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 ~~July 4, 2015~~April 2, 2016

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 ~~July 4, 2015~~April 2, 2016, ~~51,414,000~~46,686,000 shares of the Registrant’s Common Stock were outstanding.

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

INDEX



		Page

PART I: FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)
	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	1413
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2221
Item 4.	Controls and Procedures	2221

PART II: OTHER INFORMATION		22

Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	2322
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2322
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Mine Safety Disclosures	23
Item 5.	Other Information	23
Item 6.	Exhibits	24
SIGNATURES		25

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited - in thousands, except per share amounts)


	July 4, 2015		January 3, 2015			April 2, 2016		January 2, 2016
Assets
Current assets:
Cash and cash equivalents	$	26,074	$	51,995		$	29,520	$	20,994
Marketable debt securities – current	62,379		69,609			—		6,567
Accounts receivable, net of allowance for doubtful accounts of $701 and $739, respectively	20,464		19,693
Accounts receivable, net of allowance for doubtful accounts of $1,115 and $1,039, respectively						20,186		29,002
Inventories	68,377		53,535			80,967		86,600
Income taxes receivable						—		15,284
Prepaid expenses	20,584		17,792			12,019		10,207
Deferred income taxes	8,757		8,786			15,521		15,535
Other current assets	10,836		11,185			14,116		13,737
Total current assets	217,471		232,595			172,329		197,926

Non-current assets:
Marketable debt securities – non-current	28,751		44,441			—		8,553
Property and equipment, net	186,696		165,453			203,500		204,376
Goodwill and intangible assets, net	15,570		15,986			82,711		83,344
Deferred income taxes	7,944		3,433
Other assets	19,139		12,279			22,463		19,197
Total assets	$	475,571	$	474,187		$	481,003	$	513,396

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	87,985	$	84,197		$	96,608	$	103,941
Customer prepayments	25,660		28,726			30,936		51,473
Accrued sales returns	12,679		15,262			22,910		20,562
Compensation and benefits	24,395		33,066			26,345		15,670
Taxes and withholding	9,867		10,207			19,294		9,856
Other current liabilities	18,684		15,594			24,124		23,447
Total current liabilities	179,270		187,052			220,217		224,949

Non-current liabilities:
Warranty liabilities	3,425		2,722			4,907		4,942
Deferred income taxes						14,116		12,499
Other long-term liabilities	37,484		27,506			54,579		48,667
Total liabilities	220,179		217,280			293,819		291,057

Shareholders’ equity:
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding	—		—			—		—
Common stock, $0.01 par value; 142,500 shares authorized, 51,414 and 52,798 shares issued and outstanding, respectively	514		528
Common stock, $0.01 par value; 142,500 shares authorized, 46,686 and 49,402 shares issued and outstanding, respectively						467		494
Additional paid-in capital	—		—			—		—
Retained earnings	254,860		256,413			186,717		221,859
Accumulated other comprehensive income (loss)	18		(34		)
Accumulated other comprehensive loss						—		(14		)
Total shareholders’ equity	255,392		256,907			187,184		222,339
Total liabilities and shareholders’ equity	$	475,571	$	474,187		$	481,003	$	513,396

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				Six Months Ended				Three Months Ended
	July 4, 2015		June 28, 2014		July 4, 2015		June 28, 2014		April 2, 2016				April 4, 2015
Net sales	$	275,289	$	234,763	$	625,098	$	511,175	$	352,980			$	349,809
Cost of sales	104,750		92,366		238,726		197,395		143,906				133,976
Gross profit	170,539		142,397		386,372		313,780		209,074				215,833

Operating expenses:
Sales and marketing	126,627		106,712		267,130		231,734		150,668				140,503
General and administrative	23,880		21,265		52,134		40,161		30,906			��	28,254
Research and development	3,403		1,709		6,754		3,372		7,602				3,351
Total operating expenses	153,910		129,686		326,018		275,267		189,176				172,108
Operating income	16,629		12,711		60,354		38,513		19,898				43,725
Other income, net	133		78		286		180
Other (expense) income, net									(97		)		153
Income before income taxes	16,762		12,789		60,640		38,693		19,801				43,878
Income tax expense	5,724		4,308		20,803		13,220		6,832				15,079
Net income	$	11,038	$	8,481	$	39,837	$	25,473	$	12,969			$	28,799

Basic net income per share:
Net income per share – basic	$	0.21	$	0.16	$	0.77	$	0.47	$	0.27			$	0.55
Weighted-average shares – basic	51,672		53,648		52,009		53,880		48,100				52,346
Diluted net income per share:
Net income per share – diluted	$	0.21	$	0.16	$	0.75	$	0.47	$	0.27			$	0.54
Weighted-average shares – diluted	52,544		54,324		52,935		54,570		48,845				53,326

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					Six Months Ended				Three Months Ended
	July 4, 2015			June 28, 2014		July 4, 2015		June 28, 2014		April 2, 2016		April 4, 2015
Net income	$	11,038		$	8,481	$	39,837	$	25,473	$	12,969	$	28,799
Other comprehensive (loss) income– unrealized (loss) gain on available-for-sale marketable debt securities, net of income tax	(20		)	20		52		30
Other comprehensive income – unrealized gain on available-for-sale marketable debt securities, net of income tax										14		72
Comprehensive income	$	11,018		$	8,501	$	39,889	$	25,503	$	12,983	$	28,871

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/(Loss)			Total			Common Stock					Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income/(Loss)			Total
	Shares		Amount						Shares				Accumulated Other Comprehensive Income/(Loss)		Amount									Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income/(Loss)			Total
Balance at January 3, 2015	52,798		$	528		Additional Paid-in Capital			$	Retained Earnings	—		$	256,413		Total		$	(34	)	$	256,907
Balance at January 2, 2016																			49,402		$	494		$	—		$	221,859		$	(14	)	$	222,339
Net income	—		—			—				39,837			—			39,837			—		—			—			12,969			—			12,969
Other comprehensive income:
Unrealized gain on available-for-sale marketable debt securities, net of tax	—		—			—				—			52			52			—		—			—			—			14			14
Exercise of common stock options	198		2			2,456				—			—			2,458			—		—			6			—			—			6
Tax effect from stock-based compensation	—		—			1,939				—			—			1,939			—		—			(670		)	—			—			(670		)
Stock-based compensation	52		1			5,827				—			—			5,828			(12	)	—			3,766			—			—			3,766
Repurchases of common stock	(1,634	)	(17		)	(10,222		)		(41,390		)	—			(51,629		)	(2,704	)	(27		)	(3,102		)	(48,111		)	—			(51,240		)
Balance at July 4, 2015	51,414		$	514		$	—			$	254,860		$	18		$	255,392
Balance at April 2, 2016																			46,686		$	467		$	—		$	186,717		$	—		$	187,184

See accompanying notes to condensed consolidated financial statements.

Index

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited - in thousands)


	Six Months Ended						Three Months Ended
	July 4, 2015			June 28, 2014			April 2, 2016			April 4, 2015
Cash flows from operating activities:
Net income	$	39,837		$	25,473		$	12,969		$	28,799
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	21,903			19,213			13,854			10,783
Stock-based compensation	5,828			2,035			3,766			2,782
Net loss on disposals and impairments of assets	184			87			1			177
Excess tax benefits from stock-based compensation	(1,945		)	(720		)	(26		)	(858		)
Deferred income taxes	(4,515		)	(2,003		)	1,622			(3,415		)
Changes in operating assets and liabilities:
Accounts receivable	(825		)	651			8,816			1,780
Inventories	(14,842		)	(3,004		)	5,633			(2,469		)
Income taxes	4,221			(394		)	16,558			15,453
Prepaid expenses and other assets	(944		)	(4,355		)	(1,272		)	(1,661		)
Accounts payable	7,879			(1,042		)	(495		)	7,458
Customer prepayments	(3,066		)	2,695			(20,537		)	(2,591		)
Accrued compensation and benefits	(8,121		)	9,724			10,677			(8,977		)
Other taxes and withholding	(2,622		)	(529		)	7,493			(58		)
Warranty liabilities	1,113			281			(261		)	900
Other accruals and liabilities	969			1,466			5,183			761
Net cash provided by operating activities	45,054			49,578			63,981			48,864

Cash flows from investing activities:
Proceeds from marketable debt securities							15,090			16,244
Purchases of property and equipment	(38,938		)	(39,766		)	(12,289		)	(17,796		)
Proceeds from sales of property and equipment							14			33
Investments in marketable debt securities	(19,306		)	(28,405		)	—			(18,195		)
Proceeds from maturities of marketable debt securities	41,932			23,548
Proceeds from sales of property and equipment	41			5
Increase in restricted cash	—			(500		)
Net cash used in investing activities	(16,271		)	(45,118		)
Net cash provided by (used in) investing activities							2,815			(19,714		)

Cash flows from financing activities:
Repurchases of common stock	(51,629		)	(21,470		)	(51,240		)	(20,475		)
Net decrease in short-term borrowings	(7,478		)	(6,192		)	(6,661		)	(16,530		)
Proceeds from issuance of common stock	2,458			1,366			6			1,353
Excess tax benefits from stock-based compensation	1,945			720			26			858
Debt issuance costs							(401		)	—
Net cash used in financing activities	(54,704		)	(25,576		)	(58,270		)	(34,794		)

Net decrease in cash and cash equivalents	(25,921		)	(21,116		)
Net increase (decrease) in cash and cash equivalents							8,526			(5,644		)
Cash and cash equivalents, at beginning of period	51,995			58,223			20,994			51,995
Cash and cash equivalents, at end of period	$	26,074		$	37,107		$	29,520		$	46,351

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 ~~July 4, 2015~~April 2, 2016 of Select Comfort Corporation and 100%-owned subsidiaries ~~(“Select Comfort”~~(Select Comfort or the ~~“Company”)~~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 ~~July 4, 2015~~April 2, 2016, and January ~~3, 2015~~2, 2016, 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 January ~~3, 2015~~2, 2016 and other recent filings with the SEC.

The preparation of condensed 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 condensed 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, goodwill and indefinite-lived intangible assets, warranty liabilities and revenue recognition.

The condensed 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 (FASB) 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 was originally effective for ~~annual reporting periods~~fiscal years beginning after December 15, 2016 and early adoption was not permitted. In July 2015, the FASB deferred the effective date from ~~annual reporting periods~~fiscal years beginning after December 15, 2016 to ~~annual reporting periods~~fiscal years beginning after December 15, 2017 (including interim reporting periods within those ~~periods)~~fiscal years). Early adoption is permitted to the original effective date of ~~annual reporting periods~~fiscal years beginning after December 15, 2016 (including interim reporting periods within those ~~periods)~~fiscal years). Companies may use either a full retrospective or a modified retrospective approach to adopt this new guidance. We are evaluating the effect of the new standard on our consolidated financial statements and related disclosures, and have not yet selected a transition method.

In November 2015, the FASB issued new guidance related to classification of deferred taxes. The new guidance requires that deferred tax liabilities and assets be classified as non-current on the balance sheet. It is effective for interim and annual periods beginning after December 15, 2016, but early adoption is permitted. We are evaluating the effect of the new standard on our consolidated financial statements and related disclosures, and have not yet selected a transition method.

In February 2016, the FASB issued new guidance on accounting for leases and generally requires most leases to be recognized on the balance sheet. This new guidance is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The provisions of this new guidance are to be applied using a modified retrospective approach, with elective reliefs, which requires application of the new guidance for all periods presented. We are evaluating the effect of the new standard on our consolidated financial statements and related disclosures.

7In March 2016, the FASB issued new guidance on the accounting for and disclosure of stock-based compensation. The new guidance is intended to simplify several aspects of the accounting for stock-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. This new guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. We are evaluating the effect of the new standard on our consolidated financial statements and related disclosures.

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

2. Fair Value Measurements

The following ~~tables set~~table sets forth by level within the fair value hierarchy, our financial assets at January 2, 2016, that were accounted for at fair value on a recurring basis, according to the valuation techniques we used to determine their fair value (in thousands):. At April 2, 2016, we did not hold any financial assets that required a fair value measurement on a recurring basis.


	July 4, 2015								January 2, 2016
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Marketable debt securities – current
U.S. Treasury securities	$	15,012	$	—	$	—	$	15,012
Municipal bonds									$	—	$	4,055	$	—	$	4,055
Corporate bonds	—		15,059		—		15,059		—		2,512		—		2,512
U.S. Agency bonds	—		15,011		—		15,011
Municipal bonds	—		9,804		—		9,804
Commercial paper	—		7,493		—		7,493
	15,012		47,367		—		62,379		—		6,567		—		6,567
Marketable debt securities – non-current
U.S. Treasury securities	7,515		—		—		7,515
Corporate bonds	—		12,627		—		12,627		—		5,001		—		5,001
U.S. Agency bonds	—		7,530		—		7,530		—		2,496		—		2,496
Municipal bonds	—		1,079		—		1,079		—		1,056		—		1,056
	7,515		21,236		—		28,751		—		8,553		—		8,553
	$	22,527	$	68,603	$	—	$	91,130	$	—	$	15,120	$	—	$	15,120

January 3, 2015
Level 1 Level 2 Level 3 Total
Marketable debt securities – current
U.S. Treasury securities $ 17,506
$ —
$ —
$ 17,506
Corporate bonds —
20,139
—
20,139
U.S. Agency bonds —
12,525
—
12,525
Commercial paper —
12,486
—
12,486
Municipal bonds —
6,953
—
6,953
17,506
52,103
—
69,609
Marketable debt securities – non-current
U.S. Treasury securities 14,990
—
—
14,990
Corporate bonds —
15,236
—
15,236
U.S. Agency bonds —
10,014
—
10,014
Municipal bonds —
4,201
—
4,201
14,990
29,451
—
44,441
$ 32,496
$ 81,554
$ —
$ 114,050

At ~~July 4, 2015~~April 2, 2016 and January ~~3, 2015~~,2, 2016, we had ~~$1.3~~$1.7 million and ~~$1.0~~$1.6 million,, respectively, of debt and equity securities that fund our deferred compensation plan and are classified in other ~~assets in our condensed consolidated balance sheets.~~assets. We also had corresponding deferred compensation plan liabilities of ~~$1.3~~$1.7 million and ~~$1.0~~$1.6 million at ~~July 4, 2015~~April 2, 2016 and January ~~3, 2015~~,2, 2016, respectively, which are included in other long-term ~~liabilitiesin our condensed consolidated balance sheets.~~liabilities. 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.

3. Marketable Debt Securities

The following table sets forth our investments in marketable debt securities at January 2, 2016 (in thousands). We did not hold any marketable debt securities at April 2, 2016.



	January 2, 2016
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Corporate bonds	$	7,532	$	—	$	(19	)	$	7,513
Municipal bonds	5,114		—		(3		)	5,111
U.S. Agency bonds	2,497		—		(1		)	2,496
	$	15,143	$	—	$	(23	)	$	15,120

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



	January 2, 2016
	Amortized Cost		Fair Value
Marketable debt securities – current (due in less than one year)	$	6,575	$	6,567
Marketable debt securities – non-current (due in one to two years)	8,568		8,553
	$	15,143	$	15,120

During the three months ended April 2, 2016 and April 4, 2015, we received proceeds of $15.1 million and $16.2 million, respectively, from marketable debt securities.

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):~~

July 4, 2015

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Fair
Value
Corporate bonds $ 27,700
$ 3
$ (17 ) $ 27,686
U.S. Agency bonds 22,517
24
—
22,541
U.S. Treasury securities 22,503
24
—
22,527
Municipal bonds 10,887
1
(5 ) 10,883
Commercial paper 7,494
—
(1 ) 7,493
$ 91,101
$ 52
$ (23 ) $ 91,130

January 3, 2015

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Fair
Value
Corporate bonds 35,409
2
(36 ) 35,375
U.S. Treasury securities $ 32,507
$ 12
$ (23 ) $ 32,496
U.S. Agency bonds 22,545
4
(10 ) 22,539
Commercial paper 12,487
—
(1 ) 12,486
Municipal bonds 11,157
2
(5 ) 11,154
$ 114,105
$ 20
$ (75 ) $ 114,050

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

July 4, 2015 January 3, 2015

Amortized
Cost

Fair
Value

Amortized
Cost

Fair
Value
Marketable debt securities – current (due in less than one year) $ 62,359
$ 62,379
$ 69,607
$ 69,609
Marketable debt securities – non-current (due in one to two years) 28,742
28,751
44,498
44,441
$ 91,101
$ 91,130
$ 114,105
$ 114,050

During the three months ended July 4, 2015 and June 28, 2014, $25.6 million and $13.5 million, respectively, of marketable debt securities matured and were redeemed at face value. During the six months ended July 4, 2015 and June 28, 2014, $41.8 million and $23.5 million, respectively, of marketable debt securities matured and were redeemed at face value.

~~Other Investments~~

~~We have a minority equity investment in one of our strategic product-development partners. The carrying value of this investment at~~ ~~July 4, 2015~~ ~~and January 3, 2015 using the cost method is $6.0 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):


	July 4, 2015		January 3, 2015		April 2, 2016		January 2, 2016
Raw materials	$	9,499	$	10,220	$	6,578	$	9,349
Work in progress	333		411		47		48
Finished goods	58,545		42,904		74,342		77,203
	$	68,377	$	53,535	$	80,967	$	86,600

5. Goodwill and Intangible Assets

Goodwill and Indefinite-Lived Intangible Assets

At both ~~July 4, 2015~~April 2, 2016 and January ~~3, 2015,~~2, 2016, our condensed consolidated balance sheets included goodwill of ~~$9.0~~$64.0 million and indefinite-lived trade name/trademarks of $1.4 million.

Definite-Lived Intangible Assets

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


	July 4, 2015				January 3, 2015				April 2, 2016				January 2, 2016
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Developed technologies	$	5,231	$	1,586	$	5,231	$	1,342	$	18,851	$	2,889	$	18,851	$	2,342
Customer relationships	2,413		847		2,413		675		2,413		1,106		2,413		1,020
Trade names/trademarks	101		101		101		101		101		101		101		101
	$	7,745	$	2,534	$	7,745	$	2,118	$	21,365	$	4,096	$	21,365	$	3,463

Amortization expense for the three months ended April 2, 2016 and April 4, 2015, was $0.6 million and $0.2 million, respectively.

6. Credit Agreement

Our~~$20.0 million~~ ~~Credit Agreement (Credit Agreement) with Wells Fargo Bank, National Association, as amended, is an unsecured~~ revolving credit facility, ~~that matures on~~ ~~August 31, 2016~~.as amended, (Credit Agreement) is for general corporate purposes with net aggregate availability of $150 million. The Credit Agreement contains an accordion feature that allows us to increase the amount of the ~~line~~credit facility from ~~$20~~$150 million to up to ~~$50~~$200 million in total availability, subject to ~~lender~~Lenders' approval. The Credit Agreement matures in February 2021.

~~Any borrowings under~~The Credit Agreement provides the Lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio and a minimum interest coverage ratio. Under the terms of the 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~~we pay a variable rate of interest ~~payable by us in respect~~and a commitment fee based on our leverage ratio. As of ~~loans outstanding under the revolving credit facility is: (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 July 4, 2015 and January 3, 2015,~~April 2, 2016, we had no outstanding borrowings ~~and $20 million was available under the Credit Agreement. We had no outstanding~~or letters of credit ~~as of July 4, 2015 or January 3, 2015.~~and we were in compliance with all financial covenants.

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

7. Repurchase of Common Stock

Repurchases of our common stock were as follows (in thousands):


	Three Months Ended				Six Months Ended				Three Months Ended
	July 4, 2015		June 28, 2014		July 4, 2015		June 28, 2014		April 2, 2016		April 4, 2015
Amount repurchased under Board-approved share repurchase program	$	30,019	$	10,011	$	50,026	$	20,022	$	50,000	$	20,007
Amount repurchased in connection with the vesting of employee restricted stock grants	1,135		1,223		1,603		1,448		1,240		468
Total amount repurchased	$	31,154	$	11,234	$	51,629	$	21,470	$	51,240	$	20,475

As of ~~July 4, 2015,~~April 2, 2016, the remaining share repurchase authorization under our Board-approved share repurchase plan was ~~$185~~$87 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~~share 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.

8. Stock-Based Compensation

Stock-based compensation expense consisted of the following (in thousands):

Three Months Ended Six Months Ended
July 4,
2015 June 28,
2014 July 4,
2015 June 28,
2014
Options $ 672
$ 694
$ 1,316
$ 929
Restricted shares 2,374
1,449
4,512
1,106
Total stock-based compensation expense⁽¹⁾
3,046
2,143
5,828
2,035
Income tax benefit 1,038
722
2,005
696
Total stock-based compensation expense, net of tax $ 2,008
$ 1,421
$ 3,823
$ 1,339

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



	Three Months Ended
	April 2, 2016		April 4, 2015
Stock options	$	615	$	644
Stock awards	3,151		2,138
Total stock-based compensation expense	3,766		2,782
Income tax benefit	1,299		960
Total stock-based compensation expense, net of tax	$	2,467	$	1,822

9. ~~Employee Benefits~~Profit Sharing and 401(k) Plan

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 calendar quarter, we may make a discretionary contribution equal to a percentage of the employee’s contribution. During the three months ended ~~July 4, 2015~~April 2, 2016 and ~~June 28, 2014~~April 4, 2015, our contributions, net of forfeitures, were $~~0.9~~1.3 million and $~~0.9~~1.2 million, respectively. ~~During the six months ended July 4, 2015 and June 28, 2014, our contributions, net of forfeitures, were $2.1 million and $1.8 million, respectively.~~

10. Other (Expense) Income, Net

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


	Three Months Ended						Six Months Ended						Three Months Ended
	July 4, 2015			June 28, 2014			July 4, 2015			June 28, 2014			April 2, 2016			April 4, 2015
Interest expense													$	(106	)	$	(10	)
Interest income	$	143		$	88		$	306		$	200		9			163
Interest expense	(10		)	(10		)	(20		)	(20		)
Other income, net	$	133		$	78		$	286		$	180
Other (expense) income, net													$	(97	)	$	153

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

11. Net Income per Common Share

The components of basic and diluted net income per share ~~are~~were as follows (in thousands, except per share amounts):


	Three Months Ended				Six Months Ended				Three Months Ended
	July 4, 2015		June 28, 2014		July 4, 2015		June 28, 2014		April 2, 2016		April 4, 2015
Net income	$	11,038	$	8,481	$	39,837	$	25,473	$	12,969	$	28,799

Reconciliation of weighted-average shares outstanding:	Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	51,672		53,648		52,009		53,880		48,100		52,346
Dilutive effect of stock-based awards	872		676		926		690		745		980
Diluted weighted-average shares outstanding	52,544		54,324		52,935		54,570		48,845		53,326

Net income per share – basic	$	0.21	$	0.16	$	0.77	$	0.47	$	0.27	$	0.55
Net income per share – diluted	$	0.21	$	0.16	$	0.75	$	0.47	$	0.27	$	0.54

Anti-dilutive stock-based awards excluded from the calculations of diluted net income per share calculations were immaterial for the periods presented.

12. Commitments and Contingencies

Sales Returns

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


	Six Months Ended						Three Months Ended
	July 4, 2015			June 28, 2014			April 2, 2016			April 4, 2015
Balance at beginning of year	$	15,262		$	9,433		$	20,562		$	15,262
Additions that reduce net sales	40,076			32,923			23,636			23,077
Deductions from reserves	(42,659		)	(33,162		)	(21,288		)	(23,174		)
Balance at end of period	$	12,679		$	9,194		$	22,910		$	15,165

Warranty Liabilities

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


	Six Months Ended						Three Months Ended
	July 4, 2015			June 28, 2014			April 2, 2016			April 4, 2015
Balance at beginning of year	$	5,824		$	4,153		$	10,028		$	5,824
Additions charged to costs and expenses for current-year sales	4,869			3,237			3,585			3,008
Deductions from reserves	(4,177		)	(3,231		)	(3,272		)	(2,318		)
Changes in liability for pre-existing warranties during the current year, including expirations	421			274			(574		)	211
Balance at end of period	$	6,937		$	4,433		$	9,767		$	6,725

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

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.

13On December 4, 2015, Saeid Azimpour, a consumer, filed a purported class-action lawsuit in U.S. District Court in Minnesota alleging he was fraudulently induced to purchase a down alternative pillow at a Sleep Number store based on signage that indicated that the pillow was 50% off. Plaintiff alleges that the price he paid for the pillow was not truly 50% off the price at which Sleep Number previously sold the pillow. Plaintiff asserts 10 causes of action including consumer fraud, unlawful trade practices, deceptive trade practices under Minnesota law, violation of the Minnesota false advertising law, unjust enrichment, violation of the California unfair competition law, violation of the California false advertising law and violation of the California remedies act. Plaintiff seeks to represent all individuals who “purchased one or more items from the Company advertised or priced at a discount from the original retail price at any time between December 1, 2011 and present.” Plaintiff seeks injunctive relief, damages, disgorgement and attorneys’ fees. We believe the claims asserted in this lawsuit are without merit and we intend to vigorously defend this case.

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

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~~line;

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;

The vulnerability of key suppliers to recessionary pressures, labor negotiations, liquidity concerns or other factors;

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~~main manufacturing facilities;

Increasing government ~~regulation;~~regulations, which have added or may add cost pressures or process changes to ensure compliance;

The adequacy of our management information systems to meet the evolving needs of our business and to protect sensitive data from potential cyber threats;

The costs, distractions and potential disruptions to our business related to upgrading our management information 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.

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

Index

Overview

Business Overview

We offer consumers high-quality, innovative and individualized sleep solutions and services, which include a complete line of SLEEP NUMBER^® beds and bedding accessories. Our ~~vertically integrated~~ business ~~model~~ has three significant competitive advantages: proprietary sleep innovations, ongoing customer relationships and exclusive distribution.

We have a vertically integrated business model and are the exclusive designer, manufacturer, marketer, retailer and servicer of a complete line of Sleep Number^® beds. Only the Sleep Number bed offers SleepIQ^® technology - proprietary ~~sensors~~sensor technology that works directly with the bed’s DualAir™ ~~technology~~system to track and monitor each individual’s sleep. ~~Select Comfort~~SleepIQ technology communicates how you slept and what adjustments you can make to optimize your sleep and improve your daily life. Sleep Number also offers a full line of exclusive sleep products, including FlextFit™ adjustable ~~base technology~~bases and Sleep Number^® pillows, sheets and other bedding products.

We are committed to delivering superior shareholder value through three primary ~~EPS drivers:~~drivers of earnings per share growth: increasing demand, leveraging our business model and deploying our capital efficiently. We are the sleep innovation leader and drive growth through effective brand marketing and a differentiated retail experience.

We generate revenue by marketing our innovations to new and existing customers, and selling products through two distribution channels. 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 wholesale customers in the United States and the QVC shopping channel.

We are also the only vertically integrated manufacturer/retailer in the industry. We have two manufacturing plants that distribute Sleep Number products. We also offer mattress home delivery and installation, and maintain an in-house customer service department. This integration enables operational synergies and efficiencies, and a strong working capital position. Vertical integration allows us to build a long-term loyal customer relationship as we service the consumer through the full purchase and ownership cycle. This relationship with our customer creates a productive cycle of repeat and referral business.

Mission and Vision

Our mission is to ~~Improve Lives~~improve lives by ~~Individualizing Sleep Experiences.~~individualizing sleep experiences.

Our vision is ~~To Become One~~to become one of the ~~World's Most Beloved Brands By Delivering An Unparalleled Sleep Experience~~.world's most beloved brands by delivering an unparalleled sleep experience. We plan to achieve this by offering benefit-driven, innovative sleep solutions to our customers through ~~our consumer-driven innovation strategy with technology as our differentiator.~~an unmatched retail experience and a carefree ownership experience.

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, timing of investments in growth initiatives and infrastructure, timing of store openings/closings and related expenses, changes in net sales resulting from changes in our store base, the timing of new product introductions, 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, 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 period ended ~~July 4, 2015~~April 2, 2016 were as follows:

In the fourth quarter 2015, we replaced our nearly 20-year-old legacy computer systems with a new vertically-integrated Enterprise Resource Planning (ERP) system. We experienced technical and operational issues in our plants and supply chain as we ramped up the new system, which led to delivery delays and inconveniences for our customers. During the first quarter 2016, we continued to make progress resolving technical and operational issues associated with the ERP implementation, with the

Index

completion of our implementation by quarter end. The system is effectively operating at normal service levels across our vertical enterprise.

Net sales for the quarter increased ~~17%~~1% to ~~$275~~$353 million, compared with ~~$235~~$350 million for the same period one year ago. The sales increase was driven by ~~a 13% comparable sales increase in our Company-Controlled channel and~~ 5 percentage points of growth from sales generated by 1634 net new stores opened in the past 12 ~~months.~~months, partially offset by a 4% comparable sales decline in our Company-Controlled channel.

Sales per store (for stores open at least one year), on a trailing twelve-month basis ~~increased 16% to $2.5~~for the period ended April 2, 2016, were $2.4 million, ~~compared~~in line with ~~$2.1 million for~~ the prior-year trailing twelve-month period.

Operating income for the quarter ~~increased 31%~~decreased to ~~$17~~$20 million, or ~~6.0%~~5.6% of net sales, compared with ~~$13~~$44 million, or ~~5.4%~~12.5% of net sales, for the same period one year ago. The ~~increase~~decrease in operating income was ~~primarily due to the additional operating income generated by the 17% increase~~attributable to: (i) increases in ~~net~~cost of sales and operating expenses related to execution inefficiencies associated with our ERP implementation; (ii) $4.3 million of additional research and development expenses to support the ~~120 basis point improvement~~advancement of our product innovation pipeline (including $3.3 million of expenses related to SleepIQ LABS' operations that was acquired on September 15, 2015); and (iii) increases in miscellaneous other operating expenses to support the ~~gross profit rate.~~growth of the business, including incremental depreciation expense related to our new ERP system.

Net income for the quarter ~~increased 30%~~decreased to ~~$11~~$13 million, or ~~$0.21~~$0.27 per diluted share, compared with net income of $8$29 million, or ~~$0.16~~$0.54 per diluted share, for the same period one year ago.

~~We achieved a return on invested capital (ROIC) of 16.4% during the trailing-twelve month period ended July 4, 2015, well above our 10% cost of capital.~~

Cash provided by operating activities totaled ~~$45~~$64 million for the ~~six~~three months ended ~~July 4, 2015,~~April 2, 2016, compared with ~~$50~~$49 million for the same period one year ago.

At ~~July 4, 2015,~~April 2, 2016, cash and cash equivalents ~~and marketable debt securities, less customer prepayments,~~ totaled ~~$92~~$30 million and there were no borrowings under our revolving credit facility.

In the ~~second~~first quarter of ~~2015,~~2016, we repurchased ~~948,745~~2,637,400 shares of our common stock under our Board-approved share repurchase program at a cost of ~~$30~~$50 million (an average of ~~$31.64~~$18.96 per share). compared with $20 million in the first quarter of 2015. As of ~~July 4, 2015,~~April 2, 2016, the remaining authorization under our Board-approved share repurchase program was ~~$185~~$87 million.

~~Index~~

The following table sets forth 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								Six Months Ended									Three Months Ended
		July 4, 2015				June 28, 2014				July 4, 2015				June 28, 2014					April 2, 2016					April 4, 2015
Net sales		$	275.3	100.0	%	$	234.8	100.0	%	$	625.1	100.0	%	$	511.2	100.0	%		$	353.0		100.0	%	$	349.8	100.0	%
Cost of sales		104.8		38.1	%	92.4		39.3	%	238.7		38.2	%	197.4		38.6	%		143.9			40.8	%	134.0		38.3	%
Gross profit		170.5		61.9	%	142.4		60.7	%	386.4		61.8	%	313.8		61.4	%		209.1			59.2	%	215.8		61.7	%

Operating expenses:
Sales and marketing		126.6		46.0	%	106.7		45.5	%	267.1		42.7	%	231.7		45.3	%		150.7			42.7	%	140.5		40.2	%
General and administrative		23.9		8.7	%	21.3		9.1	%	52.1		8.3	%	40.2		7.9	%		30.9			8.8	%	28.3		8.1	%
Research and development		3.4		1.2	%	1.7		0.7	%	6.8		1.1	%	3.4		0.7	%		7.6			2.2	%	3.4		1.0	%
Total operating expenses		153.9		55.9	%	129.7		55.2	%	326.0		52.2	%	275.3		53.8	%		189.2			53.6	%	172.1		49.2	%
Operating income		16.6		6.0	%	12.7		5.4	%	60.4		9.7	%	38.5		7.5	%		19.9			5.6	%	43.7		12.5	%
Other income, net		0.1		0.0	%	0.1		0.0	%	0.3		0.0	%	0.2		0.0	%
Other (expense) income, net																			(0.1		)	0.0	%	0.2		0.0	%
Income before income taxes		16.8		6.1	%	12.8		5.4	%	60.6		9.7	%	38.7		7.6	%		19.8			5.6	%	43.9		12.5	%
Income tax expense		5.7		2.1	%	4.3		1.8	%	20.8		3.3	%	13.2		2.6	%		6.8			1.9	%	15.1		4.3	%
Net income		$	11.0	4.0	%	$	8.5	3.6	%	$	39.8	6.4	%	$	25.5	5.0	%		$	13.0		3.7	%	$	28.8	8.2	%

Net income per share:
Basic		$	0.21			$	0.16			$	0.77			$	0.47				$	0.27				$	0.55
Diluted		$	0.21			$	0.16			$	0.75			$	0.47				$	0.27				$	0.54

Weighted-average number of common shares:	Weighted-average number of common shares:																	Weighted-average number of common shares:
Basic		51.7				53.6				52.0				53.9					48.1					52.3
Diluted		52.5				54.3				52.9				54.6					48.8					53.3

Index

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


	Three Months Ended				Six Months Ended				Three Months Ended
	July 4, 2015		June 28, 2014		July 4, 2015		June 28, 2014		April 2, 2016		April 4, 2015
Company-Controlled channel	97.2	%	96.4	%	97.4	%	96.3	%	97.3	%	97.5	%
Wholesale/Other channel	2.8	%	3.6	%	2.6	%	3.7	%	2.7	%	2.5	%
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

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


	Three Months Ended				Six Months Ended				Three Months Ended
	July 4, 2015		June 28, 2014		July 4, 2015		June 28, 2014		April 2, 2016		April 4, 2015
Sales change rates:
Retail comparable-store sales⁽¹⁾	13	%	8	%	18	%	5	%	(4	%)	22	%
E-Commerce and Direct	14	%	(5	%)	15	%	(2	%)	8	%	17	%
Company-Controlled comparable sales change	13	%	7	%	18	%	4	%	(4	%)	22	%
Net store openings/closings	5	%	6	%	6	%	7	%	5	%	6	%
Total Company-Controlled channel	18	%	13	%	24	%	11	%	1	%	28	%
Wholesale/Other channel	(9	%)	6	%	(15	%)	(11	%)	10	%	(19	%)
Total net sales change	17	%	13	%	22	%	10	%	1	%	27	%

⁽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.

~~Index~~

Other sales metrics were as follows:

Three Months Ended Six Months Ended
July 4,
2015 June 28,
2014 July 4,
2015 June 28,
2014
Average sales per store ($ in thousands)^{(1) (3)}
$ 2,480
$ 2,144

Average sales per square foot^{(1) (3)}
$ 1,048
$ 1,009

Stores > $1 million in net sales^{(1) (3)}
100 % 97 %
Stores > $2 million in net sales^{(1) (3)}
67 % 46 %
Average revenue per mattress unit – Company-Controlled channel⁽²⁾
$ 4,081
$ 3,709
$ 3,991
$ 3,520



	Three Months Ended
	April 2, 2016			April 4, 2015⁽³⁾
Average sales per store ($ in thousands)⁽¹⁾	$	2,363		$	2,424
Average sales per square foot⁽¹⁾	$	960		$	1,038
Stores > $1 million in net sales⁽¹⁾	98		%	99		%
Stores > $2 million in net sales⁽¹⁾	61		%	63		%
Average revenue per mattress unit – Company-Controlled channel⁽²⁾	$	3,978		$	3,923

⁽¹⁾ Trailing twelve months for stores included in our comparable store sales calculation.

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

⁽³⁾ Fiscal 2014 included 53 weeks, as compared to 52 weeks in fiscal ~~2015~~2016 and ~~2013.~~2015. The additional week in 2014 was in the fiscal fourth quarter. Company-Controlled comparable sales metrics have been adjusted to remove the estimated impact of the additional week on those metrics.

The number of retail stores operating was as follows:


	Three Months Ended				Six Months Ended				Three Months Ended
	July 4, 2015		June 28, 2014		July 4, 2015		June 28, 2014		April 2, 2016		April 4, 2015
Beginning of period	463		443		463		440		488		463
Opened	5		16		13		33		14		8
Closed	(1	)	(8	)	(9	)	(22	)	(5	)	(8	)
End of period	467		451		467		451		497		463

Index

Comparison of Three Months Ended ~~July 4, 2015~~April 2, 2016 with Three Months Ended ~~June 28, 2014~~April 4, 2015

Enterprise Resource Planning (ERP) system

Net sales

Net sales increased ~~17%~~1% to ~~$275~~$353 million for the three months ended ~~July 4, 2015,~~April 2, 2016, compared with ~~$235~~$350 million for the same period one year ago. ~~Demand for our product innovations, effective marketing and our differentiated retail experience all contributed to the strong sales increase.~~ The sales increase was driven by ~~a 13% comparable sales increase in our Company-Controlled channel and 5~~4 percentage points (ppt.) of growth from sales generated by 1634 net new stores opened in the past 12 ~~months.~~months, offset by a 4% comparable sales decrease in our Company-Controlled channel. Net sales for the three months ended April 2, 2016 benefited from the reduction of our fourth quarter 2015 ending order backlog, offset by sales pressures from elevated order cancellations, customer appeasements and higher than normal sales returns resulting from our ERP implementation challenges.

The ~~$41~~$3 million net sales increase compared with the same period one year ago was comprised of the following: (i) a ~~$26~~$14 million increase resulting from net store openings; (ii) a $1 million increase in Wholesale/Other channel sales; partially offset by (iii) a $12 million decrease in sales from our Company-Controlled comparable retail ~~stores; (ii) a $13 million increase resulting from net store openings; and (iii) a $2 million increase in E-Commerce and Direct sales.~~stores. Company-Controlled mattress unit sales ~~increased 7%~~decreased 1% compared to the prior-year period. Average revenue per mattress unit in our Company-Controlled channel increased by ~~10%~~1% to ~~$4,081 driven by sales of product innovations, including our new FlexFit™ adjustable bases.~~$3,978.

Gross profit

Gross profit of ~~$171~~$209 million ~~increased~~decreased by ~~$28~~$7 million, or ~~20%~~3%, compared with the same period one year ago. The gross profit rate was ~~61.9%~~59.2% of net sales for the three months ended ~~July 4, 2015,~~April 2, 2016, compared with ~~60.7%~~61.7% for the prior-year period. The ~~120 basis point increase~~2.5 ppt. decrease in the gross profit rate was primarily due to: (i) ~~favorable product mix changes~~appeasements, labor inefficiencies, increased material costs and excess freight from actions taken to manage operating issues resulting from ~~advancements in~~ our ~~selling process and product innovations over the last 12 months;~~ERP implementation; and (ii) ~~reductions in promotional discounts.~~higher sales return costs. In addition, our gross profit rate can fluctuate from quarter to quarter due to a variety of other factors, including raw material price fluctuations, ~~return and exchange costs,~~ warranty expenses and performance-based incentive compensation.

Sales and marketing expenses

Sales and marketing expenses for the three months ended ~~July 4, 2015~~April 2, 2016 increased to ~~$127~~$151 million, or ~~46.0%~~42.7% of net sales, compared with ~~$107~~$141 million, or ~~45.5%~~40.2% of net sales, for the same period one year ago. The ~~50 basis point~~2.5 ppt. increase in the sales and marketing expense rate in the current period was mainly due ~~to the timing of media expenses incurred (fiscal calendar year shift); partially offset by the leveraging impact of the 17% net sales increase.~~

~~Index~~

~~General and administrative expenses~~

General and administrative (G&A) expenses increased $2.6 million to $24 million for the three months ended July 4, 2015, compared with $21 million in the same period one year ago, but decreased to 8.7% of net sales, compared with 9.1% of net sales last year. Theto: (i) an increase in ~~G&A~~customer financing expenses, ~~was mainly due to~~as a ~~$2.0 million increase in employee compensation, including incremental compensation costs to enhance~~larger percentage of our ~~IT infrastructure. The G&A expense rate decreased by 40 basis points in~~customers took advantage of promotional financing offers; (ii) the ~~current period compared with~~deleveraging impact from the ~~same period one year ago due to the leveraging impact of the 17% net sales increase.~~

~~Research and development expenses~~

Research and development expenses for the three months ended July 4, 2015 were $3.4 million, or 1.2% of net sales, compared with $1.7 million, or 0.7% of net sales, for the same period one year ago. The $1.7 million increase in R&D expenses was due to increased investments to support product innovations, consistent with our long-term consumer innovation strategy.

~~Comparison of Six Months Ended July 4, 2015 with Six Months Ended June 28, 2014~~

~~Net sales~~

Net sales in 2015 increased 22% to $625 million, compared with $511 million for the same period one year ago. Demand for our product innovations, effective marketing and our differentiated retail experience all contributed to the strong sales increase. The sales increase was driven by an 18%4% comparable sales ~~increase in our Company-Controlled channel~~decline; and ~~6 percentage points of growth from sales generated by 16 net new retail stores opened in the past 12 months.~~

~~The $114 million net sales increase compared with the same period one year ago was comprised of the following: (i) a $77 million increase~~(iii) higher customer service costs resulting from our Company-Controlled comparable retail stores; (ii) a $35 million increase resulting from net store openings; and (iii) a $5 million increase in E-Commerce and Direct sales; partially offset by (iv) a $3 million decrease in Wholesale/Other channel sales. Company-Controlled mattress units increased 9% compared to the prior-year period. Average revenue per mattress unit in our Company-Controlled channel increased by 13%.ERP implementation challenges.

~~Gross profit~~

Gross profit of $386 million increased by $73 million, or 23%, compared with the same period one year ago. The gross profit rate increased to 61.8% of net sales for the first six months of 2015, compared with 61.4% for the prior-year period. The 40 basis point increase in the gross profit rate was primarily due to: (i) favorable product mix changes resulting from advancements in our selling process and product innovations over the last 12 months; and (ii) reductions in promotional discounts. In addition, our gross profit rate can fluctuate from quarter to quarter due to a variety of other factors, including raw material price fluctuations, return and exchange costs, warranty expenses and performance-based incentive compensation.

~~Sales and marketing expenses~~

Sales and marketing expenses in 2015 increased to $267 million, or 42.7% of net sales, compared with $232 million, or 45.3% of net sales, for the same period one year ago. The 260 basis point decrease in the sales and marketing expense rate in the current period was mainly due to the leveraging impact of the 22% net sales increase, which more than offset higher marketing, selling and occupancy costs as we continue to invest in our exclusive distribution strategy.

General and administrative expenses

General and administrative (G&A) expenses increased $3 million to ~~$52~~$31 million ~~in 2015,~~for the three months ended April 2, 2016, compared with ~~$40~~$28 million in the ~~prior~~same period one year ago, and increased to ~~8.3%~~8.8% of net sales, compared with ~~7.9%~~8.1% of net sales ~~one year ago.~~last year. The increase in G&A expenses was ~~mainly~~primarily due to: (i) a ~~$6.7~~$2.4 million increase in employee compensation, including increased stock-based compensation (the six months ended June 28, 2014 included a $1.2 million benefit related to a change in estimated forfeitures due to employee turnover during the three months ended March 29, 2014) and incremental compensation costs to ~~enhance~~support our ~~IT infrastructure;~~strategic growth drivers; and (ii) ~~$2.0 million of additional legal expenses, including costs associated with proxy preparation, filing and consulting services; (iii) $1.1~~$2.4 million of additional depreciation ~~expense~~expenses resulting from the increase in capital expenditures to support the growth of the business, including our new ~~digital website~~ERP system which was launched in the ~~second~~fourth quarter of ~~2014; and (iv)~~2015; partially offset by (iii) a ~~$2.2~~$2.1 million ~~increase~~decrease in miscellaneous other ~~expenses.~~expenses, including costs associated with proxy preparation, filing and consulting services. The G&A expense rate increased by ~~40 basis points~~0.7 ppt. in the current period compared with the same period one year ago due to the ~~increase in expenses~~items discussed ~~above, partially offset by the leveraging impact of the 22% net sales increase.~~above.

Research and development expenses

Research and development (R&D) expenses for the ~~six~~three months ended ~~July 4, 2015~~April 2, 2016 were ~~$6.8~~$7.6 million, or ~~1.1%~~2.2% of net sales, compared with $3.4 million, or ~~0.7%~~1.0% of net sales, for the same period one year ago. The ~~$3.4~~$4.3 million increase in R&D expenses was due to increased investments to support product innovations, including $3.3 million of expenses related to SleepIQ LABS' operations (acquired on September 15, 2015). The $4.3 million increase is consistent with our long-term consumer innovation strategy.

Index

Liquidity and Capital Resources

As of ~~July 4, 2015~~April 2, 2016, cash and cash equivalents totaled $30 million compared with cash, cash equivalents and marketable debt securities ~~totaled~~of $~~117 million~~ ~~compared with~~ ~~$166~~36 million as of January ~~3, 2015~~2, 2016. The $497 million decrease was primarily due to $4564 million of cash provided by operating activities, which was more than offset by $3912 million of cash used to purchase property and equipment, $~~51.6~~51 million of cash used to repurchase our common stock ($50.0 million under our Board-approved share repurchase program and ~~$1.6~~$1.2 million in connection with the vesting of employee restricted stock grants)~~. Our~~ ~~$91~~ and a $7 million ~~of marketable debt securities held as of~~ ~~July 4, 2015~~ ~~are all highly liquid and include U.S. government and agency securities, corporate debt securities, municipal bonds and commercial paper.~~ net decrease in short-term borrowings.

The following table summarizes our cash flows (dollars in millions). Amounts may not add due to rounding differences:


	Six Months Ended						Three Months Ended
	July 4, 2015			June 28, 2014			April 2, 2016			April 4, 2015
Total cash provided by (used in):
Operating activities	$	45.1		$	49.6		$	64.0		$	48.9
Investing activities	(16.3		)	(45.1		)	2.8			(19.7		)
Financing activities	(54.7		)	(25.6		)	(58.3		)	(34.8		)
Net decrease in cash and cash equivalents	$	(25.9	)	$	(21.1	)
Net increase (decrease) in cash and cash equivalents							$	8.5		$	(5.6	)

Cash provided by operating activities for the ~~six~~three months ended ~~July 4, 2015~~April 2, 2016 was ~~$45~~$64 million compared with ~~$50~~$49 million for the ~~six~~three months ended ~~June 28, 2014.~~April 4, 2015. Significant components of the ~~$5 million~~ year-over-year ~~decrease~~change in cash ~~from~~provided by operating activities included: (i) ~~an $18~~a $16 million decrease in net income for the three months ended April 2, 2016 compared with the same period one year ago; (ii) a $20 million fluctuation in accrued compensation and benefits which primarily resulted from year-over-year changes in company-wide performance-based incentive compensation that was earned in 2014 and paid in the first quarter of 2015, ~~but was not~~compared with no company-wide incentive compensation earned in ~~2013; partially offset by (ii) a $14 million increase~~2015 and paid in the first quarter of 2016; and (iii) the ERP implementation issues we experienced in our ~~2015 net income. In addition, inventories increased by $15 million to support~~plants and supply chain during the ~~Fourth of July event (fiscal year calendar shift), preparation ahead of the Labor Day event and our planned~~ fourth quarter of 2015 ~~Enterprise Resource Planning (ERP) systems launch, with $8 million~~that resulted in higher inventory levels, increased accounts receivables, increased accounts payables and higher customer prepayments at the end of ~~the increase funded by an increase in accounts payable.~~2015.

Net cash provided by investing activities was $3 million for the three months ended April 2, 2016, compared with net cash used in investing activities ~~was $16 million for the six months ended July 4, 2015, compared with $45~~of $20 million for the same period one year ago. Investing activities for the current-year period included ~~$39~~$12 million of property and equipment purchases, compared with ~~$40~~$18 million for the same period one year ago. On a net basis, we decreased our investments in marketable debt securities by ~~$23~~$15 million during the ~~six~~three months ended ~~July 4, 2015,~~April 2, 2016, compared with a net increase of $5$2 million during the comparable period one year ago.

Net cash used in financing activities was ~~$55~~$58 million for the ~~six~~three months ended ~~July 4, 2015,~~April 2, 2016, compared with ~~$26~~$35 million for the same period one year ago. During the ~~six~~three months ended ~~July 4, 2015,~~April 2, 2016, we repurchased ~~$51.6~~$51.2 million of our stock ($50.0 million under our Board-approved share repurchase program and ~~$1.6~~$1.2 million in connection with the vesting of employee restricted stock grants) compared with ~~$21.5~~$20.5 million ($20.0 million under our Board-approved share repurchase program and ~~$1.4~~$0.5 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 share repurchase program, we repurchased ~~1,584,397~~2,637,400 shares at a cost of $50 million (an average of ~~$31.57~~$18.96 per share) during the ~~six~~three months ended ~~July 4, 2015.~~April 2, 2016. During the ~~six~~three months ended ~~June 28, 2014,~~April 4, 2015, we repurchased ~~1,098,486~~635,652 shares at a cost of $20 million (an average of ~~$18.23~~$31.48 per share). As of ~~July 4, 2015,~~April 2, 2016, the remaining share repurchase authorization under our Board-approved share repurchase plan was ~~$185~~$87 million. There is no expiration date governing the period over which we can repurchase shares.

Our ~~$20.0 million Credit Agreement (Credit Agreement) with Wells Fargo Bank, National Association, as amended, is an unsecured~~ revolving credit facility ~~that matures August 31, 2016.~~(Credit Agreement) is for general corporate purposes with net aggregate availability of $150 million. The Credit Agreement contains an accordion feature that allows us to increase the amount of the ~~line~~credit facility from ~~$20~~$150 million to up to ~~$50~~$200 million in total availability, subject to ~~lender~~Lenders' approval. The Credit Agreement matures in February 2021.

The Credit Agreement provides the Lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio and a minimum interest coverage ratio. Under the terms of the Credit Agreement we pay a variable rate of interest and a commitment fee based on our leverage ratio. As of ~~July 4, 2015~~April 2, 2016, we had no outstanding borrowings or letters of credit and we were in compliance with all financial covenants.

Index

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 ~~$117~~$30 million of cash and 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.

~~Index~~

We have an agreement with Synchrony Bank to offer qualified customers revolving credit arrangements to finance purchases from us (Synchrony Agreement). The Synchrony Agreement contains certain financial covenants, including a ~~minimum tangible net worth requirement~~maximum leverage ratio and a minimum ~~working capital requirement.~~interest coverage ratio. As of ~~July 4, 2015~~April 2, 2016 we were in compliance with all financial covenants.

Under the terms of the Synchrony Agreement, 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.

Non-GAAP Data

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

We define earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation and asset impairments. 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 are as follows (dollars in thousands):



	Three Months Ended				Trailing-Twelve Months Ended
	April 2, 2016		April 4, 2015		April 2, 2016		April 4, 2015
Net income	$	12,969	$	28,799	$	34,689	$	79,781
Income tax expense	6,832		15,079		16,664		40,301
Interest expense	106		10		256		53
Depreciation and amortization	13,757		10,544		50,129		40,426
Stock-based compensation	3,766		2,782		11,274		9,688
Asset impairments	15		209		67		703
Adjusted EBITDA	$	37,445	$	57,423	$	113,079	$	170,952

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 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 (dollars in thousands):



	Three Months Ended				Trailing-Twelve Months Ended
	April 2, 2016		April 4, 2015		April 2, 2016		April 4, 2015
Net cash provided by operating activities	$	63,981	$	48,864	$	123,059	$	154,468
Subtract: Purchases of property and equipment	12,289		17,796		80,079		77,730
Free cash flow	$	51,692	$	31,068	$	42,980	$	76,738

Index

Non-GAAP Data (continued)

Return on Invested Capital (ROIC)

(dollars in thousands)

ROIC is a financial measure we use to determine how efficiently we deploy our capital. It quantifies the return we earn on our invested capital. Management believes ROIC is also a useful metric for investors and financial analysts. We compute ROIC as outlined below. Our definition and calculation of ROIC may not be comparable to similarly titled definitions and calculations used by other companies. The tables below reconcile net operating profit after taxes (NOPAT) and total invested capital, which are non-GAAP financial measures, to the comparable GAAP financial measures:


	Trailing-Twelve Months Ended						Trailing-Twelve Months Ended
	July 4, 2015			June 28, 2014			April 2, 2016			April 4, 2015
Net operating profit after taxes (NOPAT)
Operating income	$	123,587		$	78,866		$	51,270		$	119,669
Add: Rent expense⁽¹⁾	61,157			53,165			63,204			59,592
Add: Interest income	521			380			340			466
Less: Depreciation on capitalized operating leases⁽²⁾	(15,280		)	(13,500		)	(16,501		)	(14,761		)
Less: Income taxes⁽³⁾	(57,496		)	(40,451		)	(31,992		)	(55,697		)
NOPAT	$	112,489		$	78,460		$	66,321		$	109,269

Average invested capital
Total equity	$	255,392		$	232,967		$	187,184		$	270,254
Less: Cash greater than target⁽⁴⁾	—			(2,673		)	—			(36,125		)
Add: Long-term debt⁽⁵⁾	—			—			—			—
Add: Capitalized operating lease obligations⁽⁶⁾	489,256			425,320			505,632			476,736
Total invested capital at end of period	$	744,648		$	655,614		$	692,816		$	710,865
Average invested capital⁽⁷⁾	$	686,514		$	604,661		$	729,234		$	661,708
Return on invested capital (ROIC)⁽⁸⁾	16.4		%	13.0		%	9.1		%	16.5		%

___________________

⁽¹⁾ Rent expense is added back to operating income to show the impact of owning versus leasing the related assets.

⁽²⁾ Depreciation is based on the average of the last five fiscal quarters' ending capitalized operating lease obligations (see note 6) for the respective reporting periods with an assumed thirty-year useful life. This is subtracted from operating income to illustrate the impact of owning versus leasing the related assets.

⁽³⁾ Reflects annual effective income tax rates, before discrete adjustments, of 32.5% and 33.8% for 2016 and ~~34.0% for~~ 2015, ~~and 2014,~~ respectively.

⁽⁴⁾ Cash greater than target is defined as cash, cash equivalents and marketable debt securities less customer prepayments in excess of $100 million.

⁽⁵⁾ Long-term debt includes existing capital lease ~~obligations.~~obligations, if applicable.

⁽⁶⁾ A multiple of eight times annual rent expense is used as an estimate for capitalizing our operating lease obligations. The methodology utilized aligns with the methodology of a nationally recognized credit rating agency.

⁽⁷⁾ Average invested capital represents the average of the last five fiscal quarters' ending invested capital balances.

⁽⁸⁾ ROIC equals NOPAT divided by average invested capital.

Note - Our ROIC calculation and data are considered non-GAAP financial measures and are not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts.

GAAP - generally accepted accounting principles in the U.S.

Index

~~Non-GAAP Data~~ ~~(continued)~~

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

~~Our Adjusted EBITDA calculations are as follows (dollars in thousands):~~

Three Months Ended
Trailing-Twelve
Months Ended
July 4,
2015 June 28,
2014 July 4,
2015 June 28,
2014
Net income $ 11,038
$ 8,481
$ 82,338
$ 52,157
Income tax expense 5,724
4,308
41,717
27,044
Interest expense 10
10
53
44
Depreciation and amortization 10,921
9,765
41,582
34,744
Stock-based compensation 3,046
2,143
10,591
4,275
Asset impairments 15
88
630
173
Adjusted EBITDA $ 30,754
$ 24,795
$ 176,911
$ 118,437

~~Free Cash Flow~~

~~The following table summarizes our free cash flow calculations (dollars in thousands):~~

Six Months Ended
Trailing-Twelve
Months Ended
July 4,
2015 June 28,
2014 July 4,
2015 June 28,
2014
Net cash provided by operating activities $ 45,054
$ 49,578
$ 139,944
$ 101,540
Subtract: Purchases of property and equipment 38,938
39,766
75,766
79,481
Free cash flow $ 6,116
$ 9,812
$ 64,178
$ 22,059

Off-Balance-Sheet Arrangements and Contractual Obligations

As of ~~July 4, 2015~~April 2, 2016, 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 ~~July 4, 2015~~April 2, 2016.

There has been no material change in our contractual obligations since the end of fiscal ~~2014~~2015. See Note 6, 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 January ~~3, 2015~~2, 2016 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 January ~~3, 2015~~2, 2016. There were no significant changes in our critical accounting policies since the end of fiscal ~~2014~~2015.

~~Index~~

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~~cash and ~~long-term investments in marketable debt securities.~~cash equivalents. 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~~cash and cash equivalents as of ~~July 4, 2015~~April 2, 2016 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 ~~July 4, 2015~~April 2, 2016, 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 ~~July 4, 2015~~April 2, 2016, 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

On December 4, 2015, Saeid Azimpour, a consumer, filed a purported class-action lawsuit in U.S. District Court in Minnesota alleging he was fraudulently induced to purchase a down alternative pillow at a Sleep Number store based on signage that indicated that the pillow was 50% off. Plaintiff alleges that the price he paid for the pillow was not truly 50% off the price at which Sleep Number previously sold the pillow. Plaintiff asserts 10 causes of action including consumer fraud, unlawful trade practices, deceptive trade practices under Minnesota law, violation of the Minnesota false advertising law, unjust enrichment, violation of the California unfair competition law, violation of the California false advertising law and violation of the California remedies act. Plaintiff seeks to represent all individuals who “purchased one or more items from the Company advertised or priced at a discount from the original retail price at any time between December 1, 2011 and present.” Plaintiff seeks injunctive relief, damages, disgorgement and attorneys’ fees. We believe the claims asserted in this lawsuit are without merit and we intend to vigorously defend this case.

~~Index~~

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⁽³⁾
April 5, 2015 through May 2, 2015 353,979
$ 32.78
352,404
$ 203,432,000
May 3, 2015 through May 30, 2015 357,834
31.37
328,876
193,124,000
May 31, 2015 through July 4, 2015 272,732
30.53
267,465
184,962,000
Total 984,545
$ 31.64
948,745
$ 184,962,000



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⁽³⁾
January 3, 2016 through January 30, 2016	770,022	$	19.91	768,340	$	121,242,000
January 31, 2016 through February 27, 2016	853,896	18.24		837,250	105,957,000
February 28, 2016 through April 2, 2016	1,079,801	18.83		1,031,810	86,542,000
Total	2,703,719	$	18.95	2,637,400	$	86,542,000


⁽¹⁾	Under the current Board-approved $250 million share repurchase program, we repurchased ~~948,745~~2,637,400 shares of our common stock at a cost of $~~30.0~~50.0 million (based on trade dates) during the three months ended ~~July 4, 2015~~April 2, 2016.


⁽²⁾	In connection with the vesting of employee restricted stock grants, we also repurchased ~~35,800~~66,319 shares of our common stock at a cost of ~~$1.1~~$1.2 million during the three months ended ~~July 4, 2015.~~April 2, 2016.


⁽³⁾	There is no expiration date governing the period over which we can repurchase shares under our Board-approved $250 million share repurchase ~~program.~~program (increased to $250 million as of September 17, 2014). Any repurchased shares are constructively retired and returned to an unissued status.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

Index

ITEM 6. EXHIBITS



Exhibit Number	Description	Method of Filing
10.1	First Amendment Agreement to Credit and Security Agreement dated as of September 9, 2015 by and among Select Comfort Corporation, KeyBank National Association, as Administrative Agent, Swing Line Lender and Issuing Lender, and the other financial institutions from time to time party thereto	Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed February 25, 2016
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 ~~July 4, 2015,~~April 2, 2016, filed with the SEC on ~~July 31, 2015,~~May 9, 2016, formatted in eXtensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets as of ~~July 4, 2015~~April 2, 2016 and January ~~3, 2015;~~2, 2016; (ii) Condensed Consolidated Statements of Operations for the three ~~and six~~ months ended ~~July~~April 2, 2016 and April 4, ~~2015 and June 28, 2014;~~2015; (iii) Condensed Consolidated Statements of Comprehensive Income for the three ~~and six~~ months ended ~~July~~April 2, 2016 and April 4, ~~2015 and June 28, 2014;~~2015; (iv) Condensed Consolidated Statement of Shareholders' Equity for the ~~six~~three months ended ~~July 4, 2015;~~April 2, 2016; (v) Condensed Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~July~~April 2, 2016 and April 4, ~~2015 and June 28, 2014;~~2015; and (vi) Notes to Condensed Consolidated Financial Statements.	Filed herewith

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:	~~July 31, 2015~~May 9, 2016	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)

Index

EXHIBIT INDEX



Exhibit Number	Description	Method of Filing
10.1	First Amendment Agreement to Credit and Security Agreement dated as of September 9, 2015 by and among Select Comfort Corporation, KeyBank National Association, as Administrative Agent, Swing Line Lender and Issuing Lender, and the other financial institutions from time to time party thereto	Incorporated by reference to Exhibit 10.1 contained in Select Comfort's Current Report on Form 8-K filed February 25, 2016
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 ~~July 4, 2015,~~April 2, 2016, filed with the SEC on ~~July 31, 2015,~~May 9, 2016, formatted in eXtensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets as of ~~July 4, 2015~~April 2, 2016 and January ~~3, 2015;~~2, 2016; (ii) Condensed Consolidated Statements of Operations for the three ~~and six~~ months ended ~~July~~April 2, 2016 and April 4, ~~2015 and June 28, 2014;~~2015; (iii) Condensed Consolidated Statements of Comprehensive Income for the three ~~and six~~ months ended ~~July~~April 2, 2016 and April 4, ~~2015 and June 28, 2014;~~2015; (iv) Condensed Consolidated Statement of Shareholders' Equity for the ~~six~~three months ended ~~July 4, 2015;~~April 2, 2016; (v) Condensed Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~July~~April 2, 2016 and April 4, ~~2015 and June 28, 2014;~~2015; and (vi) Notes to Condensed Consolidated Financial Statements.	Filed herewith