UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the Quarterly Period Ended ~~March 29,~~June 28, 2014

Commission File Number: 0-25121

SELECT COMFORT CORPORATION

(Exact name of registrant as specified in its charter)



Minnesota		41-1597886
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



9800 59th Avenue North
Minneapolis, Minnesota		55442
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (763) 551-7000

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES ý NO o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	ý		Accelerated filer o
Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO ý

As of ~~March 29,~~June 28, 2014, ~~54,273,000~~53,743,000 shares of the Registrant’s Common Stock were outstanding.

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

INDEX



		Page

PART I: FINANCIAL INFORMATION

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Statements of Comprehensive Income	4
	Condensed Consolidated Statement of Shareholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1415
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2224
Item 4.	Controls and Procedures	2224

PART II: OTHER INFORMATION		2224
Item 1.	Legal Proceedings	2224
Item 1A.	Risk Factors	2325
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2325
Item 3.	Defaults Upon Senior Securities	2325
Item 4.	Mine Safety Disclosures	2325
Item 5.	Other Information	2325
Item 6.	Exhibits	2426
SIGNATURES		2527

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)


	(unaudited) March 29, 2014		December 28, 2013		(unaudited) June 28, 2014		December 28, 2013
Assets
Current assets:
Cash and cash equivalents	$	60,409	$	58,223	$	37,107	$	58,223
Marketable debt securities – current	52,147		52,159		45,831		52,159
Accounts receivable, net of allowance for doubtful accounts of $418 and $425, respectively	15,579		14,979
Accounts receivable, net of allowance for doubtful accounts of $478 and $425, respectively					14,334		14,979
Inventories	44,590		40,152		43,156		40,152
Prepaid expenses	7,923		9,216		12,097		9,216
Deferred income taxes	6,926		6,936		6,910		6,936
Other current assets	8,613		7,874		9,494		7,874
Total current assets	196,187		189,539		168,929		189,539

Non-current assets:
Marketable debt securities – non-current	30,469		34,632		37,822		34,632
Property and equipment, net	137,567		129,542		151,479		129,542
Goodwill and intangible assets, net	16,613		16,823		16,403		16,823
Deferred income taxes	6,396		4,943		6,953		4,943
Other assets	6,229		6,286		6,831		6,286
Total assets	$	393,461	$	381,765	$	388,417	$	381,765

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	63,385	$	73,391	$	59,368	$	73,391
Customer prepayments	20,177		15,392		18,087		15,392
Accrued sales returns	10,737		9,433		9,194		9,433
Compensation and benefits	19,493		15,242		24,632		15,242
Taxes and withholding	16,514		12,517		11,281		12,517
Other current liabilities	10,410		11,207		11,103		11,207
Total current liabilities	140,716		137,182		133,665		137,182

Non-current liabilities:
Warranty liabilities	1,897		1,567		1,822		1,567
Other long-term liabilities	18,725		17,796		19,963		17,796
Total liabilities	161,338		156,545		155,450		156,545

Shareholders’ equity:
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding	—		—		—		—
Common stock, $0.01 par value; 142,500 shares authorized, 54,273 and 54,901 shares issued and outstanding, respectively	543		549
Common stock, $0.01 par value; 142,500 shares authorized, 53,743 and 54,901 shares issued and outstanding, respectively					537		549
Additional paid-in capital	—		5,382		—		5,382
Retained earnings	231,557		219,276		232,387		219,276
Accumulated other comprehensive income	23		13		43		13
Total shareholders’ equity	232,123		225,220		232,967		225,220
Total liabilities and shareholders’ equity	$	393,461	$	381,765	$	388,417	$	381,765

See accompanying notes to condensed consolidated financial statements.

Index

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited - in thousands, except per share amounts)


	Three Months Ended				Three Months Ended				Six Months Ended
	March 29, 2014		March 30, 2013		June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
Net sales	$	276,412	$	258,237	$	234,763	$	207,391	$	511,175	$	465,628
Cost of sales	105,029		94,821		92,366		75,993		197,395		170,814
Gross profit	171,383		163,416		142,397		131,398		313,780		294,814

Operating expenses:
Sales and marketing	125,022		109,813		106,712		98,357		231,734		208,170
General and administrative	18,896		15,820		21,265		15,374		40,161		31,194
Research and development	1,663		2,556		1,709		2,560		3,372		5,116
Total operating expenses	145,581		128,189		129,686		116,291		275,267		244,480
Operating income	25,802		35,227		12,711		15,107		38,513		50,334
Other income, net	102		91		78		78		180		169
Income before income taxes	25,904		35,318		12,789		15,185		38,693		50,503
Income tax expense	8,912		11,847		4,308		5,259		13,220		17,106
Net income	$	16,992	$	23,471	$	8,481	$	9,926	$	25,473	$	33,397

Basic net income per share:
Net income per share – basic	$	0.31	$	0.43	$	0.16	$	0.18	$	0.47	$	0.61
Weighted-average shares – basic	54,113		55,095		53,648		55,029		53,880		55,062
Diluted net income per share:
Net income per share – diluted	$	0.31	$	0.42	$	0.16	$	0.18	$	0.47	$	0.60
Weighted-average shares – diluted	54,844		56,251		54,324		55,987		54,570		56,101

See accompanying notes to condensed consolidated financial statements.

Index

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(unaudited - in thousands)


	Three Months Ended					Three Months Ended					Six Months Ended
	March 29, 2014		March 30, 2013			June 28, 2014		June 29, 2013			June 28, 2014		June 29, 2013
Net income	$	16,992	$	23,471		$	8,481	$	9,926		$	25,473	$	33,397
Other comprehensive income (loss) – unrealized gain (loss) on available-for-sale marketable debt securities, net of income tax	10		(7		)	20		(38		)	30		(45		)
Comprehensive income	$	17,002	$	23,464		$	8,501	$	9,888		$	25,503	$	33,352

See accompanying notes to condensed consolidated financial statements.

Index

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statement of Shareholders’ Equity

(unaudited - in thousands)


	Common Stock					Additional Paid-in Capital				Retained Earnings			Accumulated Other Comprehensive Income			Total			Common Stock						Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income				Total
	Shares		Amount						Shares				Accumulated Other Comprehensive Income		Amount										Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income				Total
Balance at December 28, 2013	54,901		$	549		Additional Paid-in Capital			$	Retained Earnings	5,382		$	219,276		Total		$	13		$	225,220		54,901			$	549			$	5,382			$	219,276			$	13	$	225,220
Net income	—		—			—				16,992			—			16,992			—		—				—				25,473				—				25,473
Other comprehensive income:
Unrealized gain on available-for-sale marketable debt securities, net of tax	—		—			—				—			10			10			—		—				—				—				30				30
Exercise of common stock options	32		—			411				—			—			411			101		—				1,366				—				—				1,366
Tax effect from stock-based compensation	—		—			(166		)		—			—			(166		)	—		—				313				—				—				313
Stock-based compensation	(80	)	—			(108		)		—			—			(108		)	(84	)	—				2,035				—				—				2,035
Repurchases of common stock	(580	)	(6		)	(5,519		)		(4,711		)	—			(10,236		)	(1,175	)	(12		)		(9,096		)		(12,362		)		—				(21,470		)
Balance at March 29, 2014	54,273		$	543		$	—			$	231,557		$	23		$	232,123
Balance at June 28, 2014																			53,743		$	537			$	—			$	232,387			$	43			$	232,967

See accompanying notes to condensed consolidated financial statements.

Index

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited - in thousands)


	Three Months Ended						Six Months Ended
	March 29, 2014			March 30, 2013			June 28, 2014			June 29, 2013
Cash flows from operating activities:
Net income	$	16,992		$	23,471		$	25,473		$	33,397
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	9,176			6,661			19,213			14,153
Stock-based compensation	(108		)	432			2,035			1,992
Net (gain) loss on disposals and impairments of assets	(2		)	27
Net loss (gain) on disposals and impairments of assets							87			(58		)
Excess tax benefits from stock-based compensation	(19		)	(2,401		)	(720		)	(2,837		)
Deferred income taxes	(1,450		)	585			(2,003		)	4,072
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable	(552		)	2,454			651			2,541
Inventories	(4,438		)	5,269			(3,004		)	1,769
Income taxes	3,795			7,534			(394		)	(3,084		)
Prepaid expenses and other assets	1,030			(889		)	(4,355		)	(3,933		)
Accounts payable	3,600			12,955			(1,042		)	(1,708		)
Customer prepayments	4,785			2,302			2,695			(2,857		)
Accrued compensation and benefits	4,080			(9,165		)	9,724			(4,802		)
Other taxes and withholding	36			(1,443		)	(529		)	(1,156		)
Warranty liabilities	185			(239		)	281			(571		)
Other accruals and liabilities	1,754			(2,531		)	1,466			(775		)
Net cash provided by operating activities	38,864			45,022			49,578			36,143

Cash flows from investing activities:
Purchases of property and equipment	(16,660		)	(14,309		)	(39,766		)	(37,096		)
Proceeds from maturities of marketable debt securities	10,000			5,898			23,548			23,463
Investments in marketable debt securities	(13,623		)	(12,883		)	(28,405		)	(16,504		)
Increase in restricted cash	(500		)	—			(500		)	—
Proceeds from sales of property and equipment	5			3			5			117
Acquisition of business	—			(15,500		)	—			(15,500		)
Investment in non-marketable equity securities	—			(1,500		)	—			(3,000		)
Net cash used in investing activities	(20,778		)	(38,291		)	(45,118		)	(48,520		)

Cash flows from financing activities:
Repurchases of common stock	(10,236		)	(10,144		)	(21,470		)	(22,031		)
Net decrease in short-term borrowings	(6,094		)	(4,370		)	(6,192		)	(4,750		)
Proceeds from issuance of common stock	411			2,282			1,366			6,595
Excess tax benefits from stock-based compensation	19			2,401			720			2,837
Net cash used in financing activities	(15,900		)	(9,831		)	(25,576		)	(17,349		)

Net increase (decrease) in cash and cash equivalents	2,186			(3,100		)
Net decrease in cash and cash equivalents							(21,116		)	(29,726		)
Cash and cash equivalents, at beginning of period	58,223			87,915			58,223			87,915
Cash and cash equivalents, at end of period	$	60,409		$	84,815		$	37,107		$	58,189

See accompanying notes to condensed consolidated financial statements.

Index

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Basis of Presentation

We prepared the condensed consolidated financial statements as of and for the three and six months ended ~~March 29,~~June 28, 2014 of Select Comfort Corporation and 100%-owned subsidiaries (“Select Comfort” or the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and they reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position as of ~~March 29,~~June 28, 2014, and December 28, 2013, and the consolidated results of operations and cash flows for the periods presented. Our historical and quarterly consolidated results of operations may not be indicative of the results that may be achieved for the full year or any future period.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with our most recent audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013 and other recent filings with the SEC.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of sales, expenses and income taxes during the reporting period. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates will be reflected in the financial statements in future periods. Our critical accounting policies consist of stock-based compensation, asset impairment charges, goodwill and indefinite-lived intangible assets, warranty liabilities and revenue recognition.

The consolidated financial statements include the accounts of Select Comfort Corporation and our 100%-owned subsidiaries. All significant intra-entity balances and transactions have been eliminated in consolidation.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This new guidance is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, we will adopt this new guidance beginning in fiscal 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt this new guidance and management is currently evaluating which transition approach to use. Management does not expect this new guidance to materially impact our consolidated results of operations, financial position or cash flows.

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

2. Fair Value Measurements

The following tables set forth, by level within the fair value hierarchy, our financial assets that were accounted for at fair value on a recurring basis at ~~March 29, 2014, and~~ ~~December 28, 2013~~, according to the valuation techniques we used to determine their fair value (in thousands):


	March 29, 2014								June 28, 2014
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Marketable debt securities – current
U.S. Treasury securities	$	15,009	$	—	$	—	$	15,009	$	7,505	$	—	$	—	$	7,505
Corporate bonds	—		20,356		—		20,356		—		22,851		—		22,851
U.S. Agency bonds	—		12,018		—		12,018		—		9,508		—		9,508
Municipal bonds	—		4,764		—		4,764		—		5,967		—		5,967
	15,009		37,138		—		52,147		7,505		38,326		—		45,831
Marketable debt securities – non-current
U.S. Treasury securities	8,989		—		—		8,989		16,494		—		—		16,494
Corporate bonds	—		10,303		—		10,303		—		7,640		—		7,640
U.S. Agency bonds	—		7,502		—		7,502		—		10,005		—		10,005
Municipal bonds	—		3,675		—		3,675		—		3,683		—		3,683
	8,989		21,480		—		30,469		16,494		21,328		—		37,822
	$	23,998	$	58,618	$	—	$	82,616	$	23,999	$	59,654	$	—	$	83,653

~~SELECT COMFORT CORPORATION~~

~~AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~



	December 28, 2013
	Level 1		Level 2		Level 3		Total
Marketable debt securities – current
U.S. Treasury securities	$	15,011	$	—	$	—	$	15,011
Corporate bonds	—		20,300		—		20,300
U.S. Agency bonds	—		12,025		—		12,025
Municipal bonds	—		4,823		—		4,823
	15,011		37,148		—		52,159
Marketable debt securities – non-current
U.S. Treasury securities	8,978		—		—		8,978
Corporate bonds	—		15,484		—		15,484
U.S. Agency bonds	—		7,498		—		7,498
Municipal bonds	—		2,672		—		2,672
	8,978		25,654		—		34,632
	$	23,989	$	62,802	$	—	$	86,791

We did not have any transfers between Level 1 and Level 2 fair value measurements during the periods presented.

At ~~March 29,~~June 28, 2014, and December 28, 2013, we had $1.1 million and $1.1 million, respectively, of debt and equity securities that ~~fund~~funded our deferred compensation plan and are classified in other ~~assets.~~assets in our condensed consolidated balance sheets. We also had corresponding deferred compensation plan liabilities of $1.1 million and $1.1 million at ~~March 29,~~June 28, 2014, and December 28, 2013, respectively, which are included in other long-term ~~liabilities.~~liabilities in our condensed consolidated balance sheets. The majority of the debt and equity securities are Level 1 as they trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis. Unrealized gains/(losses) on the debt and equity securities offset those associated with the corresponding deferred compensation plan liabilities.

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

3. Investments

Marketable Debt Securities

Investments in marketable debt securities were comprised of the following (in thousands):


	March 29, 2014									June 28, 2014
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. Treasury securities	$	23,979	$	19	$	—		$	23,998	$	23,978	$	24	$	(3	)	$	23,999
Corporate bonds	30,669		5		(15		)	30,659		30,476		17		(2		)	30,491
U.S. Agency bonds	19,516		10		(6		)	19,520		19,505		12		(4		)	19,513
Municipal bonds	8,414		25		—			8,439		9,623		27		—			9,650
	$	82,578	$	59	$	(21	)	$	82,616	$	83,582	$	80	$	(9	)	$	83,653



	December 28, 2013
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. Treasury securities	$	23,975	$	15	$	(1	)	$	23,989
Corporate bonds	35,804		3		(23		)	35,784
U.S. Agency bonds	19,517		10		(4		)	19,523
Municipal bonds	7,474		23		(2		)	7,495
	$	86,770	$	51	$	(30	)	$	86,791

~~SELECT COMFORT CORPORATION~~

~~AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

Maturities of marketable debt securities were as follows (in thousands):


	March 29, 2014				December 28, 2013				June 28, 2014				December 28, 2013
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Marketable debt securities – current (due in less than one year)	$	52,112	$	52,147	$	52,122	$	52,159	$	45,791	$	45,831	$	52,122	$	52,159
Marketable debt securities – non-current (due in one to two years)	30,466		30,469		34,648		34,632		37,791		37,822		34,648		34,632
	$	82,578	$	82,616	$	86,770	$	86,791	$	83,582	$	83,653	$	86,770	$	86,791

During the three months ended ~~March 29,~~June 28, 2014 and ~~March 30,~~June 29, 2013, respectively, ~~$10.0~~$13.5 million and ~~$5.8~~$17.5 million of marketable debt securities matured and were redeemed at face value. During the six months ended June 28, 2014 and June 29, 2013, respectively, $23.5 million and $23.3 million of marketable debt securities matured and were redeemed at face value. During the ~~three~~six months ended ~~March 29,~~June 28, 2014, there were no other-than-temporary declines in market value.

Other Investments

During 2013, we made a minority equity investment in one of our strategic product-development partners. The carrying value of this investment at ~~March 29,~~June 28, 2014 and December 28, 2013 using the cost method is $4.5 million and is included in other assets on our condensed consolidated balance sheets.

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

4. Inventories

Inventories consisted of the following (in thousands):


	March 29, 2014		December 28, 2013		June 28, 2014		December 28, 2013
Raw materials	$	8,234	$	7,118	$	8,475	$	7,118
Work in progress	507		505		202		505
Finished goods	35,849		32,529		34,479		32,529
	$	44,590	$	40,152	$	43,156	$	40,152

5. Goodwill and Intangible Assets

Goodwill and Indefinite-Lived Intangible Assets

The following is a roll forward of goodwill and indefinite-lived trade name/trademarks (in thousands):


	Three Months Ended				Three Months Ended				Six Months Ended				Six Months Ended
	March 29, 2014				March 30, 2013				June 28, 2014				June 29, 2013
	Goodwill		Indefinite-Lived Trade Name/ Trademarks		Goodwill		Indefinite-Lived Trade Name/ Trademarks		Goodwill		Indefinite-Lived Trade Name/ Trademarks		Goodwill		Indefinite-Lived Trade Name/ Trademarks
Beginning balance	$	8,963	$	1,396	$	2,850	$	—	$	8,963	$	1,396	$	2,850	$	—
Comfortaire purchase(1)	—		—		6,157		1,396		—		—		6,157		1,396
Ending balance	$	8,963	$	1,396	$	9,007	$	1,396	$	8,963	$	1,396	$	9,007	$	1,396

⁽¹⁾ Comfortaire purchase includes goodwill and indefinite-lived trade name/trademarks resulting from the acquisition of Comfortaire Corporation in the first quarter of fiscal 2013.

~~SELECT COMFORT CORPORATION~~

~~AND SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

Definite-Lived Intangible Assets

The following table provides the gross carrying amount and related accumulated amortization of our definite-lived intangible assets (in thousands):


	March 29, 2014				December 28, 2013				June 28, 2014				December 28, 2013
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Developed technologies	$	5,231	$	974	$	5,231	$	850	$	5,231	$	1,097	$	5,231	$	850
Customer relationships	2,413		416		2,413		330		2,413		503		2,413		330
Trade names/trademarks	101		101		101		101		101		101		101		101
	$	7,745	$	1,491	$	7,745	$	1,281	$	7,745	$	1,701	$	7,745	$	1,281

Amortization expense for definite-lived intangible assets ~~for the three months ended~~ ~~March 29, 2014~~ ~~and March 30, 2013~~ was $0.2 million and ~~$0.1~~$0.4 million, for the three and six months ended June 28, 2014, respectively, and $0.3 million and $0.4 million, for the three and six months ended June 29, 2013, respectively.

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

6. ~~Debt~~

Credit Agreement

Our $20.0 million Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as amended, is an unsecured revolving credit facility that matures on August 31, 2016. The Credit Agreement contains an accordion feature that allows us to increase the amount of the line from $20.0 million to up to $50.0 million in total availability, subject to lender approval.

Any borrowings under the ~~Amendment~~Credit Agreement will, at our request, be classified as either LIBOR Loans or Adjusted Base Rate (“ABR”) Loans (both as defined in the Credit Agreement). The rate of interest payable by us in respect of loans outstanding under the revolving credit facility isis: (i) with respect to LIBOR Loans, the Adjusted LIBO Rate (as defined in the Credit Agreement) for the interest period then in effect, plus 1.25%; or (ii) with respect to ABR Loans, the ABR (as defined in the Credit Agreement) then in effect for the Daily One-Month LIBO Rate (as defined in the Credit Agreement), plus 1.50%, or the prime rate. We are subject to certain financial covenants under the Credit Agreement, including minimum tangible net worth, a requirement to maintain a minimum amount of cash, cash equivalents and marketable debt securities, and to maintain at the administrative agent cash, cash equivalents and marketable debt securities equal to the amount the lenders are committed to lend under the Credit Agreement.

At both ~~March 29,~~June 28, 2014, and December 28, 2013, $20.0 million was available under the Credit Agreement, we had no borrowings and we were in compliance with all financial covenants. We had no outstanding letters of credit as of ~~March 29,~~June 28, 2014 or December 28, 2013.

7. Repurchase of Common Stock

Repurchases of our common stock ~~for the three months ended~~ ~~March 29, 2014~~ ~~and~~ ~~March 30, 2013~~ were as follows (in thousands):


	Three Months Ended				Three Months Ended				Six Months Ended
	March 29, 2014		March 30, 2013		June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
Amount repurchased under Board-approved share repurchase program	$	10,011	$	10,009	$	10,011	$	10,009	$	20,022	$	20,018
Amount repurchased in connection with the vesting of employee restricted stock grants	225		135		1,223		1,878		1,448		2,013
Total amount repurchased	$	10,236	$	10,144	$	11,234	$	11,887	$	21,470	$	22,031

As of ~~March 29,~~June 28, 2014, the remaining authorization under our Board of Directors ("Board") approved share repurchase program was $~~126.7~~116.7 million. There is no expiration date governing the period over which we can repurchase shares. Any repurchased shares are constructively retired and returned to an unissued status.

The cost of stock repurchases is first charged to additional paid-in-capital. Once additional paid-in capital is reduced to zero, any additional amounts are charged to retained earnings.

1011

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

8. Stock-Based Compensation

We compensate officers, directors and key employees with stock-based compensation under two stock plans approved by our shareholders in 2004 and 2010 and administered under the supervision of our Board. Compensation expense, net of estimated forfeitures, is recognized ratably over the vesting period.

Stock-based compensation ~~(benefit)~~ expense ~~for~~consisted of the ~~three months ended~~ ~~March 29, 2014~~ ~~and~~ ~~March 30, 2013, was as follows~~following (in thousands):

Three Months Ended
March 29, 2014 March 30, 2013
Options $ 235
$ 545
Restricted shares (343 ) (113 )
Total stock-based compensation (benefit) expense⁽¹⁾
(108 ) 432
Income tax expense (benefit) 37
(148 )
Total stock-based compensation (benefit) expense, net of tax $ (71 ) $ 284



	Three Months Ended						Six Months Ended
	June 28, 2014			June 29, 2013			June 28, 2014			June 29, 2013
Options	$	694		$	732		$	929		$	1,277
Restricted shares	1,449			828			1,106			715
Total stock-based compensation expense⁽¹⁾	2,143			1,560			2,035			1,992
Income tax benefit	(722		)	(537		)	(696		)	(685		)
Total stock-based compensation expense, net of tax	$	1,421		$	1,023		$	1,339		$	1,307

⁽¹⁾ The ~~three~~six months ended ~~March 29,~~June 28, 2014 includes a $1.2 million benefit related to a change in estimated forfeitures due to employee turnover during the ~~quarter. The~~ three months ended March ~~30, 2013 includes $0.4 million of CEO transition benefit.~~29, 2014.

9. Employee Benefits

Under our profit sharing and 401(k) plan, eligible employees may defer up to 50% of their compensation on a pre-tax basis, subject to Internal Revenue Service limitations. Each ~~year,~~calendar quarter, we may make a discretionary contribution equal to a percentage of the employee’s contribution. During the three months ended ~~March 29,~~June 28, 2014 and ~~March 30,~~June 29, 2013 our contributions, net of forfeitures, were $0.9 million and $~~0.7~~0.8 million, respectively. During the six months ended June 28, 2014 and June 29, 2013 our contributions, net of forfeitures, were $1.8 million and $1.5 million, respectively.

10. Other Income, Net

Other income, net, consisted of the following (in thousands):


	Three Months Ended						Three Months Ended						Six Months Ended
	March 29, 2014			March 30, 2013			June 28, 2014			June 29, 2013			June 28, 2014			June 29, 2013
Interest income	$	112		$	105		$	88		$	91		$	200		$	196
Interest expense	(10		)	(14		)	(10		)	(13		)	(20		)	(27		)
Other income, net	$	102		$	91		$	78		$	78		$	180		$	169

1112

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

11. Net Income per Common Share

The following computations reconcile net income per share – basic with net income per share – diluted (in thousands, except per share amounts):


	Three Months Ended				Three Months Ended				Six Months Ended
	March 29, 2014		March 30, 2013		June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
Net income	$	16,992	$	23,471	$	8,481	$	9,926	$	25,473	$	33,397

Reconciliation of weighted-average shares outstanding:					Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	54,113		55,095		53,648		55,029		53,880		55,062
Effect of dilutive securities:
Options	353		690		365		539		359		613
Restricted shares	378		466		311		419		331		426
Diluted weighted-average shares outstanding	54,844		56,251		54,324		55,987		54,570		56,101

Net income per share – basic	$	0.31	$	0.43	$	0.16	$	0.18	$	0.47	$	0.61
Net income per share – diluted	$	0.31	$	0.42	$	0.16	$	0.18	$	0.47	$	0.60

Additional potentially dilutive stock options totaling ~~0.7~~0.8 million and ~~1.0~~1.3 million for the three months ended ~~March 29,~~June 28, 2014 and ~~March 30,~~June 29, 2013, respectively, and 0.9 million and 1.3 million for the six months ended June 28, 2014 and June 29, 2013, respectively, have been excluded from our diluted net income per share calculations because these securities’ exercise prices were anti-dilutive (e.g., greater than the average market price of our common stock).

12. Commitments and Contingencies

Sales Returns

The accrued sales returns estimate is based on historical return rates, which are reasonably consistent from period to period, and is adjusted for any current trends as appropriate. If actual returns vary from expected rates, sales in future periods are adjusted.

The activity in the sales returns liability account was as follows (in thousands):


	Three Months Ended						Six Months Ended
	March 29, 2014			March 30, 2013			June 28, 2014			June 29, 2013
Balance at beginning of year	$	9,433		$	5,330		$	9,433		$	5,330
Additions that reduce net sales	19,021			12,963			32,923			23,388
Deductions from reserves	(17,717		)	(13,230		)	(33,162		)	(22,963		)
Acquired sales return reserve⁽¹⁾	—			50			—			50
Balance at end of period	$	10,737		$	5,113		$	9,194		$	5,805

⁽¹⁾ Acquired sales return reserve resulted from the acquisition of Comfortaire Corporation in the first quarter of fiscal 2013.

1213

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

Warranty Liabilities

We provide a 25-year limited warranty on our beds. The customer participates over the last 23 years of the warranty period by paying a portion of the retail value of replacement parts. The estimated warranty costs, which are expensed at the time of sale and included in cost of sales, are based on historical trends and warranty claims rates incurred by us and are adjusted for any current trends as appropriate. Actual warranty claim costs could differ from these estimates. We regularly assess and adjust the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs.

The activity in the accrued warranty liabilities account was as follows (in thousands):


	Three Months Ended						Six Months Ended
	March 29, 2014			March 30, 2013			June 28, 2014			June 29, 2013
Balance at beginning of year	$	4,153		$	4,858		$	4,153		$	4,858
Additions charged to costs and expenses for current-year sales	1,568			1,469			3,237			2,113
Deductions from reserves	(1,536		)	(1,403		)	(3,231		)	(2,568		)
Changes in liability for pre-existing warranties during the current year, including expirations	153			(306		)	274			(117		)
Acquired warranty reserve⁽¹⁾	—			658			—			658
Balance at end of period	$	4,338		$	5,276		$	4,433		$	4,944

⁽¹⁾ Acquired warranty reserve resulted from the acquisition of Comfortaire Corporation in the first quarter of fiscal 2013.

Legal Proceedings

We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with generally accepted accounting principles in the United States, we record a liability in our consolidated financial statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. With respect to currently pending legal proceedings, we have not established an estimated range of reasonably possible additional losses either because we believe that we have valid defenses to claims asserted against us or the proceeding has not advanced to a stage of discovery that would enable us to establish an estimate. We currently do not expect the outcome of these matters to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against us could adversely impact our consolidated results of operations, financial position or cash flows. We expense legal costs as incurred.

On August 23, 2013, we filed a complaint in U.S. District Court in the District of Minnesota against Gentherm, Inc. seeking a declaratory judgment that Select Comfort be named as an assignee of certain patents asserted against Select Comfort by Gentherm or in the alternative that the asserted patents are not enforceable or are invalid or that Select Comfort and its products do not infringe any valid claim of the asserted patents. This complaint was filed after Gentherm asserted in a letter that Select Comfort’s recently introduced DualTemp™ layer product infringed certain patents owned by Gentherm. Subsequently, Gentherm filed counterclaims alleging infringement of its patents and seeking various legal and equitable remedies, including injunctive relief, treble damages and attorney’s fees. We believe the claims asserted by Gentherm are without merit, and we intend to vigorously pursue our claims and defend the claims asserted by Gentherm.

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Index



ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in seven sections:

Risk Factors

Overview

Results of Operations

Liquidity and Capital Resources

Non-GAAP Data Reconciliations

Off-Balance-Sheet Arrangements and Contractual Obligations

Critical Accounting Policies

Risk Factors

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and the Notes thereto included herein. This quarterly report on Form 10-Q contains certain forward-looking statements that relate to future plans, events, financial results or performance. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “predict,” “intend,” “potential,” “continue” or the negative of these or similar terms. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections.

These risks and uncertainties include, among others:

Current and future general and industry economic trends and consumer confidence;

The effectiveness of our marketing messages;

The efficiency of our advertising and promotional efforts;

Our ability to execute our Company-Controlled distribution strategy;

Our ability to achieve and maintain acceptable levels of product and service quality, and acceptable product return and warranty claims rates;

Our ability to continue to improve and expand our product line, and consumer acceptance of our products, product quality, innovation and brand image;

Industry competition, the emergence of additional competitive products, and the adequacy of our intellectual property rights to protect our products and brand from competitive or infringing activities;

Availability of attractive and cost-effective consumer credit options;

Pending and unforeseen litigation and the potential for adverse publicity associated with litigation;

Our “just-in-time” manufacturing processes with minimal levels of inventory, which may leave us vulnerable to shortages in supply;

Our dependence on significant suppliers and our ability to maintain relationships with key suppliers, including several sole-source suppliers;

Rising commodity costs and other inflationary pressures;

Risks inherent in global sourcing activities;

Risks of disruption in the operation of either of our two primary manufacturing facilities;

Increasing government regulation;

The adequacy of our management information systems to meet the evolving needs of our business and existing and evolving regulatory standards applicable to data privacy and security;

The costs and potential disruptions to our business related to upgrading our management information ~~systems, including the digital platform supporting our website;~~systems;

Our ability to attract, retain and motivate qualified management, executive and other key employees, including qualified retail sales professionals and managers; and

Uncertainties arising from global events, such as terrorist attacks or a pandemic outbreak, or the threat of such events.

Additional information concerning these and other risks and uncertainties is contained under the caption “Risk Factors” in our Annual Report on Form 10-K.

1415

Index

We have no obligation to publicly update or revise any of the forward-looking statements contained in this quarterly report on Form 10-Q.

Overview

Business Overview

We ~~believe we~~ are leading the industry in delivering an unparalleled sleep ~~experience~~experiences by offering consumers high-quality ~~innovative~~ and individualized sleep solutions and services, which include a complete line of Sleep Number® beds and bedding. We are the exclusive designer, manufacturer, marketer, retailer and servicer of the revolutionary Sleep Number ~~bed, which allows individuals to adjust the firmness and support of each side at the touch of a button.~~bed. We offer further individualization through our new sleep tracking technology, SleepIQ^TM, and a solutions-focused line of Sleep Number pillows, sheets, FlexFit^TMadjustable bases, and other bedding products, including the innovative DualTemp^TM temperature-balancing layer.

~~As the only national specialty-mattress retailer, we~~We generate revenue by selling products through two distribution channels. Our vertical, direct to consumer business model is our primary source of revenue with exclusive distribution through our Company-Controlled channel, which includes Retail, Direct Marketing and ~~E-Commerce, sells directly to consumers. Our Wholesale/Other channel sells to and through selected retail and~~E-Commerce. In addition, we operate a small wholesale ~~customers~~business in the United States and ~~Australia, and the QVC shopping channel.~~Australia.

Mission, Vision and Goals

Our mission is to improve lives by Individualizing Sleep Experiences.

Our vision is to become one of the world’s most beloved brands by delivering an Unparalleled Sleep Experience. We ~~plan to achieve this by executing~~expect our ~~consumer brand strategy to advance our long-term~~customer-focused strategies and goals ~~and strengthen~~will build our competitive ~~advantages.~~advantages and deliver sustainable, profitable growth.

Our long-term goals are:

Everyone will know Sleep Number®;

Innovative Sleep ~~Number®~~Number products will deliver meaningful benefits;

Customers will easily find and interact with Sleep Number;

Customers will enthusiastically recommend Sleep Number; and

We will leverage our business model to fund innovation and growth.

Results of Operations

Quarterly and Annual Results

Quarterly and annual operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in sales, the timing, amount and effectiveness of advertising expenditures, changes in sales return rates or warranty experience, ~~the~~ timing of store openings/closings and related expenses, changes in net sales resulting from changes in our store base, the timing of promotional offerings, competitive factors, changes in commodity costs, any disruptions in supplies or third-party service providers, seasonality of retail and bedding industry sales, timing and volume of QVC shows, consumer confidence and general economic conditions. Therefore, our historical results of operations may not be indicative of the results that may be achieved for any future period.

Highlights

Financial highlights for the three months ended ~~March 29,~~June 28, 2014 were as follows:

Net sales increased 7%13% to $~~276.4~~234.8 million, compared with $~~258.2~~207.4 million for the same period one year ago. ~~Company-Controlled comparable~~Strong sales ~~increased 2%.~~of our innovative new products contributed to the 13% net sales increase. The 13% net sales increase was ~~primarily~~ driven by sales from 3238 net new stores opened in the past 12 ~~months.~~months and a 7% comparable sales increase in our Company-Controlled channel.

Retail sales-per-store (for stores open at least one year), on a trailing twelve-month basis, of $2.1 million ~~were in line~~increased 2% compared with ~~sales-per-store in~~ the ~~comparable period one year ago.~~prior-year trailing twelve-month period.

Operating income decreased to $~~25.8~~12.7 million, or ~~9.3%~~5.4% of net sales, compared with $~~35.2~~15.1 million, or ~~13.6%~~7.3% of net sales, for the same period one year ago. The decline in operating income was primarily ~~driven by~~due to a ~~1.3~~2.7 percentage point (ppt.) decrease in our gross profit rate, ~~and a 2.7 ppt.~~partially offset by the additional operating income generated by the 13% increase in ~~our sales and marketing expense rate.~~net sales. See page 1819 for additional ~~details.~~details on our gross profit rate.

~~Index~~

Net income decreased ~~28%~~15% to $~~17.0~~8.5 million, or $~~0.31~~0.16 per diluted share, compared with net income of $~~23.5~~9.9 million, or $~~0.42~~0.18 per diluted share, for the same period one year ago.

Index

Cash provided by operating activities totaled $~~38.9~~49.6 million for the ~~three~~six months ended ~~March 29,~~June 28, 2014, compared with $~~45.0~~36.1 million for the same period one year ago.

At ~~March 29,~~June 28, 2014, cash, cash equivalents and marketable debt securities totaled $~~143.0~~120.8 million and we had no borrowings under our revolving credit facility. In the ~~first~~second quarter of 2014, we repurchased ~~566,543~~531,943 shares of our common stock under our Board-approved share repurchase program at a cost of $10.0 million ((an average of $~~17.67~~18.82 per share). As of ~~March 29,~~June 28, 2014, the remaining authorization under our Board-approved share repurchase program was ~~$126.7~~$116.7 million.

The following table sets forth ~~for the periods indicated,~~ our results of operations expressed as dollars and percentages of net sales. Figures are in millions, except percentages and per share amounts. Amounts may not add due to rounding differences.


		Three Months Ended									Three Months Ended								Six Months Ended
		March 29, 2014				March 30, 2013					June 28, 2014				June 29, 2013				June 28, 2014				June 29, 2013
Net sales		$	276.4	100.0	%	$	258.2	100.0	%		$	234.8	100.0	%	$	207.4	100.0	%	$	511.2	100.0	%	$	465.6	100.0	%
Cost of sales		105.0		38.0	%	94.8		36.7	%		92.4		39.3	%	76.0		36.6	%	197.4		38.6	%	170.8		36.7	%
Gross profit		171.4		62.0	%	163.4		63.3	%		142.4		60.7	%	131.4		63.4	%	313.8		61.4	%	294.8		63.3	%

Operating expenses:
Sales and marketing		125.0		45.2	%	109.8		42.5	%		106.7		45.5	%	98.4		47.4	%	231.7		45.3	%	208.2		44.7	%
General and administrative		18.9		6.8	%	15.8		6.1	%		21.3		9.1	%	15.4		7.4	%	40.2		7.9	%	31.2		6.7	%
Research and development		1.7		0.6	%	2.6		1.0	%		1.7		0.7	%	2.6		1.2	%	3.4		0.7	%	5.1		1.1	%
Total operating expenses		145.6		52.7	%	128.2		49.6	%		129.7		55.2	%	116.3		56.1	%	275.3		53.8	%	244.5		52.5	%
Operating income		25.8		9.3	%	35.2		13.6	%		12.7		5.4	%	15.1		7.3	%	38.5		7.5	%	50.3		10.8	%
Operating income – as adjusted ⁽¹⁾		25.8		9.3	%	34.8		13.5	%		12.7		5.4	%	15.1		7.3	%	38.5		7.5	%	49.9		10.7	%
Other income, net		0.1		0.0	%	0.1		0.0	%		0.1		0.0	%	0.1		0.0	%	0.2		0.0	%	0.2		0.0	%
Income before income taxes		25.9		9.4	%	35.3		13.7	%		12.8		5.4	%	15.2		7.3	%	38.7		7.6	%	50.5		10.8	%
Income tax expense		8.9		3.2	%	11.8		4.6	%		4.3		1.8	%	5.3		2.5	%	13.2		2.6	%	17.1		3.7	%
Net income		$	17.0	6.1	%	$	23.5	9.1	%		$	8.5	3.6	%	$	9.9	4.8	%	$	25.5	5.0	%	$	33.4	7.2	%
Net income – as adjusted ⁽¹⁾		$	17.0	6.1	%	$	23.2	9.0	%		$	8.5	3.6	%	$	9.9	4.8	%	$	25.5	5.0	%	$	33.1	7.1	%

Net income per share:
Basic		$	0.31			$	0.43				$	0.16			$	0.18			$	0.47			$	0.61
Diluted		$	0.31			$	0.42				$	0.16			$	0.18			$	0.47			$	0.60
Diluted – as adjusted ⁽¹⁾		$	0.31			$	0.41				$	0.16			$	0.18			$	0.47			$	0.59

Weighted-average number of common shares:	Weighted-average number of common shares:									Weighted-average number of common shares:
Basic		54.1				55.1					53.6				55.0				53.9				55.1
Diluted		54.8				56.3					54.3				56.0				54.6				56.1


⁽¹⁾	This non-GAAP measure is not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates annual and year-over-year comparisons for investors and financial analysts. See page 2022 for a reconciliation of this non-GAAP measure to the appropriate GAAP measure.

GAAP – generally accepted accounting principles

The percentage of our total net sales, by dollar volume, from each of our channels was as follows:


	Three Months Ended				Three Months Ended				Six Months Ended
	March 29, 2014		March 30, 2013		June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
Company-Controlled channel	96.1	%	94.8	%	96.4	%	96.1	%	96.3	%	95.4	%
Wholesale/Other channel	3.9	%	5.2	%	3.6	%	3.9	%	3.7	%	4.6	%
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

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Index

The components of total net sales change, including comparable net sales changes, were as follows:


	Three Months Ended				Three Months Ended				Six Months Ended
	March 29, 2014		March 30, 2013		June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
Sales change rates:
Retail comparable-store sales⁽¹⁾	2	%	(8	%)	8	%	(7	%)	5	%	(7	%)
Direct and E-Commerce	2	%	(18	%)	(5	%)	4	%	(2	%)	(9	%)
Company-Controlled comparable sales change	2	%	(9	%)	7	%	(6	%)	4	%	(8	%)
Net store openings/closings	7	%	6	%	6	%	7	%	7	%	7	%
Total Company-Controlled channel	9	%	(3	%)	13	%	1	%	11	%	(1	%)
Wholesale/Other channel	(21	%)	35	%	6	%	7	%	(11	%)	23	%
Total net sales change	7	%	(2	%)	13	%	1	%	10	%	0	%

⁽¹⁾ Stores are included in the comparable-store calculations in the 13th full month of operations. Stores that have been remodeled or repositioned within the same shopping center remain in the comparable-store base.

Other sales metrics were as follows:


	Three Months Ended						Three Months Ended						Six Months Ended
	March 29, 2014			March 30, 2013			June 28, 2014			June 29, 2013			June 28, 2014		June 29, 2013
Average sales per store⁽¹⁾ ($ in thousands)	$	2,120		$	2,118		$	2,144		$	2,094
Average sales per square foot⁽¹⁾	$	1,042		$	1,256		$	1,009		$	1,197
Stores > $1 million in net sales⁽¹⁾	97		%	98		%	97		%	98		%
Stores > $2 million in net sales⁽¹⁾	47		%	46		%	46		%	46		%
Average net sales per mattress unit – Company-Controlled channel⁽²⁾	$	3,373		$	3,132
Average revenue per mattress unit⁽²⁾							$	3,709		$	3,182		$	3,520	$	3,154

⁽¹⁾ Trailing twelve months for stores included in our comparable-store calculations.

⁽²⁾ Represents Company-Controlled channel total net sales divided by Company-Controlled channel mattress units.

The number of retail stores operating was as follows:


	Three Months Ended				Three Months Ended				Six Months Ended
	March 29, 2014		March 30, 2013		June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
Beginning of period	440		410		443		411		440		410
Opened	17		10		16		17		33		27
Closed	(14	)	(9	)	(8	)	(15	)	(22	)	(24	)
End of period	443		411		451		413		451		413

Comparison of Three Months Ended ~~March 29,~~June 28, 2014 with Three Months Ended ~~March 30,~~June 29, 2013

Net sales

Net sales increased 7%13% to $~~276.4~~234.8 million for the three months ended ~~March 29,~~June 28, 2014, compared with $~~258.2~~207.4 million for the same period one year ago. Strong sales of our innovative new products contributed to the 13% net sales increase. The net sales increase was primarily driven by sales from 3238 net stores opened in the past 12 months and a ~~2% increase in~~7% comparable sales increase in our Company-Controlled channel.

The $~~18.2~~27.4 million net sales increase compared with the same period one year ago was comprised of the following: (i) a ~~$16.4~~$14.7 million sales increase resulting from net store openings; (ii) a ~~$4.3~~$13.0 million increase in sales from our Company-Controlled comparable retail stores; and (iii) a ~~$0.3~~$0.5 million increase in ~~Direct and E-Commerce sales;~~Wholesale/Other channel sales, partially offset by (iv) a ~~$2.8~~$0.8 million decrease in ~~Wholesale/Other channel~~Direct and E-Commerce sales. Company-Controlled mattress units ~~increased 1%~~decreased 3% compared to the prior-year period. Average ~~net sales~~revenue per mattress unit in our Company-Controlled channel increased by 8%17%. The 17% increase reflects our highly effective selling process and the strong sales of our innovative new products, including our new FlexFit adjustable bases.

1718

Index

Gross profit

Gross profit of $142.4 million increased by $11.0 million, or 8%, compared with the same period one year ago. The gross profit rate decreased to ~~62.0%~~60.7% of net sales for the three months ended ~~March 29,~~June 28, 2014, compared with ~~63.3%~~63.4% for the prior-year period. ~~Increased~~The 2.7 ppt. decrease in the gross profit rate was primarily due to: (i) a higher sales mix of lower-margin rate products, including FlexFit adjustable bases; (ii) increased sales return and exchange costs ~~including the impact of~~resulting from the second quarter 2013 change in our 30-night trial policy to 100 ~~nights, reduced~~nights; and (iii) certain supply chain inefficiencies related to the strong demand for our new products. In addition, our gross profit rate ~~by 1.0 ppt. An increase in logistic costs resulting~~can fluctuate from ~~the severe winter weather reduced the gross profit rate by 0.2 ppt. The remaining change was~~quarter to quarter due to a variety of other factors, ~~that can fluctuate from quarter to quarter,~~ including manufacturing and logistics efficiencies, warranty expenses and performance-based incentive ~~compensation and warranty expenses.~~compensation.

Sales and marketing expenses

~~Sales~~The sales and marketing ~~expenses~~expense rate for the three months ended ~~March 29,~~June 28, 2014~~increased14%~~ decreased to ~~$125.0 million, or~~ ~~45.2%~~45.5% of net sales, compared with ~~$109.8 million, or~~ ~~42.5%~~47.4% of net sales for the same period one year ago. The ~~$15.2 million~~ ~~increase mainly resulted from (i) $6.6 million of incremental fixed costs resulting from new, repositioned and remodeled stores; (ii) a $3.5 million increase~~1.9 ppt. decrease in variable store compensation; (iii) a $2.1 million increase in financing costs, as a greater percentage of our customers utilized promotional financing to purchase our products; (iv) a $1.5 million increase in production expenses related to our new marketing campaign; and (v) a $1.3 million, or 3%, increase in media spending. Thethe sales and marketing expense rate ~~increased 2.7 ppt. compared with~~in the ~~same~~current period ~~one year ago~~was mainly due to ~~the factors noted above.~~leveraging our media spending which was consistent with last year, while net sales increased 13%.

General and administrative expenses

General and administrative (“G&A”) expenses increased $~~3.1~~5.9 million to $~~18.9~~21.3 million for the three months ended ~~March 29,~~June 28, 2014, compared with $~~15.8~~15.4 million in the same period one year ago, and increased to ~~6.8%~~9.1% of net sales, compared with ~~6.1%~~7.4% of net sales last year. The $~~3.1~~5.9 million increase in G&A expenses was primarily due toto: (i) a ~~$2.5~~$2.1 million increase in performance-based incentive compensation; (ii) a ~~$0.5~~$1.3 million increase in employee compensation to support business growth ~~initiatives, and salary and wage rate increases that were in line with inflation; and~~initiatives; (iii) ~~$0.3~~$0.8 million of additional depreciation expense resulting from the increase in capital expenditures to support the growth of the ~~business. These increases were partially offset by~~business, including our new digital website which was launched in the second quarter of 2014; and (iv) a ~~$0.2~~$1.7 million ~~net decrease~~increase in miscellaneous other ~~expenses, including a reduction in stock-based compensation.~~expenses. The G&A expense rate increased by ~~0.7~~1.7 ppt. in the current period compared with the same period one year ago due to the ~~net~~ increase in ~~expenses.~~expenses, partially offset by the 13% increase in net sales.

Research and development expenses

Research and development ~~("R&D")~~ expenses for the three months ended ~~March 29,~~June 28, 2014 were $1.7 million, or ~~0.6%~~0.7% of net sales, compared with $2.6 million, or ~~1.0%~~1.2% of net sales, for the same period one year ago.

Other income, net

Other income, net was $0.1 million for the three months ended ~~March 29,~~June 28, 2014, consistent with the comparable period one year ago.

Income tax expense

Income tax expense was $~~8.9~~4.3 million for the three months ended ~~March 29,~~June 28, 2014 compared with $~~11.8~~5.3 million for the same period one year ago. The effective tax rate for the three months ended ~~March 29,~~June 28, 2014 was ~~34.4%~~33.7%, compared with the prior-year period rate of ~~33.5%~~34.6%.

Comparison of Six Months Ended June 28, 2014 with Six Months Ended June 29, 2013

Net sales

Net sales increased 10% to $511.2 million for the six months ended June 28, 2014, compared with $465.6 million for the same period one year ago. The net sales increase was primarily driven by sales from 38 net new stores opened in the past 12 months and a 4% comparable sales increase in our Company-Controlled channel.

The $45.5 million net sales increase compared with the same period one year ago was comprised of the following: (i) a $31.1 million sales increase resulting from net new store openings; and (ii) a $17.3 million increase in sales from our Company-Controlled comparable retail stores; partially offset by (iii) a $2.3 million decrease in Wholesale/Other channel sales; and (iv) a $0.6 million decrease in Direct and E-Commerce sales. Company-Controlled mattress units decreased 1% compared to the prior-year period. Average revenue per mattress unit in our Company-Controlled channel increased by 12%. The 12% increase reflects our highly effective selling process and the strong sales of our innovative new products, including our new FlexFit adjustable bases.

Index

Gross profit

Gross profit of $313.8 million increased by $19.0 million, or 6%, compared with the same period one year ago.The gross profit rate decreased to 61.4% of net sales for the six months ended June 28, 2014, compared with 63.3% for the prior-year period. The 1.9 ppt. decrease in the gross profit rate was primarily due to: (i) a higher sales mix of lower-margin rate products, including FlexFit adjustable bases; (ii) increased sales return and exchange costs resulting from the second quarter 2013 change in our 30-night trial policy to 100 nights; and (iii) certain supply chain inefficiencies related to the strong demand for our new products. In addition, our gross profit rate can fluctuate from quarter to quarter due to a variety of other factors, including manufacturing and logistics efficiencies, warranty expenses and performance-based incentive compensation.

Sales and marketing expenses

The sales and marketing expense rate for the six months ended June 28, 2014 increased to 45.3% of net sales, compared with 44.7% of net sales, for the same period one year ago. The 0.6 ppt. increase in the sales and marketing expense rate in the current period was primarily due to an increase in fixed selling expenses related to new, repositioned and remodeled stores, partially offset by leveraging our media spending which increased 2% compared with the prior year period, while net sales increased 10%.

General and administrative expenses

General and administrative (“G&A”) expenses increased $9.0 million to $40.2 million for the six months ended June 28, 2014, compared with $31.2 million in the prior year, and increased to 7.9% of net sales, compared with 6.7% of net sales one year ago. The $9.0 million increase in G&A expenses was primarily due to: (i) a $4.6 million increase in performance-based incentive compensation; (ii) a $1.5 million increase in employee compensation resulting from headcount increases to support business growth initiatives; (iii) $1.1 million of additional depreciation expense resulting from the increase in capital expenditures to support the growth of the business, including our new digital website which was launched in the second quarter of 2014; and (iv) a $1.8 million net increase in miscellaneous other expenses. The G&A expense rate increased by 1.2 ppt. in the current period compared with the same period one year ago due to the increase in expenses.

Research and development expenses

Research and development ("R&D") expenses for the six months ended June 28, 2014 were $3.4 million, or 0.7% of net sales, compared with $5.1 million, or 1.1% of net sales, for the same period one year ago.

Other income, net

Other income, net was $0.2 million for the six months ended June 28, 2014, consistent with the comparable period one year ago.

Income tax expense

Income tax expense was $13.2 million for the six months ended June 28, 2014, compared with $17.1 million for the same period one year ago. The effective tax rate for the six months ended June 28, 2014 increased to 34.2% compared with 33.9% for the prior-year period. The 2013 effective tax rate was ~~positively~~favorably impacted by the retroactive reinstatement of the 2012 R&D tax credit in the first quarter of 2013. In addition, the R&D tax credit expired at the end of 2013 and has not yet been extended by Congress. As a result, our 2014 effective tax rate does not include any benefit from the R&D tax credit.

~~Index~~

Liquidity and Capital Resources

As of ~~March 29,~~June 28, 2014, cash, cash equivalents and marketable debt securities totaled $~~143.0~~120.8 million compared with $145.0 million as of December 28, 2013. The $~~2.0~~24.3 million decrease was primarily due to $~~38.9~~49.6 million of cash provided by operating activities which was more than offset by $~~16.7~~39.8 million of cash used to purchase property and equipment, $~~10.2~~21.5 million of cash used to repurchase our common stock ($20.0 million under our Board-approved share repurchase program and $1.4 million in connection with the vesting of employee restricted stock grants), and a ~~$6.1~~$6.2 million decrease in short-term borrowings. The $~~82.6~~83.7 million of marketable debt securities held as of ~~March 29,~~June 28, 2014 are all highly liquid and include U.S. government and agency securities, corporate debt securities and municipal bonds.

Index

The following table summarizes our cash flows ~~for the~~ ~~three months endedMarch 29, 2014, and~~ ~~March 30, 2013~~ (dollars in millions). Amounts may not add due to rounding differences:


	Three Months Ended						Six Months Ended
	March 29, 2014			March 30, 2013			June 28, 2014			June 29, 2013
Total cash provided by (used in):
Operating activities	$	38.9		$	45.0		$	49.6		$	36.1
Investing activities	(20.8		)	(38.3		)	(45.1		)	(48.5		)
Financing activities	(15.9		)	(9.8		)	(25.6		)	(17.3		)
Net increase (decrease) in cash and cash equivalents	$	2.2		$	(3.1	)
Net decrease in cash and cash equivalents							$	(21.1	)	$	(29.7	)

Cash provided by operating activities for the ~~three~~six months ended ~~March 29,~~June 28, 2014 was $~~38.9~~49.6 million compared with $~~45.0~~36.1 million for the ~~three~~six months ended ~~March 30,~~June 29, 2013. The $~~6.2~~13.4 million year-over-year ~~decrease~~increase in cash from operating activities was comprised of a $~~6.5~~20.1 million ~~decrease~~ ~~in net income for the~~ ~~three months endedMarch 29, 2014~~ ~~compared with the same period one year ago and a~~ ~~$2.0 milliondecrease~~increase in cash from changes in operating assets and liabilities ~~partially offset by~~and a $~~2.3~~1.3 million increase in adjustments to reconcile net income to net cash provided by operating ~~activities.~~activities, partially offset by a $7.9 milliondecrease in net income for the six months endedJune 28, 2014 compared with the same period one year ago.

Net cash used in investing activities was $~~20.8~~45.1 million for the ~~three~~six months ended ~~March 29,~~June 28, 2014, compared with $~~38.3~~48.5 million for the same period one year ago. Investing activities for the current-year period included $~~16.7~~39.8 million of property and equipment purchases, compared with $~~14.3~~37.1 million for the same period one year ago. On a net basis, we increased our ~~investment~~investments in marketable debt securities by $~~3.6~~4.9 million during the ~~three~~six months ended ~~March 29,~~June 28, 2014 compared with a net ~~investment~~reduction of $7.0 million during the comparable period one year ago.

Net cash used in financing activities was $~~15.9~~25.6 million for the ~~three~~six months ended ~~March 29,~~June 28, 2014, compared with $~~9.8~~17.3 million for the same period one year ago. During the ~~three~~six months ended ~~March 29,~~June 28, 2014, we repurchased $~~10.2~~21.5 million of our stock ($~~10.0~~20.0 million under our Board-approved share repurchase program and $~~0.2~~1.4 million in connection with the vesting of employee restricted stock grants) compared with $~~10.1~~22.0 million ($~~10.0~~20.0 million under our Board-approved share repurchase program and $~~0.1~~2.0 million in connection with the vesting of employee restricted stock grants) during the same period one year ago. Changes in book overdrafts are included in the net change in short-term borrowings. Financing activities for both periods reflect the vesting of employee restricted stock awards and exercise of employee stock options along with the associated excess tax benefits.

Under the Board-approved $290 million share repurchase program, we repurchased ~~566,543~~1,098,486 shares at a cost of $~~10.0~~20.0 million ((an average of $~~17.67~~18.23 per share) during the ~~three~~six months ended ~~March 29,~~June 28, 2014. During the ~~three~~six months ended ~~March 30,~~June 29, 2013, we repurchased ~~458,637~~930,369 shares at a cost of $~~10.0~~20.0 million ((an average of $~~21.82~~21.52 per share). As of ~~March 29,~~June 28, 2014, the remaining authorization under our Board-approved share repurchase program was $~~126.7~~116.7 million. There is no expiration date governing the period over which we can repurchase shares.

Our $20.0 million Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as amended, is an unsecured revolving credit facility that matures August 31, 2016. The Credit Agreement contains an accordion feature that allows us to increase the amount of the line from $20.0 million to up to $50.0 million in total availability, subject to lender approval. As of ~~March 29,~~June 28, 2014 we were in compliance with all financial covenants.

Our business model, which can operate with minimal working capital, does not require additional capital from external sources to fund operations or organic growth. The $~~143.0~~120.8 million of cash, cash equivalents and marketable debt securities, cash generated from ongoing operations, and cash available under our revolving credit facility are expected to be adequate to maintain operations and fund anticipated expansion and strategic initiatives for the foreseeable future.

We have an agreement with Synchrony Bank (formerly GE Capital Retail ~~Bank~~Bank) to offer qualified customers revolving credit arrangements to finance purchases from us (“GESynchrony Agreement”). The GESynchrony Agreement contains certain financial covenants, including a minimum tangible net worth requirement and a minimum ~~cash~~working capital requirement. As of ~~March 29,~~June 28, 2014 we were in compliance with all financial covenants.

~~Index~~

Under the terms of the GESynchrony Agreement, ~~GE Capital Retail~~Synchrony Bank sets the minimum acceptable credit ratings, the interest rates, fees and all other terms and conditions of the customer accounts, including collection policies and procedures, and is the owner of the accounts.

Index

Non-GAAP Data Reconciliations

Reported to Adjusted Statements of Operations Data (in thousands, except per share amounts)

In addition to disclosing results that are determined in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), we also disclose non-GAAP results that exclude certain significant charges or credits. Our "as adjusted" data is considered a non-GAAP financial measure and is not in accordance with, or preferable to, "as reported," or GAAP financial data. However, we believe that the disclosure of results excluding certain significant charges or credits provides additional insights into underlying business performance and facilitates year-over-year comparisons. Below are our reconciliations of our non-GAAP financial measures to the most comparable GAAP financial measures.


	Three Months Ended									Six Months Ended
	March 29, 2014		March 30, 2013							June 28, 2014		June 29, 2013
	As Reported		As Reported		CEO Transition Benefit⁽¹⁾			As Adjusted		As Reported		As Reported		CEO Transition Benefit⁽¹⁾			As Adjusted
Operating income	$	25,802	$	35,227	$	(391	)	$	34,836	$	38,513	$	50,334	$	(391	)	$	49,943
Other income, net	102		91		—			91		180		169		—			169

Income before income taxes	25,904		35,318		(391		)	34,927		38,693		50,503		(391		)	50,112
Income tax expense⁽²⁾	8,912		11,847		(134		)	11,713
Income tax expense (benefit)⁽²⁾										13,220		17,106		(135		)	16,971
Net income	$	16,992	$	23,471	$	(257	)	$	23,214	$	25,473	$	33,397	$	(256	)	$	33,141

Net income per share –
Basic	$	0.31	$	0.43	$	0.00		$	0.42	$	0.47	$	0.61	$	0.00		$	0.60
Diluted	$	0.31	$	0.42	$	0.00		$	0.41	$	0.47	$	0.60	$	0.00		$	0.59

Basic Shares	54,113		55,095		55,095			55,095		53,880		55,062		55,062			55,062
Diluted Shares	54,844		56,251		56,251			56,251		54,570		56,101		56,101			56,101

⁽¹⁾ In February 2012, we announced that William R. McLaughlin, then President and Chief Executive Officer would retire from the Company effective June 1, 2012. In recognition of Mr. McLaughlin’s contributions, the Compensation Committee approved the modification of Mr. McLaughlin’s currently unvested stock awards, including performance-based stock awards. The performance-based stock awards are subject to applicable performance adjustments through 2014 based on ~~free cash flow and~~ actual ~~market share growth~~performance versus performance targets. ~~During~~In the ~~three~~first six months ~~endedMarch 30,~~of 2013,, we ~~incurred~~recorded a non-cash compensation benefit of $0.4 million ($0.3 million, net of income tax) ~~of non-recurring, non-cash expenses associated with these~~resulting from performance-based stock award ~~modifications which is included in general and administrative expenses in the condensed consolidated statement of operations.~~adjustments.

⁽²⁾ Reflects effective income tax ~~rates,~~rate, before discrete adjustments, of ~~34.3%~~34.4% for 2013.

GAAP - generally accepted accounting principles

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Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)

We define earnings before interest, taxes, depreciation and amortization as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation and asset impairments (“Adjusted EBITDA”). Management believes Adjusted EBITDA is a useful indicator of our financial performance and our ability to generate cash from operating activities. Our definition of Adjusted EBITDA may not be comparable to similarly titled definitions used by other companies. The table below reconciles Adjusted EBITDA, which is a non-GAAP financial measure, to the comparable GAAP financial measure.

Our Adjusted EBITDA calculations ~~for the three months and trailing-twelve months ended~~ ~~March 29, 2014~~ ~~and~~ ~~March 30, 2013~~ are as follows (dollars in thousands):


	Three Months Ended					Trailing-Twelve Months Ended				Three Months Ended				Trailing-Twelve Months Ended
	March 29, 2014			March 30, 2013		March 29, 2014		March 30, 2013		June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
Net income	$	16,992		$	23,471	$	53,602	$	79,148	$	8,481	$	9,926	$	52,157	$	72,101
Income tax expense	8,912			11,847		27,995		41,872		4,308		5,259		27,044		38,204
Interest expense	10			14		47		62		10		13		44		55
Depreciation and amortization	8,885			6,333		32,151		21,838		9,765		7,172		34,744		24,284
Stock-based compensation	(108		)	432		3,692		3,774		2,143		1,560		4,275		3,929
Asset impairments	3			30		100		174		88		15		173		186
Adjusted EBITDA	$	34,694		$	42,127	$	117,587	$	146,868	$	24,795	$	23,945	$	118,437	$	138,759

Free Cash Flow

Our “free cash flow” data is considered a non-GAAP financial measure and is not in accordance with, or preferable to, “net cash provided by ~~operations,~~operating activities,” or GAAP financial data. However, we are providing this information as we believe it facilitates analysis for investors and financial analysts.

The following table summarizes our free cash flow calculations ~~for the~~ ~~three months~~ ~~and trailing-twelve months ended~~ ~~March 29, 2014, and~~ ~~March 30, 2013~~(dollars in thousands):


	Three Months Ended				Trailing-Twelve Months Ended				Six Months Ended					Trailing-Twelve Months Ended
	March 29, 2014		March 30, 2013		March 29, 2014		March 30, 2013		June 28, 2014		June 29, 2013			June 28, 2014		June 29, 2013
Net cash provided by operating activities	$	38,864	$	45,022	$	81,947	$	101,130	$	49,578	$	36,143		$	101,540	$	93,536
Subtract: Purchases of property and equipment	16,660		14,309		79,162		56,621		39,766		37,096			79,481		66,190
Free cash flow	$	22,204	$	30,713	$	2,785	$	44,509	$	9,812	$	(953	)	$	22,059	$	27,346

Off-Balance-Sheet Arrangements and Contractual Obligations

As of ~~March 29,~~June 28, 2014, we were not involved in any unconsolidated special purpose entity transactions. Other than our operating leases, we do not have any off-balance-sheet financing. There were no outstanding letters of credit at ~~March 29,~~June 28, 2014.

There has been no material change in our contractual obligations since the end of fiscal 2013. See Note 6, ~~Debt,~~Credit Agreement, of the Notes to our Condensed Consolidated Financial Statements for information regarding our credit agreement. See our Annual Report on Form 10-K for the fiscal year ended December 28, 2013 for additional information regarding our other contractual obligations.

Critical Accounting Policies

We discuss our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013. There were no significant changes in our critical accounting policies since the end of fiscal 2013.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Changes in the overall level of interest rates affect interest income generated from our short-term and long-term investments in marketable debt securities. If overall interest rates were one percentage point lower than current rates, our annual interest income would not change by a significant amount based on our investments in marketable debt securities as of ~~March 29,~~June 28, 2014 and the current low interest-rate environment. We do not manage our investment interest-rate volatility risk through the use of derivative instruments.

As of ~~March 29,~~June 28, 2014, we had no borrowings under our revolving credit facility.

ITEM 4. CONTROLS AND PROCEDURES

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in Internal Controls

There were no changes in our internal control over financial reporting during the fiscal quarter ended ~~March 29,~~June 28, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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ITEM 1A. RISK FACTORS

Our business, financial condition and operating results are subject to a number of risks and uncertainties, including both those that are specific to our business and others that affect all businesses operating in a global environment. Investors should carefully consider the information in this report under the heading, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and also the information under the heading, “Risk Factors” in our most recent Annual Report on Form 10-K. The risk factors discussed in the Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q do not identify all risks that we face because our business operations could also be affected by additional risk factors that are not presently known to us or that we currently consider to be immaterial to our operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



(a) – (b)	Not applicable.
(c)	Issuer Purchases of Equity Securities

Fiscal Period
Total Number of Shares
Purchased⁽¹⁾⁽²⁾

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽¹⁾

Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
December 29, 2013 through January 25, 2014 162,525
$ 17.88
162,525
$ 133,796,000
January 26, 2014 through February 22, 2014 115,401
17.32
115,401
131,797,000
February 23, 2014 through March 29, 2014 301,797
17.66
288,617
126,691,000
Total 579,723
$ 17.66
566,543
$ 126,691,000



Fiscal Period	Total Number of Shares Purchased⁽¹⁾⁽²⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽¹⁾	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
March 30, 2014 through April 26, 2014	169,022	$	18.13	166,407	$	123,672,000
April 27, 2014 through May 24, 2014	169,922	18.70		169,922	120,494,000
May 25, 2014 through June 28, 2014	256,528	19.46		195,614	116,680,000
Total	595,472	$	18.87	531,943	$	116,680,000

⁽¹⁾

Under the current Board-approved $290.0 million share repurchase program, we repurchased ~~566,543~~531,943 shares of our common stock at a cost of $10.0 million (based on trade dates) during the three months ended ~~March 29,~~June 28, 2014. As of ~~March 29,~~June 28, 2014, the remaining authorization under our Board-approved share repurchase program was $~~126.7~~116.7 million. There is no expiration date governing the period over which we can repurchase shares. Any repurchased shares are constructively retired and returned to an unissued status.


⁽²⁾	In connection with the vesting of employee restricted stock grants, we also repurchased ~~13,180~~63,529 shares of our common stock at a cost of $~~225 thousand~~1.2 million, during the three months ended ~~March 29,~~June 28, 2014.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

2325

Index

ITEM 6. EXHIBITS



Exhibit Number	Description	Method of Filing

10.1	~~Twelfth Amendment to Amended and Restated Private Label Consumer Credit Card~~Retailer Program Agreement ~~dated~~effective as of January 1, 2014 by and ~~executed January 13, 2014~~	~~Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed January 17, 2014~~

~~10.2~~	~~Thirteenth Amendment to Amended and Restated Private Label Consumer Credit Card Program Agreement dated and executed January 13, 2014~~	~~Incorporated by reference to Exhibit 10.2 contained in Select Comfort's Current Report on Form 8-K filed January 17, 2014~~

~~10.3~~	~~Offer Letter dated March 14, 2014 from~~between Synchrony Bank, Select Comfort Corporation ~~to David R. Callen~~and Select Comfort Retail Corporation	~~Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed March 20, 2014~~ Filed herewith ⁽¹⁾

31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

31.2	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

32.1	Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350	Furnished herewith

32.2	Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350	Furnished herewith

101	The following financial information from the Company's Quarterly Report on Form 10-Q for the period ended ~~March 29,~~June 28, 2014, filed with the SEC on ~~April~~July 25, 2014, formatted in eXtensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets as of ~~March 29,~~June 28, 2014 and December 28, 2013; (ii) Condensed Consolidated Statements of Operations for the three and six months ended ~~March 29,~~June 28, 2014 and ~~March 30,~~June 29, 2013; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended ~~March 29,~~June 28, 2014 and ~~March 30,~~June 29, 2013; (iv) Condensed Consolidated Statement of Shareholders' Equity for the ~~three~~six months ended ~~March 29,~~June 28, 2014; (v) Condensed Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~March 29,~~June 28, 2014 and ~~March 30,~~June 29, 2013; and (vi) Notes to Condensed Consolidated Financial Statements.	Filed herewith

⁽¹⁾ Confidential treatment has been requested by the issuer with respect to designated portions contained within document. Such portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

2426

Index

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		SELECT COMFORT CORPORATION
		(Registrant)

Dated:	~~April~~July 25, 2014	By:	/s/ Shelly R. Ibach
			Shelly R. Ibach
			Chief Executive Officer
			(principal executive officer)

		By:	/s/ Robert J. Poirier
			Robert J. Poirier
			Chief Accounting Officer
			(principal accounting officer)

2527

Index

EXHIBIT INDEX



Exhibit Number	Description	Method of Filing

10.1	~~Twelfth Amendment to Amended and Restated Private Label Consumer Credit Card~~Retailer Program Agreement ~~dated~~effective as of January 1, 2014 by and ~~executed January 13, 2014~~	~~Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed January 17, 2014~~

~~10.2~~	~~Thirteenth Amendment to Amended and Restated Private Label Consumer Credit Card Program Agreement dated and executed January 13, 2014~~	~~Incorporated by reference to Exhibit 10.2 contained in Select Comfort's Current Report on Form 8-K filed January 17, 2014~~

~~10.3~~	~~Offer Letter dated March 14, 2014 from~~between Synchrony Bank, Select Comfort Corporation ~~to David R. Callen~~and Select Comfort Retail Corporation	~~Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed March 20, 2014~~ Filed herewith ⁽¹⁾

31.1	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

31.2	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

32.1	Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350	Furnished herewith

32.2	Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350	Furnished herewith

101	The following financial information from the Company's Quarterly Report on Form 10-Q for the period ended ~~March 29,~~June 28, 2014, filed with the SEC on ~~April~~July 25, 2014, formatted in eXtensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets as of ~~March 29,~~June 28, 2014 and December 28, 2013; (ii) Condensed Consolidated Statements of Operations for the three and six months ended ~~March 29,~~June 28, 2014 and ~~March 30,~~June 29, 2013; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended ~~March 29,~~June 28, 2014 and ~~March 30,~~June 29, 2013; (iv) Condensed Consolidated Statement of Shareholders' Equity for the ~~three~~six months ended ~~March 29,~~June 28, 2014; (v) Condensed Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~March 29,~~June 28, 2014 and ~~March 30,~~June 29, 2013; and (vi) Notes to Condensed Consolidated Financial Statements.	Filed herewith

2628



Fiscal Period	Total Number of Shares Purchased⁽¹⁾⁽²⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽¹⁾	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
December 29, 2013 through January 25, 2014	162,525	$	17.88	162,525	$	133,796,000
January 26, 2014 through February 22, 2014	115,401	17.32		115,401	131,797,000
February 23, 2014 through March 29, 2014	301,797	17.66		288,617	126,691,000
Total	579,723	$	17.66	566,543	$	126,691,000