Dave Schwantes - Senior Director, IR Shelly Ibach - President & CEO David Callen - SVP & CFO.

Jon Berg - Piper Jaffray Brad Thomas - KeyBanc Capital Markets Seth Basham - Wedbush Josh Borstein - Longbow Research Karyn O'Brien - Nomura John Baugh - Stifel Keith Hughes - SunTrust.

Welcome to Select Comfort's Q1 2015 Earnings Conference Call. [Operator Instructions]. I would like to introduce Dave Schwantes, Senior Director of Investor Relations. Thank you. You may begin..

Good afternoon and welcome to the Select Comfort Corporation first quarter 2015 earnings conference call. Thank you for joining us. I am Dave Schwantes, Senior Director of Investor Relations. With me today are Shelly Ibach, our President and Chief Executive Officer and David Callen, our Senior Vice President and CFO.

This telephone conference is being recorded and will be available on our website at sleepnumber.com. Please refer to the details in our news release to access the replay. Please also refer to our news release for a reconciliation of certain non-GAAP financial measures included in the news release or that may be discussed on this call.

The primary purpose of this call is to discuss the results of the fiscal period just ended; however, our commentary and responses to your questions may contain certain forward-looking statements.

These forward-looking statements are subject to a number of risks and uncertainties outlined in our earnings news release and discussed in some detail in our annual report on Form 10-K and other periodic filings with the SEC. The company's actual future results may vary materially. I will now turn the call over to Shelly for her comments..

Good afternoon, everyone. Thank you for joining our call today. My Sleep IQ score was 74 last night. Our consumer driven innovation strategy continues to gain traction and propel our performance. Our record quarterly results demonstrate the progress we've made in strengthening our integrated business model.

In the first quarter, we delivered net sales growth of 27% to a record $350 million with a 22% comp increase and earnings per share growth of 74% to a record $0.54.

One year ago on our Q1 2014 earnings call, I stated that we expected to deliver increased profitability and shareholder returns as a result of our growth initiatives in the investments in our differentiators.

These transformational actions have strengthened our three competitive advantages of proprietary innovative products, exclusive distribution and ongoing customer relationships.

The impact of our strategy is evident in our trailing 12-month results, net sales of $1.23 billion, up 26% from the prior 12-month period; net operating profit of $120 million, up 47%; EBITDA of $171 million, up 45%; earnings per share of $1.49, up 54% and ROIC of 16.5% on a 14% higher average invested capital base.

Today I'll provide an update on our growth initiative and capital investment priorities followed by an updated financial outlook for the balance of the year. We continued to advance our growth drivers, effective marketing, proprietary innovative products and a differentiated retail experience.

Starting with marketing, in the first quarter of this year, we introduced the second phase of our Know Better Sleep campaign. Our rigorous testing is resulting in steady and progressive performance as we continuously evolve our creative to increase consumer demand.

In the quarter, we increased media spending by 17% which helped generate 27% sales growth in 100 basis points of media leverage. This is our fifth consecutive quarter of media ROI improvement with television and digital continuing to deliver the highest returns.

Consumers are also responding strongly to our second growth initiative; proprietary, innovative products. Our vertical business model enables us to prioritize benefits that will improve sleep experiences. Innovations like Sleep IQ technology and our FlexFit series with Partner Snore technology are great examples of meaningful consumer benefits.

These innovations are complementary to the Sleep Number bed which has received numerous awards over the past year from a leading consumer magazine, including the best bed for couples, best back support and best buy. We expect our advertising of these innovations will continue to drive consumer demand and related mattress unit growth.

Traffic increases were the strongest during the February Ultimate Sleep Number event which is also where we had significant weather pressure in the prior year. Company-owned mattress units increased 10% in the quarter, slightly better than our internal expectations.

The combination of our profitable core technology and adjacent relevant innovations resulted in a 16% increase in our average revenue per mattress unit. Supported by advancements in our relationship-based selling process, customers are selecting more premium core beds. Therefore, our bed mix has also been accretive to our gross profit rate.

The third driver of sustainable profitable growth is our exclusive distribution and differentiated store experience. In the quarter, average sales per store grew 14% over the prior year to a record $2.4 million per store for the trailing 12 months. We continue to make strong progress toward our longer-term goal of averaging over $3 million per store.

We now have 85% of our store portfolio in optimized real estate locations with our experiential store design. In addition, our disciplined net new store growth contributed 6 points of growth in the quarter as planned. We expect to continue growing our store base 5% to 7% per year.

The leverage delivered in the quarter is an outcome of retail leading organic growth, increasingly profitable stores and our advantage business model. Operating income grew 69% to $44 million or 12.5% of net sales which was 320 basis points over prior year. Adjusted EBITDA grew 66% to $57.4 million.

Moving to our capital investment priorities, we generated $154 million in cash from operations in the last 12 months, enabling continued capital investments of $78 million over that same period to further advance our innovation strategy which is our number one priority for cash.

We're committed to at least a mid-teen return on invested capital which exceeds our 10% weighted average cost of capital and direct peer results. Our second cash priority is to retain sufficient liquidity to fund operating initiatives and business investments while considering near-term risk.

For 2015, we have targeted an average minimum of $100 million of cash and securities, net of customer deposits as the appropriate liquidity in light of our ERP implementation and macroeconomic conditions.

As the sleep innovation leader, we will continue to accelerate R&D and digital investments while advancing distribution and infrastructure investments. Our third capital deployment priority is returning cash to shareholders through share repurchases which we expect to be accretive to EPS in our long-term guidance.

In the quarter, we doubled share repurchases compared to the prior year, returning $20 million to shareholders. Over the past 12 months, we have returned $55 million to shareholders through share repurchases at an average price of $24.59.

Consistent with our prior communication, we will continue our repurchase program along with opportunistic repurchasing. Now I'll provide our outlook for the balance of the year. We expect top-line growth to normalize towards high single digits for the remainder of the year as we annualize 2014 innovation introductions.

We can continue to expect flat revenue in the fourth quarter as we lapped the 53rd week in 2014 and implement our new ERP platform. Although it is still early in the year with earnings per share higher than internal expectations for the first quarter, we have increased our 2015 full-year guidance by $0.05 to $1.35.

To support a strategically advantaged position of innovation leadership, we're continuing to evolve our growth initiative and enablers in a disciplined and integrated manner across the organization. We expect these advancements will keep pace with the changing consumer.

In the back half of the year, we plan to introduce our new SleepIQ Kids bed, improve our customers' digital experience and launch our 10th aggressive growth market. This continued progress is in addition to our transformational ERP implementation early in Q4. Our ERP preparation testing and budget are all on track.

The work is rigorous and because of the company-wide impact, the entire organization is engaged in the planning and implementation. To summarize, our strategy is delivering superior returns and building momentum. We're on track with the execution of our initiatives and exceeding performance expectations.

David will now share additional financial highlights from the quarter..

Thank you, Shelly. Good afternoon. Our initiatives continue to drive results with record net sales in the first quarter of $350 million, up 27% over the prior year. Our focus on sustainable, profitable growth resulted in improvements across our sales metrics in the first quarter.

Comp sales grew 22%, including strong performance by our repositioned stores, while new stores added 6% of our growth. ARU of $3,923 was 16% higher than the prior year on continued high mix of our FlexFit adjustable bases. company-controlled mattress units grew 10% on improved traffic, reflecting the effectiveness of our marketing efforts.

And average sales per comparable store on a trailing 12-month basis grew 14% to a record $2.4 million, with 20% of our stores now exceeding our $3-million target, up from 11% one year ago. The results of our initiatives are driving demand, while we also deliver operational efficiencies and leverage our infrastructure.

Highlights for the first quarter include gross profit grew 26% to $216 million or 61.7% of net sales. As expected, gross margin was 30 basis points lower than the prior year. We benefited from supply chain efficiencies that partially offset rate impact from a higher mix of our new FlexFit adjustable bases.

We have built modest gains -- modest gross margin rate improvement into our guidance for the year. As we have discussed, meaningful efficiency opportunities are expected following the installation of additional logistics modules in 2016 and are built into our 2019 EPS target of $2.75.

We levered operating expenses 350 basis points, while increasing media spending 17%, doubling R&D to $3.4 million to support our innovation pipeline and increasing G&A expenses as planned.

You will recall our operating expenses in the first quarter last year included $6 million of new product launch costs and G&A benefited from $1.2 million in equity compensation forfeitures.

The year-over-year G&A increase was largely driven by systems infrastructure and depreciation, though performance-based incentive compensation costs, legal and proxy costs and ERP launch costs each added roughly $1 million or $0.01 for the quarter. Operating profit grew 69% to $44 million or 12.5% of net sales, versus 9.3% last year.

The 24% incremental operating profit drop-through rate reflects the outcome of our initiatives and integrated business model. As previously discussed, drop-through rates for the balance of the year will be impacted by the remaining $10 million of planned ERP launch costs in comparison to the extra week in 2014.

Earnings per diluted share of $0.54 grew 74% over the prior year, including the benefit from a 3% reduction in share count. Our growth enablers are as important to our strategy as the growth drivers. The top priority in 2015 is our new ERP platform.

Our legacy systems were built 20 years ago to support a $100-million direct marketing ship-only business. As consumer expectations rapidly change, it is clear that we need an increased level of agility to enable innovation across our vertical structure. We must reduce manual processes.

The new ERP platform is designed to be fully integrated and aligned with our business as a manufacturer, retailer and home delivery provider while building flexibility for future opportunities.

Delivering this level of integration, flexibility and speed is necessary to meet customers' expectations and improve operationally as we leverage our business model. When we go live in Q4, we will have invested approximately $80 million of capital in this platform which is critical to our future growth.

We benchmarked at three intervals; the design scope, build-out cost and implementation timeline. These evaluations validated our plans while providing valuable inputs and confidence during the design and build phases. We're now well into our testing phase and are confident in a successful Q4 2015 launch.

The new ERP is also critical to deliver process efficiencies, gross margin rate improvements and fixed cost leverage. These improvements are built into our long-term guidance to more than double EPS to $2.75 in 2019. Now for comments on the balance sheet, inventories at quarter end of $56 million were in-line with plans.

Cash and securities net of customer prepayments totaled $136 million. We generated $49 million in cash from operations in the first quarter. We invested $18 million in capital expenditures and returned $20 million of cash to shareholders through share repurchases.

We're committed to disciplined deployment of capital against priorities we believe will generate the highest returns. In 2011, we began to rebuild our invested capital base in the areas most important to our future growth and profits; the store portfolio, innovation and technology.

The investments are driving results as demonstrated by the 16.5% trailing 12-month ROIC on average invested capital 14% higher than a year ago.

Now I'll take a minute to cover how we think about the balance of the year in regards to our updated 2015 guidance or $1.35 in diluted earnings per share which implies an adjusted full-year growth of 24%, excluding the extra week of 2014 and the 2015 launch costs. We continue to expect that Q1 provided the largest year-over-year growth opportunity.

Annual sales growth and operational improvements in Q1 drove greater leverage than expected. As a result, we're increasing our full-year guidance by the $0.05 of additional EPS generated in Q1. The second quarter is the seasonally low point for sales and profits.

In addition, this fiscal year includes a shift of approximately $3 million or $0.035 of media funding into Q2. Second-half growth will be impacted by more challenging comparisons, including the extra week of 2014. Second-half profitability will also be impacted by about 80% of the approximately $11 million or $0.13 of full-year ERP launch costs.

As Shelly discussed and as originally planned for the year, we expect to launch our SleepIQ Kids bed, the 10th aggressive growth market and digital initiatives in the second half with combined incremental costs of approximately $8 million or $0.10 per share.

Capital projects in 2015 are planned to total approximately $80 million, including approximately 40% on our ERP project, one-third to continue advancing our retail stores in digital and the balance on other infrastructure projects. Depreciation and amortization in 2015 will be approximately $48 million.

About $5 million of the increase from 2014 relates to our IT investments, reported in G&A expenses and $3 million related to the stores reported in sales and marketing expenses. Finally, we expect the U.S. economy will continue to grow slowly. Our initiatives are on track and we continue to have significant opportunities ahead.

With that, I'll turn the call back to Shelly for closing comments..

Thank you, David. We expect our consumer-driven innovation strategy and related investments to drive sustainable, profitable growth and superior returns for our shareholders in 2015 and beyond. The power of our transformational work is evident in our 27% sales growth and 74% increase in earnings per share in the quarter.

We're on track with our plans to more than double our 2014 EPS over the next five years to $2.75 through increased consumer demand, operating leverage and efficient capital deployment. Thank you to our Sleep Number team for your dedication to delivering our goals and improving lives.

That concludes our prepared remarks and now we would be happy to respond to your questions.

Lisa, would you please open the line?.

[Operator Instructions]. And our first question comes from Peter Keith with Piper Jaffray. Thank you. Your line is open..

Actually, this is Jon Berg on for Peter tonight. Congratulations on a nice quarter. I was just looking at your ARU growth over the last 12 months; it's obviously, been really impressive.

But as you lap now your FlexFit and Partner Snore products, I think part way through Q2, how are you looking at ARU growth in the back half? Do you still think it can be up on a year-on-year basis?.

Jon, we continue to expect both ARU and unit growth; they are both very important to the business. As we've talked about, the ARU is heavily associated with both our innovations and also our in-store experience. I think this is one of those great examples of our growth initiatives are across the enterprise and they're integrated.

So it's those innovations and how we bring them forth in the store. One of the drivers right now of ARU growth is a change in our selling process that we started in the fourth quarter of last year. We do expect to continue to see ARU growth with that change as well.

It's really a change of how we proceed with the selling process; it's resulting in the customer selecting higher up the line and selecting a more expensive bed and, therefore, it's driving mix and profit..

I guess my follow-up question is just on your guidance. I appreciate all the detail you guys provided and I understand the media shift into Q2 will pressure EPS growth a little bit.

But just looking at the full year, I don't know what your internal expectation was on the quarter, but it looks like you beat consensus by $0.12 or $0.13 and guidance was raised by about $0.05.

So is that something -- is the result of something you're seeing so far in April here or is it just more conservatism than anything else?.

It was just two months ago on our Q4 call that we provide guidance for the full year of $1.30 and we stated that Q1 was going to be a very strong quarter and it was. At the same time, it did exceed our expectations and that's why we added $0.05 to our full-year guidance so early in the year.

We're expecting top line to normalize towards high single digits for the balance of the year. Of course, the comparisons get tougher as we come up against our introductions. But more importantly, the 53rd week and ERP which really puts us in that flattish position for Q4..

Thank you. Our next question comes from Budd Bugatch with Raymond James..

This is Bobby filling in for Budd. Thank you for taking my questions and congratulations on an excellent quarter. Dave, you mentioned a little bit of gross margin leverage on a full-year basis.

Do you expect that to take place over each of the next three quarters or is that more backend loaded?.

We actually saw some of the improvement in the current quarter, but as expected, with the anniversarying of the FlexFit launch last year we should see some of that margin improvement actually flow through to the rate the balance of the year each quarter..

All right, perfect. That answers my question.

Maybe can you talk a little bit about the mall versus off mall? What does that breakout look like now and then maybe a little bit of detail on how the performance is trending between the two of them?.

I'll take the first part of that and then Shelly can follow up on the performance. As you know, we had 40% were non-mall at the end of last year and now at the end of this quarter it's 41%. We're on track with our plans to have about 45% by the end of this year in non-mall locations..

We continue to be pleased with both mall and non-mall performance. There are some advantages, of course, to non-mall and we have been fairly aggressive these last few years as leases have expired in mall in more D-type locations that many of our stores were in with a smaller footprint in our old store design.

We've taken that opportunity to assess each local market and make the best decisions to locate the store so that we can serve our targeted customer in as efficient and powerful way as we possibly can. Therefore, it has led to the decision to move many of our mall stores to non-mall and we just introduced our first non-mall in December of 2010.

So when you think about the investments we've been making in the repositions of the portfolio to non-mall that by the end of this year, will be up 45%. In fact, we'll have improved real estate and be in our new store design in about 85% of our portfolio, that's improving 70% of the portfolio.

That's really important because it allows us with the new store design a little larger footprint. We're able to serve more customers and drive a higher average revenue per store and a much higher profit per store.

When we're hitting that average $3 million, we're seeing profits that equal over $1 million which is really where most mattress retailers have their average revenue per store.

We're excited about what this means and, certainly, it's the foundation for sustainable profitable growth and positions us so well for the consumer and how she wants to shop, whether that's on her mobile device or in one of our stores..

And then, Shelly, are you seeing the same type of trade-up behavior in the off-mall as on-mall? Or is the trade-up behavior into a more premium bed at a higher rate in the off-mall stores, given the size differential?.

At this point, any fluctuations are fairly small. Our selling process is quite consistent in how it delivers performance, so we're seeing a fair amount of consistency in both..

Thank you. Our next question comes from Brad Thomas with KeyBanc Capital Markets..

My first question on sales and marketing, if I could just ask a housekeeping question.

What did you quantify the shift from 1Q into 2Q, David? And then just as you're thinking about the full year, how are you thinking about sales and marketing expense?.

So the shift that I was talking about was really more Q3 into Q2 from Q3 into Q2 and that was about $3 million of media costs or about $0.035. In terms of thinking about total sales and marketing costs for the balance of the year--.

44%..

We had targeted I think 44% of net sales, directionally similar to last year..

So the shift is 3Q to Q2 it wasn't out of 1Q..

Correct..

Okay. So just following up on the sales and marketing spend in the first quarter. Obviously, this is a strong quarter for sales, but nonetheless this was one of the strongest quarters for leverage of sales and marketing that we've seen in a number of years.

Beyond the leverage phenomenon, is there something else going on that's helping you to get more efficient with your sales and marketing expense?.

This is the advancement of the initiative that we've been working on these last couple of years. And when you think about when we started investing in stores and the depreciation flows through in our sales and marketing line. And 2011 and 2012 and 2013 we were executing over 100 stores a year, depreciation continues to flow through.

And then with the increased sales, this is the powerful four-wall profitability in our stores as we continue to grow we're over $2.4 million average per store now and that continues to drive up the profits. Our comp stores are very profitable add to our portfolio..

I would just add to that, just keeping in mind, Brad, I'm not sure you guys all modeled the $6-million launch cost for our new products last year as being a little bit of a unique item for the quarter as well last year. Similar to what we're planning for the $8 million in the back half of this year..

And then just one last, if I could on financing, you all disclosed in your K the percentage of sales associated with the promotional financing; that's moved up over the last few years. I was wondering if you could just give us an update on how much more opportunity you think there is to fine tune the financing that you guys offer..

I think it's used as a tool in our selling process and we're glad to have a great partner in the financing side and have that available for our customers. But we've talked about, I think in the K, that it was around 40% of our total business is done through financing.

So that's about how often we disclose any details, Brad, about the financing percentage..

Brad, similar to many parts of our business, this is an area where we're always testing and learning. So as we approach each month, each quarter in media, in financing, in our promotions, there's always something we're continuing to advance because the consumer moves and the consumer continues to respond differently. This is a great example of that.

As we've increased our average revenue per mattress unit, financing and how we use financing has taken on a little different view. We continue to learn and advance. So of course, more to go..

Thank you. Our next question comes from Seth Basham with Wedbush..

My question is around unique growth, specifically comp unit growth implied to be around 5% this quarter, a little bit of a slowdown from last quarter, even steeper slowdown on a two-year stack basis. Trying to understand what's driving that dynamic.

Is it simply you switching customers up to more expensive beds and close rates are declining? Any color there would be helpful..

We think about unit growth, Seth, as a metric that is an outcome of the traffic we're driving. We had strong traffic again in the quarter, as I highlighted in my prepared remarks, particularly during the February Ultimate Sleep Number Event.

Once again we had a record level of unique visitors to our website which translates to traffic, but that's the correlation that we see. We often talk about the importance of increasing consumer demand and building awareness of this brand.

That's that source of our marketing action is really about reaching people, about the products and the innovations that we have connecting with them and bringing them in and that translates to unit growth.

I would say that comparison from fourth-quarter, we were coming off a couple of fourth quarters where we had, I would say more significant opportunity as well. But you're going to see, Seth, fluctuation quarter to quarter in units. Last year during the first quarter, we were up against the C-series closeout.

So based on different promotional action, that number will move. I think where to look for the steadiness is overall on an annual basis or looking at the unit CAGR and the ARU CAGR over multiple years..

As you think about the balance of the year from a comp perspective, would you expect units to be more to that comp sales growth or ARU?.

We expect growth from both ARU and unit growth for the balance of the year..

And the last question I had was just around SleepIQ Kids bed.

How do you quantify the prospects for that product launch?.

It's a new market adjacency, so we're paving the way and we will certainly provide you more color once we have launched. There are not great market analytics right now that show you exactly -- there is not a size of the market, because it's mostly focused on bedroom furniture versus mattresses.

But we do have some predictions in our forecast and what we have right now is our fully loaded with the expenses that we expect for the implementation and we're going to learn a lot about the sales..

Thank you. Our next question comes from Josh Borstein with Longbow Research..

Just first, you talked a little bit, Shelly, about some of weather impacts it sounded like in February.

But could you just talk to what kind of weather impacts you saw and any quantification you could give any impact for sales?.

My comments were for last year. So last year we had quite a bit of weather impact throughout the month of February, so that's where I highlighted it. We certainly had weather impact this year and you hear that from a lot of retailers, but not to the extent that we did last year..

On SleepIQ and the data-driven consumer, could you talk a little how that product has been performing? You've had it in the market now for a while, who the demographic is that's buying the product, who it's appealing to most and maybe what the attachment rates might be like?.

We're really pleased with our SleepIQ technology and just learning so much from the consumer what's important to her based on the technology and continue to advance our work in this area. So very happy with the performance exceeding our expectations.

We're certainly, seeing a younger, more affluent customer being attracted to the brand which correlates with SleepIQ. But we also see our customers of all age and demographics purchasing SleepIQ and interacting with it on an ongoing basis.

So we're very pleased with how this sets us up for the future and the combination of SleepIQ technology along with the ability to make adjustments to your bed..

Would attachments rates be similar to what you guys have been seeing with adjustable foundations?.

We do not disclose on specific attachment rates on any of our innovations..

Keep in mind that the revenue and most of the income is also deferred over the life of the product which we've got it estimated as five years. So as you're modeling, it's not really contributing that much to our sales..

And then just last, more qualitatively, Shelly, what aspects of the business right now provide you with the sort of optimism going forward? What aspects maybe continue to be most challenging for you?.

Well, the integration of the growth initiatives that we've been talking about, advancing the marketing, featuring the product innovations and our store performance, so they're all working very well. What is most challenging or brings the blood pressure up would be the ERP implementation and systems transformation.

That's big and those are the growth enablers behind the scenes that are so important to enabling the future growth of this business. So we're steady and everything is progressing a little better than expected on all the front end.

I have to say with our ERP, it's progressing really well and could not be more pleased with where we're at right now in the development and testing phases that we're in, in advance of the implementation. But it's a big implementation and of course, it's consuming a lot of resources and focus right now in the company.

We're working hard to have that flow through extremely gracefully as we move forward and look forward to getting to the other side and what it's going to mean to the business..

Thank you. Our next question comes from Jessica Mace with Nomura..

This is Karyn O'Brien filling in for Jessica.

Can you just talk about where the quarter most exceeded your expectations? And then additionally, have your expectations for the last three quarters of the year remained the same?.

What was the latter part of your question?.

Have your expectations for the last three quarters of the year remained the same -- given how well this quarter went?.

First of all, I would say that it was just good balance across the board in advancements. Probably the one that came forth a little faster than we had expected would be some of the operational improvements which was a positive impact on our gross margin, that we got a little bit more out of those a little faster than we had anticipated.

And we carried that through, adding $0.05 to our full-year guidance. So we're still thinking about the rest of the year just as we were two months ago and that's why we added the $0.05 that at this time.

Even though it's really early in the year, we did see it appropriate to go ahead and raise it based on our confidence with how things are progressing..

Thank you. Our next question comes from John Baugh with Stifel..

Thank you and terrific unit numbers and thank you for the color on the return on invested capital. I had a few questions, quickly.

One, could you comment on growth stores versus opening versus closing sort of plan, maybe this year and next year? And 85% comp and I assume the 15% left to go, there are lease reasons why you can't make the changes faster. Thank you..

Yes, that's right. We're well on track. We're planning, as you know our 5% to 7% growth in our store count is the guidance that we expect going forward. We had 10 store actions in the quarter. But as you saw, there is no net change in the total store count in the quarter.

However, we did have improvements in our portfolio, as we talked about, getting to the 85% on brand, as we call it. But we're very happy with that forecast and we think that that's appropriate for the balance of the business and delivering our sustainable profitable growth..

The question is though, roughly how many maybe will you have closed to building that out -- the 6% growth number?.

So about, I don't know, 15% to 20% of our total portfolio come up for renewal each year, John. And we do an assessment, as Shelly was talking about, on a store-by-store basis and whether that's the right location or not. So we don't really talk about the -- but the total number of store actions has been declining each year.

And now with the portfolio where it is, you can expect that the number of total store actions will continue to decline..

And the R&D spend was up a lot.

I guess two questions, will that continue at that rate? And then how do we think about that in terms of new initiatives in the pipeline? Or put another way, is that spending on stuff for 2016 and 2017 or how do we think about that?.

So for the balance of the year, in terms of our spend, you can use the rate, the dollars in the quarter for the balance of the year. You can also see it as a good indication of what we have in the pipeline..

Okay. And then anyway, a lot of pieces with contribution margin and I understand and appreciate marketing expense, timing and ERP implementation and whatnot. It was a couple years ago I think you pulled back to the lower than 20% number, a 15% contribution margin. Now you have just put up 24% I think it was.

Anyway we think about that outside of all these timing influences, Shelly? Thank you..

To look at it on a one quarter basis, as I said in my prepared remarks, isn't really indicative, especially with all of the initiatives that we have on our plate. But if you look at the trailing 12-month flow-through rate, it was 15%.

We have some -- with the ERP launch costs built-in the back half of this year, especially, 80% of the launch cost is in the back half. The drop-through rate is going to be affected in the current year. But directionally, in getting to our $2.75 long-term EPS in 2019, directionally, that's where you should expect it to contribute..

So I'm confused.

So to get to the $2.75, we expect a contribution margin roughly of what?.

Similar to what we saw in the trailing 12 months, that mid-teen level..

Okay. And then my last question is on the FlexFit. Once you anniversary that, my sense is you're not done. I was just curious whether you had any sense of where you might be able to drive adjustables through time? That's my last question. Thank you..

Yes, John. On adjustable, we do continue to see our consumers respond to the combination of our Partner Snore technology and other features, those of this FlexFit series that we're offering and absolutely continue to advance it.

As I stated earlier, we have tremendous data and insight, especially with SleepIQ, it definitely informing how we think about prioritization of other sleep innovations. Certainly, our ERP, we definitely have to allow for the organization to execute the ERP here in the back half of the year.

But at the same time, we're launching SleepIQ Kids and pretty excited about the introduction and the connectivity that SleepIQ brings for the full family. So it's taking -- adding sensor technology to adjustability and then the full family connectivity..

Our next question comes from Keith Hughes with SunTrust..

A couple quick questions. Number one, you had referred to some of the leverage you had in the sales and marketing expense earlier. [Indiscernible] I'm just wondering if we could get some more detail on some of the gains there outside of the advertising. It's just so pronounced in the numbers. It's a pretty interesting topic.

Is there any more you can give us there?.

Well, I want to make sure that you heard David's comment earlier that a year ago in Q1, we had $6 million of additional expense in sales and marketing tied to the launch of the FlexFit series. And some of the other changes we're rolling out at that time. So that's a big one-timer here in the quarter.

And I think there's $1 million in the second quarter from prior year as well in selling expenses and then the media leverage year over year. Of course, selling leverage associated with our stores. We had a 14% growth in our average revenue per store and then you saw the comp increase of 22%.

This is the power of that exclusive distribution model where we're driving up average sales per store and getting the flow-through for the four-wall profitability.

This is why we set out with this initiative back in 2009, about more than doubling our average revenue per store because of being able to leverage the fixed cost expense, the fixed cost structure that's associated with that store. When you're just adding all that top line on, it's powerful, it's building for the future..

Final question, just to confirm, you had said the fourth quarter flat sales, you're talking about overall sales there.

Is that correct? Given the soft comparison with the extra week?.

Yes. In the 53rd week, right, in the fourth quarter..

Thank you. At this time, there are no further questions. I would like to turn it back over to the speakers for closing remarks..

Thank you, again, for joining us today. We look forward to discussing our second quarter 2015 performance with you next quarter. Sleep well and dream big..

Thank you. That does conclude today's conference. Thank you for your participation and you may now disconnect..