any flavor on June comps without DualTemp then? Because it was there pretty much in the quarter, at least in the order basis I know but...

Yes, we are not breaking it down further however. Dual -- it's a small sample. It's early for DualTemp, and we just launched it nationally post Memorial Day to really this couple of weeks there in June. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Okay, a couple of other modeling questions then, if I could, Shelly or Wendy. You say growth of 22 to 32 stores net between the third and fourth quarter. Is there any way to break that out quarter-by-quarter? You said the balance in the second half, but everything left is the second half?

Right. Yes, so as you break that out by quarter, we do expect a greater proportion of that growth to be in Q4 versus Q3. So it will be effectively back loaded within the quarter. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Okay, and how should we think about media spend going forward now? Where is that going to be for the year?

We're increasing our media. Yes, I think a good representation would be year-to-date we have just a 7% increase in media versus 2012's 39% increase in media. And we are increasing media in the second half to build awareness, support the local market development and certainly support the product innovation. Budd Bugatch - Raymond James & Associates, Inc., Research Division: So where will it come in for the year? Where will all media spend versus last year be for the year? Where do you think it'll be?

Well, again, I go back to the fact or go back to Shelly's point that last year, we were up 39%. So the 7% was well below that level, and we plan to increase that in the back half. We're not providing specific numbers, but certainly a sizable increase from the 7% that we saw in the first half. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Okay. And that's included in the 45% selling and marketing expense, right?

Yes, it is. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Okay. I think in the last call, you said gross margin should be modestly up for the year, is that still in the guidance or is that something that's different?

No, for gross margins, and you're asking about the year, we could be down slightly for the year, and I'll speak to the back half. First of all, I would want to start with the fact that a gross margin rate will fluctuate on a quarterly basis based on our product innovation efforts. As we look at the back half, we expect it to be modestly lower year-over-year due to the higher penetration of bedding collections, including DualTemp and given that we've incorporated our current run rate of DualTemp into our forecast. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Okay. And you did talk, Shelly, I think about the new remote. Is there -- what other new product could you tell us about that's coming out? Is there any -- and is that new remote go to all -- I started to look at it on the website, but I don't have the time right now. Does it go to everything you have already? Or how does that work for customers?

The new advanced DualAir technology is in the m and the i series only, Budd, as we launch it here on July 29. Budd Bugatch - Raymond James & Associates, Inc., Research Division: So the new m & i launch is July 29, I see.

Yes, and that will be supported with a national product launch. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Okay. And are there going to be 2 models like what you had before the m7 and m9 or...?

Yes, it will be a new m7, m9, as well as the i8 and i10. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Okay. Anything new on Comfortaire, or what you're going to do with that, or how that's proceeding?

Regarding Comfortaire, we're -- we purchased it -- acquired it for the IP, and we continue to be pleased with the IP of this acquisition. And you have not seen product innovation associated with this investment or the R&D investment that we spoke of in January.

Brad Thomas.

Brad Thomas with KeyBanc. Just a couple other follow-up questions here on topics that have already been touched on. Just with respect to gross margin in the second quarter, we do have the closeout of the m and the i lines occurring. Last year in the second quarter gross margin was up over 200 basis points. Should we be modeling in a similar level of decline of what we saw this quarter or are there other factors that might keep the margin more consistent?

Well, as you know, Brad, we manage the business based on operating margin. But just looking at gross margin in and of itself through the back half, as I mentioned, we expect it to be modestly lower year-over-year due to higher penetration of bedding collections. We've included our current run rate of DualTemp as an example. And I'd also add that Q3 of 2012, as you noticed, had a 65.1% growth gross margin, so a bit more of a difficult comps there. That quarter was favorably impacted by mix associated with some product introductions at that time.

Right, right. And then just -- again, as we look at the model -- in the first half of the year, the difference between your revenue growth and your comp was about 7%. It sounds like it's implied to be more like 10% in the back half of the year. Is there something that's changed in terms of the store actions maybe that are adding more to total sales growth relative to what the comp is? Or is there some seasonality between 3Q and 4Q that we're not breaking down? I just wanted to make sure I understand why that difference would get a little bit bigger.

Yes, I mean we -- for the second half, we do expect to have that high single digits contribution from new stores as we did previously. And our real estate program is very much on track, and we expect to end the year, as I stated, with between 435 to 445 stores.

And, Brad, this is consistent with our prior communication around some of our growth now coming from the -- more significantly from the net new stores.

Got you. Okay. And then just lastly, in terms of competition, it's been a couple months now that you guys have seen more competition on the air bed front from another public company that I won't name on this call. But anything you can speak to in terms of how maybe your stores are doing in markets where you're overlapping with that competition? Are you seeing it negatively impact you, or are you actually picking up incremental traffic? How are things looking at these early stages?

Yes. As you stated, early stages, we do not have evidence of impact or any unexpected behavior going on here. We have anticipated and planned for the entrance of adjustable air competition in our strategy and, of course, have had many years advancing our product quality as air is difficult. And for us, our strategy is focused on our customers' sleep experience, and our vertical business model supports the strategy. And importantly, we're not standing still. We're actively, aggressively utilizing our consumer feedback to develop breakthrough product innovations like the one we introduced in second quarter and will introduce here in a couple of weeks. We're excited about where we're going with product innovation and how meaningful it will be to our growth from a unit and ASP perspective as we move forward.

Jessica Schoen.

Company is Barclays. One of the questions I had was on what we should expect as far as buckets of SG&A that could impact the third and fourth quarters? I know you said that in the second quarter, increased depreciation was one of the dynamics and expecting that to likely increase with more store openings in the back half. What else should we think about quarter to quarter?

Yes, that's a significant one, Jessica. And as we stated, depreciation year-over-year will contribute about 100 basis points of increase. The other change is the one that Shelly talked about is we will be increasing our investments in media now that we've gotten back on formula with our media buying and planning.

Okay. And then the other question I had was about the industry as a whole. I was wondering if there were any call outs on general consumer behavior as you look to the higher end or the entry-level beds, as how you felt the industry acted as a whole in the second quarter maybe compared to the first quarter.

No real surprises to the latter part of your question. We continue to see consumer confidence that ebbs and flows. What I would say at this point, it's a pretty constant dynamic of the industry. Quality sleep continues to gain importance, relevancy to our customer. And consumers are value orientated, but value is more than price. Customers are looking for benefit-driven products. And for us, we offer a broad range of good, better, best within that premium, and it positions us well to serve a broad customer range.

Josh Borstein.

Longbow Research. Just on the guidance, you had guided to a high single-digit comp growth in the second half of the year. Do you expect the comp to be roughly equal in 3Q and 4Q, or weighted more towards a particular quarter?

Well, as I mentioned, we do expect higher sales growth in Q4 versus Q3, Josh, in light of our performance in Q4 of last year.

Okay, that's helpful. And then also on the second half of the year, the last quarter you guided to mid-single digit ASP growth. And now looking here in the third quarter, it looks like you're going to anniversary the introduction of the m9, the FlexFit, the $100 increase in the m7. How might we get comfortable with how we get to mid-single digit ASP growth either in the third quarter or the back half of the year?

Yes, so as I mentioned, media as well as the product innovation should drive growth in both units in ASP. Specific to ASP in the back half, a couple of things there, Josh. One is that we will be taking pricing on July 29. A $200 price increase on the m7 and the i8, when we launch the new m & i series. And also you will have -- we will have a full quarter of DualTemp as we move into the third quarter.

Okay. Great, and then just on the last quarter you had mentioned that the national broad reach TV was about 30% lower than your typical formula. And I was just curious as to whether that advertising level is now what you deem appropriate or whether that might continue to increase here in the back half of the year?

Yes, relative to the media, we are back on our core formula, which rectified at the fluctuation that you just cited. And we are moving forward with increasing the media with that base line formula as we move into the second half of the year.

Okay, great. And then just one last one for me. Could you update us on your unaided brand awareness?

Yes, we have not updated the unaided brand awareness yet this year.

[Operator Instructions] Keith Hughes.

Keith Hughes from SunTrust. Couple of questions on the new beds. I'm looking at them online here. There's a lot of discussion of temperature control and the write-ups on the four beds. I just want to be clear, you're not using the DualTemp technology in the beds, is that correct?

That's correct.

Okay. Is this more about air flow, or how do these work?

Yes, it's a combination of factors within the actual comfort layer, as well as the material of the bed that is contributing to the temperature balancing.

Okay. And also they have the controllers on here. Is the controller the big difference between what you're closing out or -- what other big changes would there be?

It is one of the big differences. Also, as you highlighted with the imbalance, the temp balance materials, but the actual remote, and you can see it, they're very different than our current remote, and it is interactive. And it's -- this is the first significant advancement in our core technology, and it really positions us for the future.

Joan Storms.

Wedbush Securities. Okay, so a couple of things. So on the marketing, your goal is sort of to take it back, and take it back under control of the company. And how do you feel -- like, obviously, you made progress month-by-month. How do you sort of feel, like, where you need to get to compared to where you are now? Are you sort of in the third inning or the fifth inning? How much more opportunities do you have to continue to improve the media buy to improve the brand awareness?

Yes, well I'll speak to that relative to where we were when we went into this at the beginning of the year. And we have confidence of being back to our -- executing our formula, clearing and achieving the level of efficiencies that we would have expected with the business. So we're there regarding the execution of that media formula. And now it's putting the weight against the media buys to support the advancement in our local market development and our product innovation. And most importantly, our awareness continues to be our greatest opportunity.

Okay. And so you still have opportunity as far as -- are you back to using sort of multiple agencies now again? And then my understanding, too, from your comments was that your media spend is back up to where you'd like it -- well, it has increased from the first quarter, and then the increase in the second half will get you back to where you want to be there.

Yes, a couple of things. First of all, regarding the media buying agencies that we work with, while at the beginning of first quarter we transition multiple buys to one agency along with our planning, we're dual packing our planning, but we've progressed together tremendously since that time. We did move back to a prior agency for our national buying, which was a significant portion of the buy, over 30%, and that has been progressing to -- and progressed to the level of efficiency that we're looking for. So all of that is on track, and we're very confident about how we're working together and proceeding relative to the media buy. The second quarter was actually up 6% in media, and the first quarter was up 8%. So for the first half, we were up 7%. So we were actually slightly lower sequentially on the media increase, and we did step up our media investment throughout the quarter. So May, we came to last year's levels of media spend. And then late in May and into June, we began increasing the media. And so for the quarter then we ended up being up 6%. And as we move into the back half of the year, we will increase the media to support our strategy. More similar to how we originally planned the year.

Okay. And then on the new product, sort of around the corner now for Labor Day, so you'll have the DualTemp and then the new m & i series. Can you comment at all about any other new product introductions for the remainder of the year? When that might occur?

For now Joan, we've shared what we're going to share. We'd communicated in the past that -- I guess last quarter, we communicated that DualTemp was the first in a series. And the m & i series would be the second in a series, and I'll leave it there. And I noted earlier that we have not yet introduced product related to the Comfortaire acquisition or the additional investment that we made with one of our R&D partners.

And then on the new m & i, my understanding is that the sort of the newer features are more advanced technology on the dual chamber or the dual chamber technology and then also on the remote?

Yes, and also the combination of the comfort and support with the layers. So we have a new proprietary foam that's in combination with other comfort layers, where we've done a tremendous amount of research and have proven out the increased comfort and pressure relief attached to this combination of layers that we have in these beds.

Is the remote changes something that you can extend to your other products as well down the road?

We do see this as a significant advancement for our overall core Sleep Number line, and we'll build from here.

Todd Schwartzman. Todd A. Schwartzman - Sidoti & Company, LLC: Sidoti & Company. Couple of points of clarification on the guidance, if I may. Wendy, I know that you spoke of the store openings with respect to accelerated openings in Q4 versus Q3. But since June 29, since quarter end, have you opened or, for that matter, closed any stores?

Well, I won't speak to the current quarter. We don't typically do that, Todd, but I'll just reiterate that we are in track with our real estate actions and on track to end the year per the guidance we've laid out. So as I said, somewhat backloaded Q4 versus Q3. Todd A. Schwartzman - Sidoti & Company, LLC: Okay. And just so I'm clear, it's the sales delta not the absolute level of sales, is that correct, that will be greater in Q4 than Q3? You're now looking for reversal of any historical seasonal patterns in other words.

I was speaking to the sales growth of Q4 versus Q3. Todd A. Schwartzman - Sidoti & Company, LLC: Got it, okay. And on the guidance regarding sales and marketing expense as a percentage of sales, is that 45% for the full year or for the back half?

That was for the full year, Todd. Todd A. Schwartzman - Sidoti & Company, LLC: Okay. And on that new wireless remote for the m & i series, are there any other differentiating features or benefits other than the addition of the sleeper's name?

Yes, it's an interactive remote that's probably the most differentiated feature on this remote, where our current remotes and most will respond to the exact button you're pressing. This one is intuitive and interactive. So you can, in fact, interact with it, and it will be responsive around finding your individualized comfort, as well as, of course, including your name. So if you're reaching for it, it will greet you. So it will say, "Hi, Wendy," and you'll know that that's your side of the bed. Todd A. Schwartzman - Sidoti & Company, LLC: Got you. Lastly, could you speak to -- could you break out the comps for the quarter by mall versus non-mall stores?

Well, we don't break that out, Todd. What I will say is that their performance was similar in the quarter. And would also add that the relocations themselves have continued to deliver very strongly with double-digit percent sales left over the balance of chain.

Michael Novak.

Frontier Capital. I know you don't like to talk about the current quarter, but could you give us some sense of how much you're expecting sales to accelerate from the current pace to meet your third quarter targets?

Yes, Mike, we -- you're right, we don't talk about the current quarter, and we also don't provide quarterly guidance. But as we said, we expect, for the back half, high teens total growth and high single digit comp as a result of the increase in our media investments, as well as our product innovation initiatives.

I'm not asking for the number. I'm just asking for relative to what you're seeing now, does it need to accelerate materially?

Yes. Again, I won't get into some of the monthly progressions. We did, as we said, experience positive sales and positive comps in June, and we expect the growth that we've laid out for the back half.

Okay. Another subject. Could you tell me about the patent protection on the dual temperature side, as well as the remote?

On the new product that we're just introducing?

Correct, as well as the dual temperature product.

Okay. Well, I'll see very high levels, obviously, for competitive reasons, but we do have patent applications pending on this new products that we're introducing. And relative to DualTemp, we also have exclusivity and patent and trademark protection on that product as well.

Isn't there a wireless remote patent run-through?

The wireless remote has, along with a few other tight kind of family of patents around that one, will expire at the end of 2014. And important to note that we're not standing still, Mike. We've been quite aggressive on our product innovation, and we know this is one of our big 3 competitive advantages. And as recent as this year, we have filed many advancements in our patents family. So we have a lot of actions going on here as we indicated with the DualTemp. It's the first in a series of our product innovations. And this new m & i series is a significant advancement in our core line that we'll build off of for years to come.

And then that could lead into my next question. Your new product development pipeline, how many years out does it extend?

Yes. We haven't been very specific because, again, that's competitive, but it's greater than 5.

Okay, and then last question. I'll maybe try this a different way. On a scale of 1 to 10, what's your confidence level in same-store sales accelerating to the high-single digits?

Well, that is our best estimate at this time. It's based on our current trends, as well as the programs that we have planned, like I said, including our significant increase in media investment in the second half, as well as the product innovation, which is starting to ramp up here as we move into the back half of the year.

Okay. And then last question. How many of the DualAir bed coverings, the temperature bed coverings are you selling per store per week right now?

We have not shared that specificity on the DualTemp. Again, I did share that balance -- we're seeing a balance, a good balance between both new customers and existing customers. And we're seeing a healthy attach of a Sleep Number bed to a new DualTemp customer. So we're really bullish about this product that it is a product that solves a significant sleep issue, a common sleep issue, and this layer can be used with all mattress brands. So that is a great source of driving traffic to Sleep Number and contributing to our awareness.

Okay. And just to clarify, you're only assuming the current run rate, what you're experiencing right now, persists to the back half of the year in your sales guidance?

For the DualTemp, that's correct.

At this time, I'd like to turn the call back over to the company.

As there are no further questions at this time, we will now conclude the call. Thank you again for joining us today. We look forward to discussing our third quarter 2013 performance with you in mid-October. Good afternoon.

Thank you. That does conclude today's conference. Thank you for your participation. You may now disconnect from the audio portion.