Select Comfort Corporation Reports Third Quarter Results; Company Announces Record Sales and Earnings; Earnings Per Share Increase 50 Percent

Select Comfort Corporation (NASDAQ:SCSS), the nation's leading bedretailer(1) and creator of the Sleep Number(R) bed, today announcedresults for the third quarter ended October 1, 2005. The companyreported record net income of $11.4 million, or $0.30 per dilutedshare, compared to net income of $8.0 million, or $0.20 per dilutedshare, in the third quarter of 2004. Third quarter 2005 net salesincreased 22 percent to a record $175.8 million, compared to thirdquarter 2004 net sales of $144.3 million. Same-store sales increased15 percent during the third quarter.

"We are extremely pleased with our third quarter performance, withsales and earnings growth exceeding our long-term targets," said BillMcLaughlin, chairman and chief executive officer. "Sales growthstemmed from strong unit trends across all channels and product lines,while earnings benefited from manufacturing and logistics productivityprograms and the selling and marketing leverage inherent in ourunique, vertically-integrated operating model."

McLaughlin continued, "Though we are mindful of recent consumertrends, we expect to achieve our annual guidance, which reflectsearnings growth of 30 percent or more. With market share of less thansix percent nationally and negligible international presence, thereremains tremendous opportunity to grow as we increase brand awarenessand expand distribution. Earnings growth should continue to outpaceour sales increases as we gain further leverage from our verticallyintegrated business model, which affords us control over the design,manufacturing, marketing and distribution of our products andpositions us to efficiently and effectively respond to externalfactors."

Third quarter results were highlighted by a number of keyaccomplishments:

-- Demonstrated operating leverage with net income improvement of 42 percent on sales growth of 22 percent

-- Achieved same-store sales growth of 15 percent in the third quarter, 14 percent year-to-date

-- Celebrated a single day sales record in retail stores on Labor Day

-- Nominated for QVC's Q-Star award for operational excellence

-- Increased Radisson bed installations to 27 percent of total Radisson beds

-- Opened 19 new stores, ending the quarter with a total of 388 retail stores

-- Added 143 new retail partner doors, ending the quarter with a total of 264 doors

-- Donated and delivered 370 beds and 9,500 pillows to hurricane victims and Ronald McDonald House Charities

Operating margins improved 150 basis points to 10.3 percent from8.8 percent in the third quarter last year. Cash flow from operatingactivities for the nine-month period ending October 1, 2005 totaled$55.8 million while capital expenditures were $19.9 million. Thecompany expects to continue to self-fund its growth in both the near-and long-term. Select Comfort's balance sheet remains debt free withcash and investments at the end of the third quarter totaling $88.4million.

In the third quarter the company repurchased 1.7 million sharesfor $33.8 million. During the first nine months of 2005 the companyrepurchased 2.3 million shares, representing approximately six percentof outstanding shares, for $46.2 million.

For the nine-month period ending October 1, 2005, the companyreported net income of $28.0 million, or $0.72 per diluted share,which represents a 36 percent increase, compared to net income of$21.1 million, or $0.53 per diluted share, during the nine-monthperiod ending October 1, 2004. During this nine-month period net salesincreased 23 percent to $503.2 million, compared to net sales of$409.0 million during the same period in 2004. Same-store sales growthwas 14 percent for the nine months ended October 1, 2005.

Outlook

The company reiterated its expectations to sustain long-term salesgrowth rates of at least 15 to 20 percent, with same-store growthbetween 7 and 12 percent, leveraging the business model with long-termearnings growth rates of at least 20 to 25 percent.

The company believes that in 2005 it will exceed its long-termtarget ranges for same-store growth, total sales and earnings growthrate targets. The company expects to open at least five stores in thefourth quarter with no store closures planned. Accordingly, thecompany is updating its EPS guidance for full-year 2005 to a range of$1.05 to $1.08 from $1.00 to $1.08.

The company announced that its outlook for 2006 is to sustainearnings growth in line with its long-term expectations of at least 20to 25 percent. Earnings growth expectations are exclusive of theimpact of new accounting regulations requiring the expensing of stockoptions.

Select Comfort will hold a conference call to discuss its thirdquarter results on October 25, 2005, at 4:00 p.m. Central Time. Asimultaneous webcast of the call will be available in the InvestorRelations section of www.selectcomfort.com. A digital replay of theconference call will be accessible beginning at approximately 6:00p.m. Central Time on October 25, 2005, through 5:00 p.m. Central Timeon November 1, 2005. To access the replay, please call 402-998-1239.An archived replay of the conference call may also be accessed afterapproximately 7:00 p.m. Central Time on October 25, 2005, atwww.selectcomfort.com.

About Select Comfort

Founded in 1987, Select Comfort Corporation is the nation'sleading bed retailer(1), holding 32 U.S. issued or pending patents forits personalized sleep products. The company designs, manufactures andmarkets a line of adjustable-firmness mattresses featuring air-chambertechnology, branded the Sleep Number(R) bed, as well as foundationsand sleep accessories. Select Comfort's products are sold through its388 retail stores located nationwide, through selected beddingretailers; through its national direct marketing operations; and onthe Internet at www.selectcomfort.com.

Statements used in this press release that relate to future plans,events, financial results or performance are forward-lookingstatements that are subject to certain risks and uncertaintiesincluding, among others, such factors as general and industry economictrends; uncertainties arising from global events; consumer confidence;effectiveness of our advertising and promotional efforts; our abilityto secure suitable retail locations; our ability to attract and retainqualified sales professionals and other key employees; our ability tosuccessfully expand distribution through independent retailers;consumer acceptance of our products, product quality, innovation andbrand image; our ability to continue to expand and improve our productline; industry competition; warranty expenses; the outcome of pendinglitigation, including consumer class action litigation; our dependenceon significant suppliers, and the vulnerability of any suppliers tocommodity shortages, inflationary pressures, labor negotiations,liquidity concerns or other factors; uncertainties related to thesupply of foam used to manufacture our products; rising commoditycosts; and increasing government regulations, including newflammability standards for the bedding industry. Additionalinformation concerning these and other risks and uncertainties iscontained in our filings with the Securities and Exchange Commission,including our Annual Report on Form 10-K, and other periodic reportsfiled with the SEC. The company has no obligation to publicly updateor revise any of the forward-looking statements that may be in thisnews release.

(1) Top 25 Bedding Retailers, Furniture Today, May 23, 2005.

SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)



Three Months Ended Nine Months Ended
--------------------- ---------------------
October 1, October 2, October 1, October 2,
2005 2004 2005 2004
---------- ---------- ---------- ----------

Net sales $175,833 $144,348 $503,185 $409,031
Cost of sales 71,041 57,366 206,806 159,101
---------- ---------- ---------- ----------
Gross profit 104,792 86,982 296,379 249,930
---------- ---------- ---------- ----------

Operating expenses:
Sales and marketing 72,866 63,851 211,939 185,438
General and
administrative 13,791 10,425 40,476 31,109
---------- ---------- ---------- ----------
Operating income 18,135 12,706 43,964 33,383

Other income:
Interest income 405 351 1,543 1,003
---------- ---------- ---------- ----------

Income before income taxes 18,540 13,057 45,507 34,386
Income tax expense 7,094 5,008 17,557 13,269
---------- ---------- ---------- ----------
Net income $11,446 $8,049 $27,950 $21,117
========== ========== ========== ==========

Net income per share -
basic $0.32 $0.22 $0.78 $0.59
========== ========== ========== ==========
Weighted average shares -
basic 35,638 35,970 35,754 36,097
========== ========== ========== ==========

Net income per share -
diluted $0.30 $0.20 $0.72 $0.53
========== ========== ========== ==========
Weighted average shares -
diluted 38,328 39,313 38,815 39,880
========== ========== ========== ==========

Reconciliation of weighted
average shares
outstanding:
Weighted average shares
outstanding 35,638 35,970 35,754 36,097
Effect of dilutive
securities:
Options 1,573 1,882 1,694 2,285
Warrants 909 1,308 1,173 1,352
Restricted shares 208 153 194 146
---------- ---------- ---------- ----------
Dilutive weighted average
shares outstanding 38,328 39,313 38,815 39,880
========== ========== ========== ==========



SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share amounts)


(Unaudited)
October 1, January 1,
2005 2005
----------- -----------
Assets
Current assets:
Cash and cash equivalents $16,222 $15,066
Marketable securities - current 29,654 35,747
Accounts receivable, net of allowance for
doubtful accounts of $841 and $685,
respectively 10,754 8,644
Inventories 22,023 20,481
Prepaid expenses 10,032 7,375
Deferred tax assets 6,264 5,287
----------- -----------
Total current assets 94,949 92,600

Marketable securities - non-current 42,513 40,930
Property and equipment, net 52,046 43,911
Deferred tax assets 12,788 10,755
Other assets 3,563 3,617
----------- -----------
Total assets $205,859 $191,813
=========== ===========

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $29,076 $26,267
Consumer prepayments 13,288 9,368
Accruals:
Sales returns 5,248 5,038
Compensation and benefits 22,334 13,913
Taxes and withholding 8,488 6,392
Other 11,078 8,143
----------- -----------
Total current liabilities 89,512 69,121


Long-term liabilities 10,427 8,348
----------- -----------
Total liabilities 99,939 77,469
----------- -----------



Shareholders' equity:
Undesignated preferred stock; 5,000,000
shares authorized, no shares issued and
outstanding - -
Common stock, $.01 par value; 95,000,000
shares authorized, 35,308,777 and
35,828,222 shares issued and outstanding,
respectively 353 358
Additional paid-in capital 61,112 95,548
Unearned compensation (3,685) (1,752)
Retained earnings 48,140 20,190
----------- -----------
Total shareholders' equity 105,920 114,344
----------- -----------
Total liabilities and shareholders'
equity $205,859 $191,813
=========== ===========



SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)


Nine Months Ended
---------------------
October 1, October 2,
2005 2004
---------- ----------

Cash flows from operating activities:
Net income $27,950 $21,117
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 11,586 10,084
Non-cash compensation 549 294
Loss on disposal of assets and impaired assets 165 -
Deferred tax benefit (3,010) (3,391)
Changes in operating assets and liabilities:
Accounts receivable (2,110) (798)
Inventories (1,542) (3,527)
Prepaid expenses (2,657) (1,261)
Other assets 28 (307)
Accounts payable 2,809 10,698
Accrued sales returns 210 1,166
Accrued compensation and benefits 8,421 (1,012)
Accrued taxes and withholding 4,487 10,054
Consumer prepayments 3,920 (109)
Other accruals and liabilities 5,014 1,025
---------- ----------
Net cash provided by operating activities 55,820 44,033
---------- ----------

Cash flows from investing activities:
Purchases of property and equipment (19,860) (14,938)
Investments in marketable securities (22,615) (60,908)
Proceeds from maturity of marketable securities 27,125 46,256
---------- ----------
Net cash used in investing activities (15,350) (29,590)
---------- ----------

Cash flows from financing activities:
Repurchase of common stock (46,201) (14,886)
Proceeds from issuance of common stock 6,887 5,380
---------- ----------
Net cash used in financing activities (39,314) (9,506)
---------- ----------
Increase in cash and cash equivalents 1,156 4,937

Cash and cash equivalents, at beginning of
period 15,066 24,725
---------- ----------
Cash and cash equivalents, at end of period $16,222 $29,662
========== ==========



SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(in thousands)
(Unaudited)


Three Months Ended Nine Months Ended
--------------------- ---------------------
October 1, October 2, October 1, October 2,
2005 2004 2005 2004
---------- ---------- ---------- ----------

Percent of sales:
Retail 77.1% 78.2% 75.7% 77.2%
Direct 9.9% 10.9% 11.4% 12.0%
E-Commerce 5.0% 4.3% 4.8% 4.5%
Wholesale 8.0% 6.6% 8.1% 6.3%
---------- ---------- ---------- ----------
Total 100.0% 100.0% 100.0% 100.0%
---------- ---------- ---------- ----------


Sales growth rates:
Same-store sales growth 15% 15% 14% 18%
New/closed stores, net 5% 7% 7% 8%
---------- ---------- ---------- ----------

Retail total 20% 22% 21% 26%
Direct 10% 5% 17% 15%
E-Commerce 41% 24% 32% 36%
Wholesale 48% 113% 56% 88%
---------- ---------- ---------- ----------
Total 22% 23% 23% 27%
---------- ---------- ---------- ----------


Stores open:
Beginning of period 369 360 370 344
Opened 19 2 32 23
Closed - - (14) (5)
---------- ---------- ---------- ----------
End of period 388 362 388 362
---------- ---------- ---------- ----------


Other metrics:
Total square footage
(000s) 453 388
Average sales per store
(000s) (a) $1,375 $1,223
Stores greater than $1
million sales (a) 73% 60%
Average sales per mattress
unit $2,064 $1,964
(Company-owned Channels)
Retail partner doors 264 86

(a) trailing twelve month
data