Dave Schwantes - Senior Director, Investor Relations Shelly Ibach - President and Chief Executive Officer David Callen - Senior Vice President and Chief Financial Officer.

Budd Bugatch - Raymond James & Associates, Inc. Bradley Thomas - KeyBanc Capital Markets Peter Keith - Piper Jaffray John Baugh - Stifel Nicolaus Josh Borstein - Longbow Research Jessica Schoen Mace - Nomura Securities Seth Basham - Wedbush Morgan Keith Hughes - SunTrust Robinson Humphrey Curtis Nagle - Bank of America Merrill Lynch.

Welcome to Select Comfort’s Second Quarter 2015 Earnings Conference Call. All lines have been placed in a listen-only mode until the question-and-answer session. Today’s call is being recorded. If anyone has any objections, you may disconnect at this time. 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’s second 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 CEO; 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 include certain forward-looking statements.

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

record average sales per comp store of $2.5 million for the trailing 12 months; gross profit rate leverage of 120 basis points; and net operating profit leverage of 60 basis points versus prior year. Our third EPS driver, deploying capital efficiently also favorably contributed to our second quarter and first-half return results.

Return on invested capital of 16.4% for the trailing 12 months remains above our 10% average cost of capital, and we accelerated the rate of share repurchases in the second quarter returning $30 million to shareholders compared to $10 million in the second quarter of last year.

Our cash and deployment actions in the first-half of the year highlight advancements of our strategy. We generated $45 million in cash from operations. We invested $39 million in capital as planned with the strength of our balance sheet and confidence in our results and plans, we returned $50 million to shareholders through share repurchases.

After funding these priorities, we ended this seasonally low cash quarter with $92 million in cash and securities less customer deposits. Our liquidity remains appropriately balanced to operate the business and fund opportunities in the back-half. Let’s transition to the third quarter.

We’ve executed several technology initiatives this month and expect them to have a positive impact on our customer’s experience. This week, we are launching our SleepIQ Kids bed nationwide. Excitement has been building among consumers since the January announcement of the only bed designed to adjust and grow with your child.

It is packed with value-added technology features and benefits. This combination of Sleep Number adjustability, smart technology, and connectivity is game changing for families. The bed is fully controlled via an app. There is no remote.

This smart bed for smart kids connects to the SleepIQ technology platform for a universal app and web experience, which provides users with knowledge on the entire family’s sleep. Consumers’ response in testing was strong. We expect SleepIQ kids to be additive to our core revenue similar to SleepIQ technology.

We anticipate and have plan for demand to this new category to build over time. In addition, we implemented important advancements to SleepIQ technology with our 2.0 app release on July 20.

This is a great example of our ability to continue to learn what is important to our customers, prioritize features, and deliver ongoing benefits via our software platform.

The benefits of this release include faster access to individual sleep information and simplified app control of the Sleep Number bed, and improved activity tracking and tips to better understand how one’s daily behaviors like diet and exercise impacts sleep. With SleepIQ technology, our customers interact with our brand every day.

Last week, we launched our newly designed website. We have now completed the site transformation that we initiated last year with the implementation of our new web platform. We are well-positioned to keep pace with the changing consumer through a steady evolution of an integrated physical and digital experience.

The new design is responsive, improving navigation and readability across consumer devices. This is especially important given that over 50% of our website traffic is through mobile devices. Our new website design aligns with the modern and dynamic representation of our brand in our stores and marketing materials.

The seamless brand execution is important for simplicity and consistency of our customers’ experience. With these changes, we anticipate converting a greater percentage of our website traffic to store traffic, as well as increased online transactions.

Looking ahead to the remainder of the year, our top priority is the implementation of our new ERP system in the fourth quarter. We are on track with budget and testing in advance of go-live. We remain appropriately cautious due to the risk associated with any ERP implementation and have incorporated transition impact into the fourth quarter.

Over the next several years, we expected ERP platform to deliver efficiencies, improved margins, and fixed cost leverage. The enterprise-wide platform is a vital part of our plans to optimize our business model to deliver shareholder returns. For 2015, we continue to expect our strategy in business model to deliver $1.35 earnings per share.

This assumes above market performance with low double-digit top line growth and significant advancement of our growth initiatives. In summary, this is an exciting time for our company. Consumers’ response and acceptance of our transformational initiatives is confirming our actions and future plans.

I want to thank our mission-based team for your moxie and dedication to our customers experience and execution excellence. David will now provide additional details about the quarter and the remainder of the year..

Thanks, Shelly. Good afternoon. We’re using multiple levers of our advantage business model to deliver superior shareholder value. While there are many moving parts when comparing 2014 and 2015, our business results are shaping up the way we expected and consistent with how we have guided for the year.

After providing details on the second quarter, I’ll provide more color on expectations for the balance of the year. Net sales of $275 million in Q2 were up 17% over the prior year. Comp growth in Q2 was 13% and net new stores added 5% to our growth, reflecting our advantage sales process, sleep innovations, and retail expansion initiatives.

The diligence employed in our retail real estate strategy continued to deliver results across our existing and new stores. Average revenue per mattress unit or ARU in Q2 was $4,081, or 10% higher than the prior year, driven by changes to our sales process in Q4 last year that continues to drive favorable product mix.

Company-controlled mattress units were up 7% in the quarter, reflecting the effectiveness of our marketing initiatives. In trailing 12-month, average sales per comparable store grew 16% to a record $2.5 million with 22% of stores now exceeding $3 million, up from 12% one-year ago.

Going average sales per store continues to be an important platform for sustainable profitable growth. We continue to leverage our business model while funding priority initiatives.

Highlights for the quarter include, gross profit grew 20% in Q2 to $171 million, or 61.9% of net sales, up a 120 basis points versus the prior year due primarily to favorable product mix, lower discounts, and supply chain efficiencies.

We continue to expect 50 basis points to 100 basis points of supply chain efficiencies to be realized beginning in the second-half of 2016, after we implement additional logistics capabilities during the first-half of 2016. These improvements are contemplated in our long-range guidance.

As planned, operating expenses of $154 million deleveraged 70 basis points in the second quarter. Notable planned expense increases included $3 million of media costs in support of the July 4th holiday period, a doubling of our R&D spending versus the prior year to $3.4 million, and $1.2 million of ERP launch cost.

Operating profit grew 31% to $16.6 million on 17% higher net sales, Q2 earnings per diluted share of $0.21, or 31% higher than the prior year. At the end of the quarter, cash and securities net of customer prepayments totaled $92 million.

As planned, inventories of $68 million at quarter end reflected the July 4th calendar shift and preparation ahead of our ERP launch. We have been testing into an inventory model that is a hybrid of our high turn, make-to-order business with tactical make-to-stock inventory to support demand.

We see this as a high-value investment in the business that is funded in part by other working capital management efforts. While early, this approach has begun to improve customer experience. Turning now to 2015 guidance, our back-half expectations are consistent with prior guidance communication.

As a reminder, several noteworthy items affect the year-over-year comparison in the back-half. The fourth quarter of 2014 included $25 million of net sales, or $0.06 of EPS for the extra week and $0.04 for a favorable legal settlement.

2015’s second-half earnings will be impacted by ERP launch costs of approximately $9 million to $10 million pre-tax, or $0.11 to $0.12, with two-thirds falling in Q3.

The back-half includes launches of the SleepIQ Kids Bed, the 10th aggressive growth market, and digital initiatives resulting in approximately $8 million of incremental marketing costs, or $0.10 per share, with about 60% impacting Q3.

Capital projects in 2015 are planned to total approximately $80 million to $85 million, including approximately 40% on our ERP project, a third to continue advancing our retail stores and 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, of which 40% will start in Q4 after our ERP launch. The remaining $3 million of year-over-year increase relates to stores and is reported in sales and marketing expenses.

Our performance and initiatives are on track as we invest for sustainable profitable growth. We remain committed long-term to deliver high single-digit top line growth and a 17% EPS CAGR to $2.75 in 2019 with at least mid-teen ROIC. We look forward to providing our next update on our initiatives and our third quarter results in early November.

We are now happy to take questions. Vince, please open the line..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mr. Budd Bugatch from Raymond James. Sir, your line is now open..

Good afternoon, Shelly. Good afternoon, Dave and David. Couple of questions, if I could. I want to make sure I do understand some of the things in the outlook.

First, in new stores, the 6% increase in net new stores for 2015, is that in units or dollars? And can you tell us how many stores you think you will open in third and fourth quarter?.

Hi, Budd, thanks for the question. We – the 6% growth is in total stores outstanding, so it’s in units, and we don’t generally provide a quarterly rollout plan. But you can break it down essentially a little heavier in Q4 than in Q3..

That means you’ve got to get – sorry, Shelly, go ahead..

The net new store growth is 5%..

The net new store growth I thought it was 6% no?.

6% for the year..

And 5% for the third and fourth quarter or what was that number? I’m sorry..

That was the comp growth of 13%, and net new store additions..

Yes, you’re talking about impact on sales growth..

…5%, right, that’s where I….

Oh, I understand that..

Yes..

No, I understood, I understood that.

But that gets you close to 490 stores at the end of the year, is that right?.

Exactly..

Okay, all right.

Secondly, on the ERP I want to make sure, you said two-thirds of the – is the balance $11 million to $12 million, or is it the $11 million to $12 million for the year?.

It’s $11 million to $12 million for the year, the balance is $9 million to $10 million..

That’s right. Okay, that’s – that comports with what I’ve got.

Talk to me a little bit, Shelly, if you would about what you do expect for SleepIQ Kids? Is it going to be meaningful sales this year, and is it in your plan for meaningful sales this year?.

Yes. It is – meaningful sales are not in our plan for this year. As I stated, this is a new market. We’re very excited about the emotional connection from parents to-date since we’ve announced the bed. And what we do know for sizing the market is that at any point in the U.S. approximately 2.5 million parents are shopping for a mattress for their child..

Okay. And do you have any advertising plan for it for the year? It just started to rollout, right? It’s in some of the stores now. And can you give us a feel on how many stores it’s been? I know it is available now on the web and in all stores, but….

Yes, and we will have all stores implemented by the end of the week. So we’re launching nationally this week, and we do have a strong digital presence. And our advertising is beginning this week as well.

As David mentioned, we have an incremental $8 million in media that is associated with the SleepIQ Kids bed launch and also the aggressive growth market..

Will bring your media spend for the year to what kind of percentage then do you think?.

We still expect a full year of 44% for sales and marketing overall. And keep in mind, of course, in the back-half of the year, we have the 53rd week and then the $8 million incremental..

[indiscernible]..

Okay.

And finally for me, did I notice some price adjustments upward on some of the beds, the c beds, or are we seeing some pricing?.

We made a change. We had three beds in the c series historically. We closed out of the c3. We raised the price of the c2 by $100, and we lowered the price of the c4 by $100. So we now have two beds in the c series consistent with our other series..

Thanks, okay. Thank you very much. Good luck on the balance of the quarter and the year..

Great. Thank you..

Thanks, Budd..

Thank you. Our next question comes from Peter Keith from Piper Jaffray. Your line is now open..

Hello, Peter. Are you there? Vince, maybe you can check to see if Peter’s line is open..

Peter, your line is now open. You may proceed. Okay. Let’s jump into the next question. Next question comes from Mr. Brad Thomas of KeyBanc Capital Markets. Your line is now open..

Yes. Hi, good afternoon, everyone..

Hi, Brad..

Hey, Brad..

A couple of questions, if I may. First, just with respect to the timing of the quarter, you obviously called out some earlier expenses around July 4 than what you’d had last year.

Was there any change in revenue as a result of the end date for the quarter?.

You can really see it in backlog and media. That’s it..

Yes, Peter, our lead time is about two week spread, so with that event coming right at the end of the quarter, of course the media hit in the period but the revenue didn’t..

Got you, appreciate the clarification there. And then, as we think about this upcoming quarter here, I believe last year you called out Labor Day as a time last year that you have had some logistical challenges that weighed on gross margin.

What are you anticipating as we anniversary that in terms of making sure some of those issues don’t recur again? And what kind of impact on the P&L might we see?.

Glad you asked, Brad. We have made some very good progress with improvements in our supply chain, and it actually started to have some operational efficiencies that flowed through in our gross margin rate in the quarter, in the second quarter. It’s also part of the inventory increase that we talked about.

About a third of the year-to-date inventory increase is related to some testing into a hybrid model that’s a make-to-stock model, and it’s going to give us some better customer experience and prepare us as we go into Q3 and Labor Day.

I would expect our inventory situation at the end of Q3 to be about $15 million to $20 million higher than where we are now, and with that inventory kind of coming back to the Q2 level by the end of the year..

Great. And then just lastly, it sounds like the investments you’re making in supply chain really have an opportunity to pay big dividends as we move into the second-half of 2016. I appreciate all the detail on costs for the upcoming quarters here.

As we think out to 2016, and earnings for that year, is that the kind of year where it may be a more normalized earnings growth where you have expenses in the first-half and then some benefits in the second-half? Do you think of 2016 as being an investment year or, again, I know it is a ways out, or is it the kind of year where maybe it’s a catch-up year given some of the expenses that you have right now? Any color or quantification would be helpful..

Yes. Our tradition is to provide 2016 guidance in a complete way after our Q4 results. But I will tell you that what we have said before is that we still have some additional ERP modules that we are rolling out in the first-half of 2016. And so the launch cost associated with those is about a third of our launch cost in 2015.

So the year-over-year change from that perspective is a decline in spend. But there is the depreciation aspect that’s flowing in that I highlighted as well in my comments related to the ERP launch this year that will be in place for the full year of 2016. So you should consider that in your modeling. But….

Great. Thank you all..

Yes, Brad, I just – again, we are committed to a high single-digit top line growth on long-term and that $2.75 target in 2019, that is really – all of our initiatives are aimed toward getting us there..

Great. Thank you so much, David..

Thank you. We now have Mr. Peter Keith from Piper Jaffray. Your line is now open..

Hi, thanks.

Can you hear me now?.

Hi, Peter..

Okay, great. Thanks. Good job on the quarter. I wanted to just take a second to look at the outlook for the back-half of the year. So the brand obviously has a lot of momentum right now. You are seeing some very nice growth in your ARU.

Although it’s not explicit, could you give us a sense on your comp units and how you are thinking about that trend in the back-half of the year? Is that something on a comp basis that you would expect mattress units to be up in 2H?.

Yes.

For overall, the sales expectations for the back-half of the year, we continue to be very pleased with our initiatives and how they are delivering above-market performance; the impact that marketing is having on traffic and units with 7% unit growth here in the quarter and how that’s been translating these last number of quarters; and also combined with the innovation driving the ARU growth in 10% in this quarter.

As we look ahead to the back-half, and the growth that we expect there, one of the guides I look at for the overall top line is the two-year right now and we expect similar comps of 22% in the back-half similar to the front-half. From an ARU and unit, we do expect growth from both in the back-half as we have talked about.

We also recognize that, we have the 53rd week in the fourth quarter, which will have an impact in the prior year. And that will have an impact on this year and then also with the ERP implementation as you know, units stress the system. And we will have a bit of initiative around ARU growth during that implementation time. So keep that in mind.

I think importantly, when we look at driving both unit performance and ARU, we look at the full-year and have had pretty consistent growth in both over multiple years now. And you will see quarterly fluctuations.

That doesn’t mean it’s a trend line, so fourth quarter will have that 53rd week impact from the prior year, the ERP, but our innovation pipeline certainly has both unit drivers and ARU drivers..

Okay. That’s helpful. So….

Hey, Peter, I want to just make sure that everyone understood. In our press release we called out that we’re expecting mid-to-high single-digit growth in the back-half. That’s on an adjusted basis excluding comparison to the 53rd week from the prior year, just want to make sure that that was clear..

Okay. And just a follow-up on that, could you just dig into the dynamic around the ERP implementation. I think you said it might pressure units, but you’ve got some initiatives around ARU.

Could you help us understand what those dynamics are?.

Well, as you go through an ERP implementation of this size, as you can imagine each unit is going to add stress to the system. So we’re not going to be executing significant initiatives during that transition that is focused on units. Obviously, units are important as part of our traffic and how we execute on an ongoing basis..

Okay, that makes sense. And then, a follow-up on the SleepIQ Kids, I think you said that you would expect the revenue to be additive similar to the SleepIQ.

Does that mean that you’re going to use the same type of deferred revenue schedule that you have for the regular SleepIQ?.

So, the SleepIQ Kids platform includes the technology along with the bed included in the price of the bed. So, a portion of the total price will be deferred. We are thinking right now about a directionally 25% to 35%..

And then the reminder just flows through current quarter?.

Exactly, yeah..

Okay. All right. Thanks a lot for all the feedback, I appreciate it..

You bet. Thank you..

Thanks, Peter..

Thank you. Our next question comes from John Baugh from Stifel. Your line is now open..

Thank you and congrats on a good quarter. A couple things, just, Dave, you were trying to clarify things there with the comment about the short week in the second-half.

So, could you state one more time that you’re guiding mid-to-high single-digits on the – I guess, maybe 26 week versus 27?.

So, John, your – the prior year had an extra week in it, which we disclosed as being about $25 million worth of sales. If you exclude that from the prior year, we’re guiding the back-half to be up mid-to-high single-digits on an adjusted basis..

Okay. Thank you for that clarity. And then Shelly there was a reference. I think you made some 48% unique visitors or something. I missed it. If you could, clarify that..

Yes. I talked about a 48% increase in unique visitors in the quarter. That’s our strongest indicator of traffic. It used to – historically for this business it was leads and unique visitors to our website in today’s time..

And, is that sort of higher than normal number? What’s the normal number? I’m not sure you’ve given that out every quarter?.

I started giving it out about a year ago after we brought our website in-house, which was last April. And the 48% increase is consistent with our prior-year performance. So full-year 2014 was right in that neighborhood..

Okay. And then, Dave, maybe you can walk through again just quickly. I think you mentioned $8 million of digital tense market. So I just kind of want to get all the numbers straight in line. We got $9 million to $10 million in the second-half from ERP. And then, we’ll have this $8 million.

And then, of course, we don’t get the extra week in the legal settlement. And then it gets parse it out again, Q3 versus Q4. Thank you..

I think you did a really good job on it, John. And I just – I’ll highlight that. Of the ERP launch cost, I’m expecting – hold on a second, let me just get back to this, 60% – or excuse me, two-thirds of it falling in Q3.

And related to the $8 million of media related to the SleepIQ Kids bed launch and the aggressive growth launch that will be about 60% impact in Q3. And the other item I called out was the incremental depreciation related to IT investments, $5 million incremental over the year – year-over-year. 40% of that will start in Q4..

Okay.

And so, when we think about $16 million [ph] and the increased D&A on the ERP that will more or less offset the reduced ERP implementation cost you project next year versus what you incurred this year?.

Yes, directionally, we’re talking about $11 million to $12 million of ERP launch cost this year. For the full-year, maybe a third of that is going to impact next year in the first-half. But, yes, we will have $6 million to $7 million of incremental depreciation related to this ERP in the first nine months of the year as we annualize that..

Okay. My last question is on the plan. It sounds like for ERP.

First of all, is there a specific date? And secondly, as we look at Labor Day, and I’m not asking you for your Labor Day plans per se, but I’m curious as to your plans in terms of not stressing the system but units, whether that you planned to approach Labor Day differently or is ERP is efficiently after that, that you’ll ship all those units before ERP is implemented.

Thank you..

Thanks, John. Yes, ERP is efficiently after Labor Day. And we haven’t given a specific date, but it is early October is what we’re planned for. And, I guess, that’s it. We’re excited about Labor Day and our plans and how our initiatives are delivering such a steady performance and how that will unfold going forward..

Yes, John. I think the only thing that’s changing is related to the inventory comment that I mentioned earlier, that we were going to be building some inventory in advance to the Labor Day event, making sure that we provide great experience for our customers..

Great. Thank you, good luck..

Thank you very much..

Thank you. Our next question comes from Josh Borstein from Longbow Research. Your line is now open..

Hi, good afternoon, everyone. Thanks for taking my questions and congrats on a nice quarter.

Just in terms of the consumer, Shelly, how would you characterize current trends? Are they more the same or do you think the consumers are in a better shape than maybe they were three or six months ago?.

Yeah. We again experienced steady performance throughout the quarter, that we’ve started seeing not only consistency with the consumer, but also consistency with our initiatives and in planning and results..

Okay. I notice – or I know that you mentioned you’re performing at above industry rates.

Do you think that the outperformance you’re seeing is just a cause of you guys doing better in the marketplace or do you think just the macro conditions are better such that people out there buying more mattresses?.

Yes. I would say both, Josh. For us, a key EPS driver is increasing demand for our brand and we’ve been taking share for some time now, and doing so and making great progress in that area. At the same time, the overall industry has delivered some steady growth and we’re also benefiting from that as well as our own initiatives..

Okay.

And coming up just for 3Q, could you remind us some of the puts and takes we should keep in mind when thinking about the same-store comp in terms of prior pricing actions, close-outs, product introductions from 3Q of last year?.

Yeah. For the most part, I would look at that two year trend that I mentioned earlier as you think about our front-half year and the back-half. That’s a good way to look at steadiness. And as we get to Q4, we have the 53rd week from 2014, we have the selling process initiatives that I talked about in October..

Okay. Thanks….

And, of course, ERP..

Right. And just the final one from me, Shelly, you had mentioned with SleepIQ Kids that anyone point in time there is about 2.5 million parents shopping for a mattress for their child.

Any sense in terms of segmentation, how many of those 2.5 million maybe looking for a premium kids bed that maybe more appropriate to SleepIQ Kids?.

Well, quite frankly this market simply hasn’t existed from a good bed or best, there’s very little out there. There’s good, and it’s really has been historically more about bedroom furniture than it has been a serious mattress that delivers on sleep benefits for children.

So, our testing, we’ve had this bed in the homes with many kids and they love it.

There’s such a high level of ownership and commitment from the children, which is really part of what changes that dynamic at that time for the family, because the child is anxious to literally go to bed and be able to get a great SleepIQ score, and the parents can engage and understand how important sleep is to be able to be how it directly impacts their performance the next day.

And the other key attribute of this bed is the Sleep Number adjustability, and being able to adjust the bed as the child grows to ensure that they have the appropriate spinal alignment for – as their weight changes over time is an important factor and benefit of this bed..

Is it fair to assume, Shelly, that most of the people who are buying SleepIQ Kids, and if you have an update there to say, or are they – are the parents also sleeping on Sleep Number beds?.

Well, this will be an important dynamic for us. We expect both. One of the features of our new SleepIQ 2.0 app, as well as the SleepIQ Kids bed is the family connected. So if they don’t, they’re going to want one to be able to connect the whole family and see how the family is sleeping and to be able to see their own SleepIQ score.

And so we expect to certainly just like today, our innovations are attractive to existing customers, as well as new customers, and that’s part of what’s been driving such as a strong top line performance for us is being able to drive repeat and referral sales as well as bring new customers in..

Great. I appreciate the color. Good luck on the back-half of the year..

Thanks..

Thank you. Our next question comes from Jessica Mace from Nomura Securities. Your line is now open..

Hi, good afternoon. Congrats on the nice results..

Thanks, Jessica..

My first question is to follow-up back on ARU.

And I’m just wondering if you could help us think about a few of the dynamics and expectations for the rest of the year, particularly around, number one, whether any trade up within your product offering, help to drive that 10% increase? And then secondly, how the dynamic or what you’ve learned from the customer behavior as you lap some of the introductions from last year that were kind of instrumental in driving that ARU higher?.

Yes. Well, thank you for asking the question. I think the ARU in the quarter gives you a good indication that the innovations we introduced at the end of first quarter of last year are continuing to deliver performance.

As I stated on our growth initiatives, this is an integrated approach between marketing, product innovation, and our retail experience, and they work nicely together, the marketing featuring the innovation, and the retail experience helping support the communication of those innovations.

We’re continuing to see attachment growth on FlexFit, FlexTop, SleepIQ, as well as mix improvement on our core bed line. It’s a really across our business and that is after we have certainly lapped those innovations..

Got it, understood. And then my other question was just on new store productivity. It looks like from the results this quarter that new stores did perform very well.

Is there any particular characteristic, or format, or geography that could be explaining some of that differential?.

Well, it’s certainly steadiness. I think we’ve been delivering multiple years of steady performance. And this is the diligence we have with our real estate strategy balancing and going into each market locally and getting the right mix of mall and non-mall – mall and non-mall continue to perform very similar in their total revenue.

And serving our customers well, we’ve addressed and continue to deliver strong comp, as well as have a very steady performance on our new stores for first-year and second-year performance. So, I would contribute it to the diligence we have around our real estate strategy..

Great. Thanks so much for taking the questions..

Thanks, Jessica..

Thank you. Our next question comes from Seth Basham from Wedbush. Your line is now open..

Thanks, and good afternoon..

Hey, Seth..

My first question is around ARU, following up on Jessica’s question. Just trying to better understand, in recent quarters you’ve given some indication of what the price mix contribution at ARU was.

Could you provide that for this quarter?.

Yes, pricing was minimal in the quarter for the ARU. The ARU of 10% primarily was driven by the FlexFit, the FlexTop, as well as the core line, and then, of course, SleepIQ is attaching very well too..

Got you.

And how that compare to the last quarter?.

Which part, these…?.

The price mix contribution to ARU..

Seth, I don’t have that handy. We can circle back with you after the call..

No problem. Okay. Clearly, therefore it seems like attachments and accessories as you’re talking about have been key drivers of ARU.

Could you provide any more color on where you are with penetration rates on adjustable basis and where you expect those to go over time?.

Seth, to clarify, I also stated that our core bed mix has been very strong and that has also been a contributor to ARU. And we are seeing year-over-year growth continued in the FlexFit as well. We have not given specific attach rates on our FlexFit or other items..

Okay. And secondly, just taking a little bit comp units, if you look at, imply comp unit trends over the last few quarters, we’ve seen a decelerating rate of growth on a one and two year stack basis.

Any color you can provide as to why you think you’re seeing that type of trend over the last few quarters?.

Yes, Seth, as I stated earlier, we drive both units as well as ARU. And we attribute our marketing effectiveness, the traffic and units, and draw a correlation with our ARU to the retail store experience and innovation. At the same time, all of our initiatives are worked together in such an integrated manner that they drive both.

We again will see quarterly fluctuations based on various initiatives. And it’s important to look at these metrics on an annual basis to allow for the quarterly flux.

Again, our innovation pipeline is exciting and you can see that we’re investing in R&D by the 50% increase over prior year, and we have both unit drivers and ARU drivers in that pipeline. So we look forward to continuing to drive increases in both ARU and units..

Gotcha. And as you look to the back-half understanding there is quarterly fluctuation. But on two-year stack basis positive comp mattress units would be up, I mean, onto your stack.

So if you look at the back-half, are there certain initiatives that you’re thinking about that will drive positive units?.

Right. Yes, as I stated, we attached our marketing initiative to driving traffic and units, and our 7% growth in this quarter. We attach that to driving higher traffic to our stores. We do expect units and ARU growth in the back half..

Okay, great.

And then just a last point of clarification on your inventory increase, I think, you attributed a third of the increase year-over-year to testing the major stock model, if I heard you correctly, could you clarify that and also tell us what the rest of the increase was attributable to?.

So two-thirds of the inventory increase is related to our higher demand and supporting the demand, including the shift in the calendar for the July 4. One-third of the $15 million increase year-to-date is related to that test, those tests that we’re doing, testing our way into a make-to-order model – make-to-stock model excuse me.

We – this is a hybrid of our current model, which is a make-to-order model, but we see that has a meaningful opportunity to improve customer experience and help us in high demand period..

Got it. Thank you very much..

You bet..

Thank you. Our next question comes from Mr. Keith Hughes from SunTrust. Your line is now open..

Thank you. Most of my questions have been answered.

But just back on inventory, I know there’s a lot of stuff going on short-term, but longer-term with a made-to-stock model, are we going to be seeing a little bit higher inventory from you in the future once all these adjustments pass out?.

Yes. We – as I mentioned, we’re planning for inventory to increase again in Q3 by another $15 million to $20 million, and then return back to about the same level as we were at the end of Q2 by year end. As I mentioned in my prepared remarks, we’re also doing this as part of our overall working capital management strategy.

So if you look at our year-over-year increase in inventory, we’re up $25 million and our accounts payable is up $29 million. So that’s also part of the strategy..

So to summarize, as part of the strategy to carry more in-stock inventory to replenish [ph] some of the shortages like we saw last year?.

Yes. That’s part of the – during high demand periods. Last year, we saw some challenge on our supply chain, and we want to make sure that we avoid that. We have a nice margin product and making sure that we’re able to commit – deliver on our commitments to the consumer is paramount..

And do you know yet what an increase and lots of ways we can measure this, but maybe per sales dollar would be the best way.

Will you need to carry more on the balance sheet to get to the fulfillment [ph] level you want?.

Well, if you look at what we really need to be focusing in on is the negative – we have negative working capital today. And on a year-over-year basis, we’re more negative by about $3 million in our working capital line than we were a year ago. So, the return is obviously favorable when you look at it that way..

Okay. Thank you..

Oh, you bet. Okay.

Vince, any other questions?.

Yes, sir. Our next question comes from Curtis Nagle from Bank of America. Your line is now open..

Great. Thanks very much for taking the call. Just two quick ones. On the buyback it looks like it continues to edge up a little bit.

I guess, should we interpret that more as opportunistic buying, or maybe an indication of greater capital return? And then secondly, just, I guess, performance of the aggressive growth markets versus your other markets?.

Yes. Well, first of all, regarding the buyback, yes, $30 million in the second quarter versus $10 million from prior year and [indiscernible] confident in the business and opportunistic buying. We are on track with our aggressive growth market and we don’t give the specific performance on the aggressive growth markets.

But just a moment on the strategy itself, it’s a three-year strategy designed to double the market share within three years. Our market has been on track to deliver that and they continue to be. We’re launching the 10th aggressive growth market. There are 13, and we’re launching the 10th one here in the back-half of the year..

Okay. Thanks very much for taking the question..

Yes. Thank you..

Thank you. At this time, we no longer have any questions on queue. I would now like to turn the call back to our host for any closing remarks..

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

Thank you. So that concludes today’s conference call. Thank you all for participating. You may now disconnect..