Sleep Number Corporation
Q4 2011 Earnings Call Transcript

Published: 9 Feb 2012

[Operator:]

Welcome to the Comfort's Fourth Quarter and Full Year of 2011 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. [Operator Instructions] I would like to introduce Mr. Mark Kimball, General Counsel. Sir, you may begin.

[Mark A. Kimball:]

Thank you, Tamara. Good afternoon, and welcome to the Select Comfort Corporation Fourth Quarter and Full Year 2011 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 Bill McLaughlin, our President and Chief Executive Officer; as well as Shelly Ibach, Executive Vice President and Chief Operating Officer; and Wendy Schoppert, Executive Vice President and Chief Financial Officer. 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 on our website. 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 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 Bill for his comments.

[William R. McLaughlin:]

Thanks, Mark. And to those on the call, thank you for joining us to learn more about Select Comfort and the SLEEP NUMBER brand. There is always a lot of ground to cover in a year-end earnings call, performance during the past quarter, full year insights and outlook for the current year. The key takeaway from the information that we'll provide today is that Select Comfort and the SLEEP NUMBER brand are confidently entering a new chapter of sustained profitable growth. We'll divide today's call into 3 parts. I'll cover our strategic opportunity; Shelly Ibach will review key initiatives that are driving and sustaining growth; and Wendy Schoppert will follow with more in-depth financial insight. We then look forward to your questions and comments. Before I start, let me extend my congratulations to the SLEEP NUMBER team and our partners for an outstanding close to last year. Let me provide some perspective on what this team has accomplished. Fourth quarter comp sales growth was the strongest of the year and our highest since fourth quarter of 2003. Our rate of sales growth in the quarter outpaced our key competitors, both manufacturers and retailers. Fourth quarter capped the year of record profit, both in dollars and operating profit margin. And after funding a significant step-up in CapEx, our cash balance exceeded our goal and we remain debt-free. Beyond the financials, 2011 programs and performance give us confidence to increase targeted investments in our unique products, brand and business model to sustain profitable growth and leadership. Over the next few years, we will remain focused on our core business providing the best individualized sleep solutions to our target consumers in the United States. We are focused on at least doubling our share to 10% to 15% of the $12 billion mattress industry, targeting approximately $1.5 billion in revenue by 2015 and increasing profit margin to at least 15%. Our focus is on organic growth, providing unmatched individualized customer experiences through our company-controlled channels and partners. We are encouraged by consumer-led changes within the sleep industry that favor our unique products and business model. Consumers are responding to the idea of better sleep through better mattresses. In just 10 years, the non-innerspring mattress segment has increased from a 5% share to nearly a 30% share of the industry and this growth does not appear to be slowing. SLEEP NUMBER's 3-part formula for sustained growth is unique to our opportunity. It includes awareness, increasing brand and store awareness among our target consumer base. Distribution, accelerating local market development and expanding availability, convenience and quality of experience. End product, advancing individualize comfort in the sleep surface, foundations and the company bedding. Our focus has been on optimizing the integration of these 3 elements, both on a national and local basis. The past year has involved deliberate testing, learning and then applying of programs to profitably accelerate growth. And the consistency of our performance over the past 2 years demonstrates this learning and is the source of confidence going forward. The opportunity to accelerate investment behind proven growth drivers coincides with our financial readiness. Increasing operating profit margin both accelerates earnings growth and increases operating flexibility over time. And a strong balance sheet also enables accelerated investment, as well as the flexibility to take advantage of opportunities in a wide range of economic conditions. Let me summarize SLEEP NUMBER's strategic opportunity. Our industry and consumers are undergoing change that our company is well positioned to lead. Our growth formula is proven with unlimited incremental opportunity. Financial resources and flexibility are stronger than ever, and our people and our culture, our secret sauce, are dedicated to setting a new standard in consumers' individual sleep experiences. 2011 offered both clarity and confidence to further step up investment and proven initiatives, and our 2012 plans accelerate targeted investment for profitable growth. I'll now turn it over to Shelly for additional context about our past performance and future opportunities.

[Shelly R. Ibach:]

Good afternoon, everyone. It's really exciting to discuss our exceptional 2011 and fourth quarter performance with you today. I'll briefly speak about last year's performance and then outline our opportunities in 2012 and beyond. In 2011, we made important progress against our #1 strategic initiative to ensure everyone will know SLEEP NUMBER and how it will improve their life. We made this progress by continuing to advance and refine our growth formula, which focuses on broadening awareness, and consumers responded. This led to exceptional quarterly performances throughout 2011 culminating in our strongest quarter with 31% comparable sales growth. Specifically, there are 5 integrated initiatives that drove our revenue and share growth in 2011

[Wendy L. Schoppert:]

Thanks, Shelly. And good afternoon. I'm pleased today to be sharing details behind our fourth quarter and full year 2011 results. And I'll emphasize the predictability and sustainability of our growth formula. I'll also discuss our outlook for 2012, as well as our strategy for optimally deploying cash. For those that may be new to the SLEEP NUMBER story, I'll begin with a few key points around our longer-term financial performance and opportunity. First, we are delivering top tier rates of sales growth as we expand market share and expect annual comp growth of at least 10% to 12% over the next 3 years, even as we grow store counts by at least 5% to 8% per year. Second, we are achieving significant operating profit leverage and expect earnings per share growth of at least 20% per year over the next 3 years. And third, we are self-funding our growth with a strong balance sheet including cash and securities above our minimum target at year end with no debt. Now to our 2011 financial performance. We began the year with a goal of expanding margins and strengthening our balance sheet while also advancing top line share growth. We were successful on all fronts, delivering strong performance for our shareholders. During the fourth quarter, we achieved earnings per share of $0.27, which included $0.03 associated with the nonrecurring net decrease to income taxes related to the favorable resolution of prior year's tax matter. Excluding this $0.03 tax adjustment, fourth quarter earnings per share was up 85% versus last year. On a full year basis, earnings per share was $1.07, which also included a similar adjustment for prior year's tax matter. Excluding this $0.03 tax adjustment, full year 2011 earnings per share was up 82% versus last year. The success of our growth strategies drove total sales growth of 27% during the fourth quarter. Sales grew 30% in our company-controlled channels including retail stores, our direct call center and e-commerce. This increase was driven by a 16% unit growth in our company-controlled channel. We also continue to grow average selling price during the quarter with company-controlled channel ASP up 13% year-over-year. As we saw last quarter, our ASP increase was driven by a higher mix of adjustable foundations and beddings, as well as the pricing actions we took between January and July of last year. In total, pricing contributed approximately 5 points to overall ASP growth for the quarter. As Shelly stated, we drove strong company-controlled comp growth during the quarter, and our full year company-controlled comp growth of 26% was our strongest full year comp since 2003. We also saw continued advancements in the performance of our store portfolio during 2011 with 93% of our comp stores generating over $1 million of sales and 24% of our comp stores generating over $2 million of sales. During the fourth quarter and full year 2011, we continue to achieve significant bottom line leverage as we grew sales. As a vertically integrated company, our most important pretax measurements of leverage is operating margin. During the quarter, our operating margin of 10.6% was 290 basis points higher than prior year. And our fourth quarter operating income growth rate of 74% represented the 12th consecutive quarter of double-digit year-over-year growth. Finally, full year operating income of $90.5 million and operating margin of 12.2% were both full year records for the company. Gross margin during the quarter of 62.9% was roughly flat on a year-over-year basis with favorable impact from pricing actions and manufacturing efficiencies, offset by lapping favorable warranty adjustments in the prior-year period. Full year 2011 gross margin of 63.3% was 80 basis points higher year-over-year driven by favorable product mix, pricing actions and manufacturing efficiencies, which builds on the 90 basis point year-over-year increase we achieved in 2010. Selling expenses continue to be a primary source of leverage and margin gain with marketing of variable investment. Selling expenses as a percentage of sales improved by over 300 basis points during the fourth quarter, and this was partially offset by planned increases in media and other marketing. Media spend was $24 million during the quarter and for the full year, media increased by 30% to $92 million or 12.3% of sales. G&A also continued to be a source of leverage with fourth quarters G&A as a percentage of sales improving by 90 basis points versus the prior year. And on a full year basis, G&A improved by 100 basis points. We generated strong cash flow during 2011. Full year EBITDA exceeded $109 million, a $40 million increase over prior year. Cash and marketable securities totaled $146 million at the end of the year, a $70 million increase over prior year, and we have no borrowings under our line of credit. By all accounts, 2011 was a strategic and financial home run for SLEEP NUMBER and we are already building on that momentum in 2012. Regarding our outlook, we currently expect earnings per diluted share to increase from $1.07 in 2011 to between $1.32 and $1.40 in 2012, a 23% to 31% increase. This growth rate increases to 27% to 35% when you adjust 2011 down for the $0.03 tax adjustment noted earlier. Our earnings guidance assumes company-controlled comps of at least 15% in 2012 with growth expected in both units and ASP as we continue to benefit from pricing actions, both lapping 2011 price increases as well as additional pricing actions in 2012. Total sales are also expected to benefit from a 5% to 8% increase in store growth from 381 at year-end 2011 to between 400 and 410 by year-end 2012. We expect to continue our trend in annual growth margin growth of at least 50 basis points in 2012, primarily driven by the pricing actions I noted earlier. While we are planning for low single digits raw material cost increases, we expect to offset these costs with continued manufacturing efficiencies in our plants and those of our suppliers. Moving down to P&L. We plan to grow media at a rate that exceeds the 30% growth we saw in 2011. And media, as a percentage of sales, may exceed 13% as we invest in awareness with continued leverage in selling expenses and G&A. We are planning for continued growth in operating margins during 2012 with an increase of at least 100 basis points from 12.2% in 2011 to at least 13.2% in 2012, continuing on our path to at least 15% by 2015, and we expect our 2012 tax rate to be approximately 36%. Lastly, capital expenditures during 2012 are expected to double from $24 million in 2011 to approximately $50 million in 2012 as we add, reposition and remodel stores and continue enhancing our customer information systems. As you'd expect, we are anticipating meaningful free cash flow generation in 2012 even with this year-over-year increase in CapEx. And as I've stated on the last 2 quarterly calls, our priority is and will continue to be to deploy cash in a manner that maximizes long-term value for our shareholders. We plan to maintain a cash balance of at least $125 million, and remain growth-oriented under a wider range of economic condition. Beyond that, our first priority is to continue investing in our profitable growth. Our business is generating strong returns on investments. Accordingly, we want to ensure we maintain adequate liquidity to fund our proven growth initiatives. We also plan to reinitiate a modest share buyback program in 2012 with the objective of maintaining our share count at current level. To summarize, our fourth quarter and full year 2011 results give us confidence in our strategy and we are taking actions to deliver another strong year in 2012, as we continue to invest in the proven programs that Shelly described. And the exciting part is, that as an early stage growth company, we are just getting started on our journey, as we continue to increase sales, earnings per share and cash. I'll now turn it back over to Bill for final comments.

[William R. McLaughlin:]

Thanks, Wendy. Our confidence in SLEEP NUMBER's ability to make a difference in our consumers' lives has been a constant and is stronger today than ever. We continue to execute against the strategic plan that we established more than 3 years ago, and we're now entering a new chapter of sustained profitable growth. We've refined our growth formula, innovating and investing in marketing, product and distribution, and we've advanced what sets us apart

[Operator:]

[Operator Instructions] Our first one comes from Budd Bugatch.

[Budd Bugatch:]

Budd Bugatch with Raymond James. Just a couple of questions. One, obviously -- there have been some new stores opened up -- previous off-mall competitors now opening some and testing some on-mall stores, that seem targeted to be fairly much co-located with SLEEP NUMBER stores. Do you have any early read on that? There are only a couple of them open, but maybe you've got some early read on that.

[William R. McLaughlin:]

Budd, we welcome all investments that are going to help raise the customer -- consumer awareness of quality sleep and the opportunity to compare the experience in our stores versus any others. We're very confident in how that will go down. Our most direct experience was when we opened our own off-mall stores against some competitors this past year and that all went very well.

[Budd Bugatch:]

And you were going to test, I think, about 20, if I remember it right, maybe 20 or 2 dozen off-malls stores. How many are now open?

[William R. McLaughlin:]

We did open the 20 that we had indicated that we would.

[Budd Bugatch:]

And the growth next year, how many will be on-mall or off-mall?

[William R. McLaughlin:]

Shelly?

[Shelly R. Ibach:]

Well, it could begin with, Budd, this is Shelly, our first priority is broadening awareness. And we're excited about the roles that the non-mall stores play with broadening awareness. And second, is our distribution expansion and strategically approaching that, depending on what specific market really needs for the trade area. What we love about the non-malls is it gives us flexibility to position ourselves to reach consumers we may not have been able to in the past, being limited just to malls. So you'll see us open a combination between mall and non-mall. But most importantly is both are working well, and we really appreciate the flexibility.

[Wendy L. Schoppert:]

And Budd, this is Wendy, I can add a few numbers that maybe helpful. I mean, we began this year at 381 stores. During 2012, we plan to open between 50 to 60. And as Shelly said, the majority of those are expected to be non-malls, and we also expect that growth to be somewhat backloaded in the second half. We expect to close around 30 stores, but most of those are the repositions that we've spoken of, many of those were mall to non-mall. So we plan to end 2012 on a net basis up around 20 to 30.

[Budd Bugatch:]

And of those 50 to 60, Wendy, how many are going to be off-mall and how many are on-mall?

[Wendy L. Schoppert:]

We shared that the majority of them are expected to be non-mall.

[Budd Bugatch:]

Non-mall, okay. And just -- and new market versus existing market, how do you -- how does that break out?

[Shelly R. Ibach:]

Well, with our current distribution strategy, one of the great things about our business model is we are national today. We are represented in over 45 states and we are very under-penetrated, however, with a little market share. So you will see our expansion almost all within existing markets that we reside in today.

[Budd Bugatch:]

Okay. But there are a couple of major metropolitan areas where you exited a couple of years ago. Are you -- when do you plan to get back into those?

[Shelly R. Ibach:]

Yes. We have some major markets that are very under-stored, as you're indicating, and I think that speaks to our aggressive growth strategy that we highlighted both on the last call and this call. And I'd like to give you an example of aggressive growth. We have 13 markets, large underdeveloped markets, that we've identified and developed an aggressive growth formula to be able to apply. And these 13 markets represent about 1/3 of the bedding sales in the U.S. If I can give you an example of what the market may look like, here's a good example. Bedding sales, overall, may be over $300 million. Our market share less than 5% and we're not heavily stored, but we do have some store count with fragmented, competitive landscape, and this is a real example from this last year. And we took bold actions with breakthrough media spending, investing a bit ahead of our sales. We repositioned 2 stores to non-mall for high visibility, near our competitors, and remodeled another 3 stores. And essentially, we kept the same-store count so we had a very strong impact where we were able to achieve sales profit and market share gains well above expectations.

[Budd Bugatch:]

Okay. And last for me -- I'm sorry, go ahead.

[Shelly R. Ibach:]

We'll apply that kind of strategy to these large underdeveloped markets.

[Budd Bugatch:]

Okay. And last for me. I'm impressed with the 24% of the stores over $2 million and 3% now over $3 million. Is there a point which you reach capacity in a store? I suspect not, but I just wanted to hear you say whether or not you're running into that with any of the stores.

[Shelly R. Ibach:]

You're absolutely right, Budd, we expect not. And it's the beauty of our business model. We have a market-based approach with an integrated real estate and marketing strategy and supported with incredible talent. For us, it's about site location, traffic and conversion. And the reason this works so well is we have exclusive distributions and no inventory constraints. And today, if you take a $2 million average sales store, it's basically 2 beds a day, and we could do a lot more than that.

[Operator:]

Next question comes from Leah Villalobos.

[Leah Villalobos:]

It's Longbow Research. Just kind of a follow-up on those 13 markets that you were just referring to. You had given some numbers in the prepared remarks and I think I just kind of missed them. What did you do this year? I think it was -- did you say 4 markets and then your adding 3 more next year, is that right?

[Shelly R. Ibach:]

That's right.

[Leah Villalobos:]

Okay. And can you just talk a little bit about your incremental media investment and how that local strategy versus increasing the investment nationally, just talk a little bit more about what's driving that.

[Shelly R. Ibach:]

Sure. Well, our #1 opportunity for growth is awareness, and ultimately that's what's driving it. So building awareness. And we entered last year with a new strategy of moving to a national broad reach, which really was a game changer for us. We moved from a narrow focus direct media buy to a national broad reach. And so the investment is behind both national broad reach, as well as local market development.

[Leah Villalobos:]

And in terms of the mix and the increase, is it pretty even?

[Shelly R. Ibach:]

From a mix perspective, I think what's important to note is for 2012 we have planned about 70% national broad reach compared to the -- and 30% national direct. Historically, that number's been more like a 55% direct.

[Leah Villalobos:]

Okay. That's helpful. And then just on the comp guidance for this year, I understand that you have some pricing that we'll see in the first half of the year and then there were some new pricing that you implemented here in January, but clearly seeing some very strong unit growth results. Can you just talk a little bit more in detail about the drivers there?

[Wendy L. Schoppert:]

I'll start with the pricing, which you brought up, Leah. For 2012 -- well, let me start with 2011, we saw about a 3% increase overall for the year due to pricing and 5% in the fourth quarter. As we look to 2012, we also expect about a 3% increase in pricing. We would expect that to be fairly front-loaded with about 4% to 5% growth from pricing in the first half and about 1% to 2% increase in the second half due to pricing.

[Leah Villalobos:]

In terms of the unit expectations versus we've seen a lot of improvement in terms of the mix this year?

[Wendy L. Schoppert:]

Yes. And as I mentioned we expect to continue to see a balanced approach to the growth with growth in both units and in ASP. Units driven by many of the initiatives and programs that Shelly just described in her remarks, and ASP, we expect primarily driven by the pricing, which I just spoke to.

[Operator:]

Next question comes from Brad Thomas.

[Bradley B. Thomas:]

Wanted just to ask about one metric that fell a little bit short of what your guidance had been for the quarter, gross margin. Can you just talk a little bit about what it was that played out that had it come in a little bit lower than you had guided to for the quarter?

[Wendy L. Schoppert:]

Sure. Brad, this is Wendy. First, gross margin versus the guidance. We ended up in the quarter driving more of our traffic proportionately during our promotional time period. So it ended up being a very highly efficient use of our media. During that time period, we grew both the top line and the bottom line. So let me back up for a moment and just make sure everyone on the call understands our broader financial strategy. We really run the business with a goal of maximizing overall operating margins, and we're real pleased with our results there in Q4 and the full year up around 300 basis points. And we are very focused on our path to exceeding 15% by 2015. With respect to gross margin, we're pleased with our full year gross margin increase of 80 basis points. And as I've mentioned, we expect to be up at the least 50 basis points for the full year of 2012.

[Bradley B. Thomas:]

Okay, great. And then as you look at the accessory business, could you talk a little bit about the performance of it during the quarter? Where are accessories as a percentage of sales? And how important is that in your sales guidance for 2012?

[Shelly R. Ibach:]

Well, a product is a key part of our integrated strategy to broaden awareness. And I think the SLEEP NUMBER bedding collection plays a great role with both awareness, as well as attach, which drives our ASP. And with the SLEEP NUMBER bedding collection, we also have exclusive proprietary solutions that support that individualization. We saw a terrific comp increase in 2011 with the bedding collection. And overall, this business has a great growth potential in the future.

[Wendy L. Schoppert:]

And Brad, it's Wendy. I'll just share a couple of numbers that may be helpful. Last quarter, Shelly shared that we increased the penetration or percent of sales for bedding collection by about 1 point. We continue to see that kind of strength, over 100 basis points improvement, in bedding collection penetration in the fourth quarter. And looking forward to 2012, we do expect to continue to grow that metric.

[Bradley B. Thomas:]

Great. And then, if I could just ask one last question around CapEx. Obviously, the number of store openings you're going to do is about double in 2012. Are there any other drivers for the increase in CapEx around systems or R&D? I recall a number of years ago you were looking at rolling out SAP, but I believe have shelved that permanently at this point, if I understand correctly.

[Wendy L. Schoppert:]

Right. First, our CapEx plan is consistent with our #1 priority for the use of cash and that's investing in growth. And as you say, as you look at the $50 million expectation that I shared, the majority of that, roughly 2/3 of that, is distribution related. The remainder is spread across a couple of areas. One is systems. We are not planning for a full-scale system project like SAP. We do have a couple of projects in place that are primarily focused on enhancing our customer information systems. And I'll also add, Brad, that we will remain flexible on this throughout the year. We can certainly flex up or down as we get a better read on the year.

[Operator:]

Next question comes from Peter Keith.

[Peter J. Keith:]

It's Piper Jaffray. I wanted to ask about the initiative around raising awareness. I know there's an interesting metric you guys included in the presentation, which you called unaided store awareness. I think at the beginning of last year it started at around 3 and maybe by the middle of the year, I seem to recall it got to 5. I was curious on 2 questions. Number one, have you been able to quantify that here at end of the year? And then what kind of your pie in the sky long-term goal on where you could ultimately take that store awareness?

[Shelly R. Ibach:]

Peter, our unaided store awareness at the midpoint of the year was 6%. So you're right, we moved from 3% to 6% the first 6 months of the year. We'll be able to share our year-end metrics on the next call. And from a future perspective, obviously, with only 6% unaided awareness, we have a great deal of opportunity, and we'll be able to better express that here in the coming months and years.

[Peter J. Keith:]

Okay, very good. Second question, somewhat unrelated, just with the comp guidance. Is there any seasonality we should think of for the year where maybe certain quarters are stronger than others, and maybe are the price increases playing a role in that?

[Wendy L. Schoppert:]

Yes, I mean, the couple of things that can consider there, Peter, was with respect to comps and -- we saw fairly steady, high growth in comps quarter-to-quarter last year. As we look forward, the pricing is -- is not a consideration with the pricing impact being more front-loaded. We will, in July, lapse the price increase that we took last year in the P&I series. And then as I mentioned, not with respect to the comp but for total, we would expect the store growth to be a bit more back-loaded. And I think you're familiar with our revenue waiting, overall, typically, Q3 tends to be our strongest followed by Q1.

[Peter J. Keith:]

Yes, okay. And the last question for me is just on the investments you're making with the customer management systems. What type of extra capabilities is that providing to your sales associates?

[Wendy L. Schoppert:]

Yes, so Shelly spoke to the very integrated way that we're approaching our growth strategy. So one of the key benefits of our enhanced customer information system is allowing more integration and allowing our associates, sales and service, to be able to have one version of the truth and be able to have full visibility to all the interactions that we're having with our customers. It's one of the strategic advantages that we have, is being able to control that customer experience from A to Z. And we just want to make sure that our customer -- our information systems allow us to maximize that strategic asset.

[Operator:]

Next question comes from Todd Schwartzman.

[Todd A. Schwartzman:]

I'm with Sidoti & Company. Just wanted to follow up on the gross margin question. Thus far, quarter-to-date, how promotional have you been? How do you think the quarter will shape up versus Q4 in terms of promotional activity?

[Wendy L. Schoppert:]

Well, our promotional plan for the quarter, we expect it to be fairly similar year-over-year, Todd.

[Todd A. Schwartzman:]

Back-end loaded or a little more even?

[Wendy L. Schoppert:]

I'm not sure I understand your question, Todd.

[Todd A. Schwartzman:]

Will it be more so, more heavily promoted in March versus January?

[Wendy L. Schoppert:]

Well, I see your question. We tend to build our promotions more around key consumer events and the times that couples are out shopping, and shopping for home-related products. And so Labor Day is a key selling period as is Presidents' Day.

[Todd A. Schwartzman:]

Okay. As far as free cash flow, what are you targeting for the full year of 2012?

[Wendy L. Schoppert:]

So Todd, we've been running historically the last couple of years of about $60 million to $70 million of free cash flow. As you look to 2012, we would expect our operating cash flow to increase as we grow the bottom line. At the same time, as we mentioned, we'll be increasing CapEx, and so we would expect our free cash flow to be in a similar range for 2012.

[Todd A. Schwartzman:]

Great. Finally, I wanted to learn a little bit more about the m7. I mean, I realize it's fairly early in the game at this point, but if you could maybe speak a little to consumer acceptance. And also in particular, the benefits of gel infusion. I know it's a big buzzword in the industry right now. I just thought I'd be curious to get your take on the benefits to the consumer?

[Shelly R. Ibach:]

So the m7 we just launched here in January and we developed this product based on insights from the consumer. Specifically, we have had a pillow in our line for about 18 months and we call it the CoolFit pillow. And that has been our -- one of our best-selling pillows over the past year. And the great news about our strategy is we hear from our sleep professionals every day in our stores. So we have their insight, as well as the consumer research that we do. And there was a great demand from our team based on the properties of this CoolFit pillow that has cooling and contouring properties and very supportive overall. And so we went forward to develop a bed and take that product along with our unique Sleep Number adjust -- dual adjustability and combined them. And it has been extremely well received by our frontline because they already had high confidence in the pillow. And of course, with the dual air adjustability, that's such a unique feature that separates our product from the rest, and to be able to combine them for that customer who's looking for this type of product and having the added benefit of SLEEP NUMBER makes all the difference.

[Wendy L. Schoppert:]

And Todd, I'll just add, as a result of driving this new innovation, we also took it as an opportunity then to increase pricing. It replaced a product that was at $2,899, so $3,199 with the $300 dollar price increase.

[Todd A. Schwartzman:]

Great. Okay, that's helpful. Longer term, can we expect to see additional materials depending on changing pace within the marketplace combined with the SLEEP NUMBER technology?

[Wendy L. Schoppert:]

We are very committed to product innovation and individualization. So you'll see us continue to bring forth advancements in product based on making sure that we're delivering on real consumer benefits.

[Operator:]

Next question comes from Eric Hollowaty.

[Eric Hollowaty:]

Eric Hollowaty, Stephens, Inc. Just a quick one, Wendy, I think in your comments you mentioned that one of the reasons, if not the only reason, gross margin was down year-over-year in the quarter was because you had some kind of adjustment in the year-ago period that, I take it, inflated the year-ago gross margin. Do you happen to know offhand what gross margin would have been without that adjustment last year?

[Wendy L. Schoppert:]

Yes, it was about 70 to 80 basis points, Eric.

[Eric Hollowaty:]

Okay, great. So you saw some decent gross margin improvement in the quarter, so x that. That's all I have.

[Operator:]

Next question comes from John Baugh.

[John A. Baugh:]

Stifel, Nicolaus. Just step right into it. Well, just first of all, I just want to be clear, you referenced a 16% unit number. Was that a Q4 mattress unit number?

[Wendy L. Schoppert:]

It was, yes. It's Q4 mattress, correct.

[John A. Baugh:]

It is. And as I took out pricing, the price increases from the ASP and we were just talking about mattress dollars only, was there much mix shift change year-over-year? Any benefit or drag?

[Wendy L. Schoppert:]

Well, it was -- with respect to mix, 2 parts to that. One, is that we did see a higher mix of adjustable foundations and bedding collection which does drive ASP. And then in terms of overall mix of mattresses, we did see a healthy mix. I believe in the past we've talked about a 30, 50, 20 mix for the Classic, Performance and Innovation Series. And we're actually seeing that trending up a bit to more of a 30, 40, 30 range. We're seeing more of a mix up into the higher Innovation Series. That's how we plan the 2012.

[John A. Baugh:]

That's great color. And lastly on the -- I think you mentioned you're going to close 30 stores, maybe I'll direct this one to Shelly. Is that representative of how many mall leases are coming due this coming year or they're like twice that many? I'm just curious, how many mall locations you're either moving to a better spot within the mall and/or just outright moving out of the mall? And then also interested in that number, sort of as we look out over the next 5 years or so.

[Shelly R. Ibach:]

Well, the 20 to 30 closes that we indicated do represent a mixture of all of the above. No, it does not represent the number of leases. And with our strategic distribution strategy, we have a plan by market for the next 3 years of how we want to execute. And the good news about the mall and the non-mall is it gives us flexibility to look at our options. So we have -- with our new store design and the experience and how we're broadening our overall sales per store, we are looking for a little larger mall footprint than we historically have executed. And so part of our strategic approach is to explore with our landlord better positioning, looking more for that 50-yard line with an appropriate sized store or exploring our -- and/or exploring our options for non-mall.

[John A. Baugh:]

Great. And then maybe for you, Wendy, as a final question. We're going to ramp store openings materially this year. We haven't been doing that for a while. Could you refresh us on what, if any, implications that has on the P&L or on the EBIT line? I understand it's more back-loaded. So as we think about modeling EBIT margins for the second half, essentially, is there some related drag to opening new stores?

[Wendy L. Schoppert:]

Well, I mean, to state the obvious, that we will see some increase, obviously, in occupancy expense. I would also mention, we've talked in the past about flow-through rate. Since our turnaround in '08, '09, we've kept our fixed cost relatively flat with very little investment in growth, which drove flow-through rates of around 30%. We're at 28% in 2011. But as we go forward, we would expect something more in the low 20 percentage as we begin to invest in our growth. So things like store growth, higher CapEx, of course, drives depreciation, and some other infrastructure growth. I will add, though, that this is consistent with our target of at least 15% operating margin by 2015.

[Operator:]

[Operator Instructions] Our next question comes from Joan Storms.

[Joan L. Bogucki-Storms:]

On the -- most of my questions have been answered about the stores. But just in sync with that, so that CapEx would be about 2/3 of the expense, would be sort of in sync with the store opening schedule. And also on the share buybacks. So we would maintain shares at around $50 million -- $56.5 million for 2012?

[Wendy L. Schoppert:]

Correct.

[Operator:]

We show no further questions.

[William R. McLaughlin:]

Well, if there are no further questions at this time, then we will conclude the call. Thank you all, very much, for joining us, and we look forward to reporting further to you following the release of our first quarter results. Thank you, all.

[Operator:]

That concludes today's call. Thank you for participating. You may disconnect at this time.