Slide 1: Select Comfort Corporation Investor Presentation
Select Comfort Corporation Investor Presentation April 22, 2015
Slide 2: Disclosures
Disclosures THIS PRESENTATION IS FOR DISCUSSION AND GENERAL INFORMATIONAL PURPOSES ONLY. IT DOES NOT HAVE REGARD TO THE SPECIFIC INVESTMENT OBJECTIVE, FINANCIAL SITUATION, SUITABILITY, OR THE PARTICULAR NEED OF ANY SPECIFIC PERSON WHO MAY RECEIVE THIS PRESENTATION, AND SHOULD NOT BE TAKEN AS ADVICE
Slide 3: Table of Contents
Table of Contents 4 Overview of Blue Clay, its Nominees and the Opportunity for Shareholders 10 Change is Needed • Stock Price Underperformance • Financial Deterioration • Failure to Meet Stated Objectives • Recent Changes Not Enough 28 Blue Clay Nominees are Better Qualified to Drive Change • Blue
Slide 4: I. Overview of Blue Clay, its Nominees and the Opportunity for Shareholders
I. Overview of Blue Clay, its Nominees and the Opportunity for Shareholders 4
Slide 5: Overview of Blue Clay Capital Management
Overview of Blue Clay Capital Management Blue Clay is an investment management firm with an experienced team focused on small- and mid-cap publicly-traded securities • Blue Clay aims to deliver superior absolute results utilizing a fundamental and long‐term investment approach with a focus on capita
Slide 6: Why We Are Involved with Select Comfort
Why We Are Involved with Select Comfort Blue Clay believes change at the Board level is needed to maximize long-term shareholder value I. Blue Clay Principals Have Long History with the Company • Principals of Blue Clay have invested in Select Comfort Corporation (“Select Comfort” or the “Company”)
Slide 7: Failure to Realize Potential for Shareholders
Failure to Realize Potential for Shareholders Share price should be substantially higher. Missed performance goals and poor capital allocation decisions by the Board have significantly impaired value creation I. Share price should be 65%‐100%+ greater if the Board and management had achieved their M
Slide 8: Blue Clay Nominees are Far Superior to Incumbents
Blue Clay Nominees are Far Superior to Incumbents Blue Clay nominees are aligned with shareholders and bring exceptional and relevant credentials Blue Clay’s Nominees • Brian A. Spaly: An experienced CEO with noted public success as Founder and Chief Executive Officer of Trunk Club, Inc., an innovat
Slide 9: Blue Clay Nominees are Far Superior to Incumbents
Blue Clay Nominees are Far Superior to Incumbents We believe the Company’s nominees are stale, lack diverse experience, are subject to interlocks and not properly aligned with shareholders The Company’s Nominees • Stephen L. Gulis, Jr., retired footwear executive, has been on the Board for nearly 10
Slide 10: II. Change is Needed
II. Change is Needed BLUE CLAY capPiTAL MANAGEMENT, LLC 10
Slide 11: Dramatic Stock Price Underperformance
Stock Price Underperformance Dramatic Stock Price Underperformance The Board and management repeatedly failed to meet performance goals, have overseen deteriorating financial results and made poor capital allocation decisions resulting in significant stock price underperformance During CEO’s Tenure
Slide 12: Dramatic Stock Price Underperformance
Dramatic Stock Price Underperformance Company’s disclosure highlighting one- and five-year TSR skewed by starting dates One‐Year TSR Skewed By Prior Underperformance Three‐Year Stock Chart • Company’s one‐year TSR starting point is December 31, $40 2013, after stock price was 40.2% below its 2012 hi
Slide 13: Dramatic Stock Price Underperformance
Dramatic Stock Price Underperformance The Board’s track record of poor capital allocation decisions twice pushed the Company into financial distress since its 1998 IPO Stock Chart Since IPO: Board Decisions Have Suppressed Stock Price, Creating Illusion of Growth $35.00 5 of 8 current non‐executive
Slide 14: Recent Stock Price Not Driven By Fundamentals
Recent Stock Price Not Driven By Fundamentals In 2012, Wall Street expected $2.70 in 2015 EPS, 108% higher than the Company’s recent $1.30 guidance. Not only is 2015 EPS expected to fall short of Wall Street estimates, it is expected to be below 2012 EPS Stock Price vs. Actual / Guided EPS During Cu
Slide 15: Deteriorating Fundamentals During CEO Tenure
Deteriorating Fundamentals During CEO Tenure EPS Estimates Continue to Decline During CEO Tenure • When Ms. Ibach became CEO, Wall Street consensus estimate for 2014 EPS was $2.27, 82% higher than actual 2014 EPS o One year into Ms. Ibach’s tenure, 2014E EPS had fallen by 27% • Additionally, Wall St
Slide 16: Significant Decline in Operating Margins
Financial Deterioration Significant Decline in Operating Margins The Board has failed to impose spending discipline. As a result, operating expense growth has outpaced revenues causing rapidly deteriorating operating margins Significant Operating Expense Growth Deteriorating Operating Margins $700 1
Slide 17: G&A Expense Growth
G&A Expense Growth Company has overseen substantial growth in G&A expense and failed to achieve operating leverage General & Administrative Expense Growth Number of Employees at Corporate Is Ballooning $100 400 384 $84.9 350 $80 350 $66.8 $63.0 308 $ Millions $59.5 300 # People $60 254 250 $40 200 $
Slide 18: Advertising Expense Growth
Advertising Expense Growth Company has failed to achieve advertising expense leverage from a percentage of sales and spend per store perspective Significant Growth in Advertising Expense Significant Failure in Leveraging Advertising Spend $200 $400 $341 $351 $158.5 $321 $144.8 $150 $300 $273 $126.9
Slide 19: Significant Added Investments Not Yielding Results
Significant Added Investments Not Yielding Results Since March 2012, the Company has spent more than $195mm on capital expenditures. Far better oversight of the deployment of Company resources is needed Significant Growth in Capital Expenditures • The Company has spent more than $195mm on capital ex
Slide 20: ROIC Decline Highlights Value Destruction
ROIC Decline Highlights Value Destruction Significant increases in capital expenditures and operating expenses have not generated acceptable returns. ROIC, margins and EPS growth have suffered as a result Declining ROIC During Ibach’s Tenure More Pronounced Destruction Excluding Company Cash Balance
Slide 21: Company is Well Below Operating Income Guidance
Failure to Achieve Stated Objectives Company is Well Below Operating Income Guidance The Company is falling well short of its performance goals of 2015 revenue of $1.5B+ and operating margin of 15%+ I. May 2012 Investor Day Presentation II. Wall Street Expects Company to Dramatically Miss Estimates
Slide 22: Negative Flow-Through vs. 20%+ Guidance
Negative Flow-Through vs. 20%+ Guidance Operating income has declined as a result of poor execution and ballooning corporate expenses I. Company Stated 20% Flow‐Through Plan II. Company has Suffered Negative Flow‐Through Company’s May 2012 Investor Day Presentation: • If 20% flow‐through was achieve
Slide 23: Poor Execution has Translated into Poor Operating Performance
Poor Execution has Translated into Poor Operating Performance If the Company had achieved its flow-through guidance, operating income would be nearly 70% greater Operating Margins Far Below Historical Peak and Guidance 16.0% 14.9% 15% + 13.4% 14.0% 12.2% 12.0% Operating Margin % 10.0% 9.4% 8.8% 8.0%
Slide 24: Fallen Well Short of EPS Guidance
Fallen Well Short of EPS Guidance Management has repeatedly missed EPS guidance Significantly Missed EPS Guidance and Continues to Underperform “And we remain committed to increasing shareholder value, with earnings per share growth of at least 20% per year over the next three years, with even highe
Slide 25: Store Growth Plans Not Achieved
Store Growth Plans Not Achieved Company will only be entering its 10th market in 2015 after planning to be in all 13 markets by 2014tore Growth Plan Not Company’s May 2012 Investor Day Presentation • Company stated goal: “Our aggressive growth strategy is designed to more than double market share pr
Slide 26: Poor Execution Has Suppressed Shareholder Value
Poor Execution Has Suppressed Shareholder Value Analysis demonstrates share price would be 65%-100%+ higher if the Company achieved its guidance (Millions, except per share) Value if May 2012 Value if May 2012 Operating Income Implied EPS Guidance Guidance Achieved Achieved 2015 Operating Income $22
Slide 27: Board Change is Needed to Ensure Long-Term Reform
Recent Changes Are Not Enough Board Change is Needed to Ensure Long-Term Reform Recent changes in capital allocation, ROIC focus, store targets and long-term EPS guidance began after Blue Clay nominated our highly-qualified candidates. Reactionary changes are not enough and demonstrate Board complac
Slide 28: III. Blue Clay Nominees are Better Qualified to Drive Change
III. Blue Clay Nominees are Better Qualified to Drive Change 28
Slide 29: Blue Clay Director Nominees
Blue Clay’s Nominees Have More Relevant and Diverse Experience Blue Clay Director Nominees Blue Clay nominees add CEO experience, sales force management and training, corporate and brand development and capital allocation expertise to the Board Brian A. Spaly • Founder and CEO of Trunk Club, Inc. o
Slide 30: Blue Clay Director Nominees
Blue Clay Director Nominees Blue Clay nominees add CEO experience, sales force management and training, corporate and brand development and capital allocation expertise to the Board Adam J. Wright • Founding Principal, Managing Partner and Senior Analyst of Blue Clay Capital Management, LLC • Curren
Slide 31: The Company's Nominees
The Company’s Nominees The Company’s nominees will have been on the Board for 9.8 and 11.2 years at the time of 2015 Annual Meeting. Due to classified board structure, their re-election would result in tenures of 12.8 and 14.2 years before they will be up for election again in 2018 Stephen L. Gulis,
Slide 32: Shareholders Need Better Representation
Shareholders Need Better Representation Current Board is mainly comprised of consultants and footwear executives; more diverse industry experiences as well as CEO and capital allocation experience are needed Tenure Director Occupation (as of May 2015 Shareholder Meeting) Daniel I. Alegre 2.0 years T
Slide 33: Poor Corporate Governance Practices
Incumbents’ Poor Corporate Governance, Excessive Tenure and Interlocks Poor Corporate Governance Practices The current Board continues to sanction shareholder-unfriendly and outdated corporate governance • Classified Board results in directors only being subject to re‐election by shareholders every
Slide 34: We Believe the Board has Grown Stale and is Entrenched
We Believe the Board has Grown Stale and is Entrenched Fresh perspectives and forward-thinking urgently needed • Median tenure of 9.8 years by the time of the 2015 Annual Meeting • Two directors have been on the Board for more than 20 years, while three other directors have been on the Board for mor
Slide 35: Interlocking Directors Leads to Lack of Independent Thinking
Interlocking Directors Leads to Lack of Independent Thinking Majority of current Board is subject to interlocks • Board includes four current or retired footwear executives • Interlocked directors comprise a majority of the current Board – current nominees Mr. Gulis and Ms. Lauderback, as well as Ms
Slide 36: Does the Current Board Believe in the Stock?
Current Board’s Misalignment with Shareholders Does the Current Board Believe in the Stock? We believe the Board’s minimal investment in the shares of Select Comfort is evidence of their minimal commitment to enhancing, and lack of confidence in their ability to create, long-term shareholder value T
Slide 37: Board has Failed to Hold Management Accountable
Incumbents’ Failure to Hold Management Accountable Board has Failed to Hold Management Accountable Despite deteriorating financials and stock underperformance, the Board has accommodated management by changing financial metrics tied to incentive compensation and rewarded management for short-term st
Slide 38: Destruction of Per Share Shareholder Value
Current Directors’ Capital Allocation Mistakes Destruction of Per Share Shareholder Value Poor strategy and Board oversight have led to two periods of financial distress that resulted in significant stock dilution to shareholders Company has Track Record of Repurchasing Shares at High Prices and Bei
Slide 39: Recent Share Repurchases Lack Investment Consideration
Recent Share Repurchases Lack Investment Consideration With no consideration for the intrinsic value of the stock, the Company consistently acquired a fixed dollar amount regardless of price per share and missed very attractive repurchase opportunities Share Repurchases Lack Investment Consideration
Slide 40: Board has Long History of Value Destructive Decisions
Board has Long History of Value Destructive Decisions Five of the current Board members (including Mr. Gulis and Ms. Lauderback) were responsible for a series of moves that we believe forced the Company into financial distress in 2009 Disastrous 2006 – 2009 Capital Allocation Decisions Aggressive in
Slide 41: Destruction of Per Share Shareholder Value
Destruction of Per Share Shareholder Value Analysis demonstrates share price would be at least twice as high if the Board’s poor capital allocation decisions had not led to multiple highly-dilutive capital raises Share Price Would Be 136% Greater Without Dilutive Capital Raises (Millions, except per
Slide 42: Destruction of Per Share Shareholder Value
Destruction of Per Share Shareholder Value Analysis demonstrates share price would be nearly 400% greater if the Company did not need to do multiple highly-dilutive capital raises and met its May 2012 guidance 2015 EPS of $6.65 if May 2012 Guidance Achieved and Dilution from Poor Capital Allocation
Slide 43: IV. Blue Clay's Analysis of the Future Opportunity
IV. Blue Clay’s Analysis of the Future Opportunity 43
Slide 44: Objective is to Maximize Long-Term Per Share Value
Objective is to Maximize Long-Term Per Share Value I. Blue Clay Believes it is in All Shareholders’ Best Interests to Have its Nominees on the Board and Constructively Engaged in Decisions that Will Shape the Company’s Future • Based on our extensive research and analysis, we believe the prudent pat
Slide 45: Highly Attractive Four-Wall Store Economics
Highly Attractive Four-Wall Store Economics Individual stores are extremely attractive investments, and we believe new store growth is Company’s best long-term investment opportunity New Store Unit Growth is Highest ROIC Opportunity • New stores cost $405,000 to open and an average store generates a
Slide 46: Mature Markets Highlight Continued Store Growth Opportunity
Mature Markets Highlight Continued Store Growth Opportunity Markets where the Company has operated the longest have more stores, higher awareness and greater market share Increased Physical Presence Improves Market Share • Store presence is an effective method for building brand awareness and levera
Slide 47: Add Stores To Drive Revenue Growth
Add Stores To Drive Revenue Growth Analysis of most mature market store density demonstrates significant white space remains for additional stores. Blue Clay estimates at least a 900 store US opportunity from 463 today I. Significant White Space Remains II. Major Metro Areas Significantly Underpenet
Slide 48: Urgency Needed in New and Underpenetrated Markets
Urgency Needed in New and Underpenetrated Markets Company missed May 2012 development targets for 13 identified new/underpenetrated markets May 2012 Underdeveloped Market Strategy Company has Failed to Execute Plan Company’s May 2012 Investor Day Presentation: Management states aggressive strategy h
Slide 49: Competitor Data Demonstrates Store Count Opportunity
Competitor Data Demonstrates Store Count Opportunity Mattress Firm highlights market penetration and resulting increased profitability as a driver for more aggressive unit growth, citing the importance of store proximity in retailer selection Proximity to Customer is Second Attribute to Retailer Sel
Slide 50: Past Statements Support Need for More Stores
Past Statements Support Need for More Stores Company’s May 2012 Investor Presentation Store Proximity is Critical for Customer Selection • May 2012 Investor Day presentation highlights ratio of two Sleep Number stores vs. 6‐8 competitor stores • Even as a “destination retailer,” Company highlighted
Slide 51: Focus on Store Growth Should Not be a Surprise to Company
Focus on Store Growth Should Not be a Surprise to Company Blue Clay’s plan to grow stores is consistent with the Company’s prior statements and store density from the Company’s most successful markets • In 2006, the Company provided guidance to open new stores at a rate of up to 10% per year, from a
Slide 52: Large Spending Increases Not Helping ROIC or EPS Growth
Large Spending Increases Not Helping ROIC or EPS Growth Declining ROIC and nearly flat EPS since March 2012 indicate the Company’s significantly increased investments in CapEx, G&A and advertising are not enhancing shareholder value Cumulative Capital Expenditures Increase of $114.8mm Cumulative Inc
Slide 53: Capital Allocation Expertise Needed
Capital Allocation Expertise Needed Capital allocation expertise is needed to ensure future investments are focused on the highest ROIC opportunities and history does not repeat itself Significant Increase in Capital Expenditures High ROIC New Store Growth Requires Limited CapEx • 2011–2014 CapEx is
Slide 54: Capital Should be Allocated to Highest ROIC Opportunities
Capital Should be Allocated to Highest ROIC Opportunities Board needs capital allocation expertise, Vote the BLUE Proxy Card I. Company Philosophy is Overly Conservative • Our number one priority remains to invest in our innovation roadmap and a scalable infrastructure • Our second priority for cash
Slide 55: Return Excess Capital to Shareholders
Return Excess Capital to Shareholders Current financial position and favorable economic backdrop enable the Company to more aggressively return capital to shareholders I. Financial Cushion Enables Company to Lower Minimum Cash Requirement • The Company has significant gap to break‐even sales; margin
Slide 56: V. Conclusion
V. Conclusion BLUE CLAY capPiTAL MANAGEMENT, LLC 56
Slide 57: Conclusion
Conclusion Blue Clay believes changes are needed on the Board, and Blue Clay’s nominees bring shareholder representation and expertise the current Board is lacking I. Change is Needed • Stock price has significantly underperformed during CEO Shelly Ibach’s tenure • Operating margins and ROIC have dr
Slide 58: VI. Appendix
VI. Appendix BLUE CLAY capPiTAL MANAGEMENT, LLC 58
Slide 59: Misleading Statements Made By the Company
Addressing Company Statements Misleading Statements Made By the Company Company misrepresenting Blue Clay’s assertions Company Statement Actual Blue Clay Position about Blue Clay Plan Sales Cannibalization Actual Blue Clay Statement: • Any concern around “cannibalization” is unwarranted given the ne
Slide 60: Misleading Statements Made By the Company
Misleading Statements Made By the Company Company misrepresenting Blue Clay’s assertions Company Statement Actual Blue Clay Position about Blue Clay Plan Advertising Actual Blue Clay Statement: • We stated “advertising expense held constant until it reaches 10% of sales” (emphasis added) “Blue Clay
Slide 61: Contact Information
Contact Information 800 Nicollet Mall, Suite 2870 Minneapolis, MN 55402 (612) 200‐1748 E‐mail: investors@blueclaycapital.com If you have any questions, require assistance with voting your BLUE proxy card, or need additional copies of the proxy materials, please contact our proxy solicitor: OKAPI PAR