•Second quarter net sales were $459 million; demand down mid-single digits versus the prior year

•Reports second quarter diluted EPS of $0.03

•2023 EPS outlook updated to a range of $1.25 to $1.75 per share

•Announces the appointment of Francis Lee to Executive Vice President and Chief Financial Officer

MINNEAPOLIS – (July 27, 2023) – Sleep Number Corporation (Nasdaq: SNBR) today reported results for the quarter ended July 1, 2023.

“As we continue to navigate a challenging macro environment, our business is well positioned for growth. Demand has steadily improved year-to-date, and we expect this trend to continue in the back-half of the year as we benefit from the launch of our entire next generation smart bed portfolio, the Climate360 smart bed, and the advancement of our ‘Sleep Next Level’ advertising campaign with the start of the NFL season,” said Shelly Ibach, Chair, President and CEO, Sleep Number. “We have taken actions across the business to drive efficiencies and remain on track to expand margins and generate more than $100 million in cash from operations in 2023.”

Today, Sleep Number also announced the appointment of Francis Lee to Executive Vice President and Chief Financial Officer. Details can be found on the Sleep Number newsroom.

•Net sales decreased 16% to $459 million, with demand down mid-single digits; demand improved throughout the second quarter, although slightly below our expectations

•Gross margin was 57.6% and in line with our expectations; as a reminder prior year second quarter results benefitted from the delivery of more than $100 million in margin-rich backlog

•Operating expenses were reduced by $22 million to $253 million compared with $275 million last year

•Earnings per diluted share of $0.03 compared with $1.54 for the same period last year

•Net sales decreased 8% to $985 million, with demand down high-single digits versus prior year

•Gross profit decreased to $575 million compared with $627 million for the prior year; gross margin rate of 58.3% was consistent with the same period last year and up 290 bp versus the back half of last year

•Operating income of $37 million compared with $54 million last year, with an 8% decline in gross margin dollars, partially offset by a $36 million reduction in operating expenses

•Earnings per diluted share of $0.54 compared with $1.60 for the same period last year

•Net cash from operating activities of $19 million for the first six months of the year, compared with $29 million for the same period last year

•Leverage ratio of 4.7x EBITDAR at the end of the second quarter versus covenant maximum of 5.0x

•Adjusted ROIC of 12.3% for the trailing twelve months

The company updated its full-year 2023 diluted EPS outlook to a range of $1.25 to $1.75. The 2023 outlook assumes net sales are down low to mid-single digits versus the prior year and gross margin improvement of more than 150 basis points versus 2022. The company expects to generate more than $100 million of operating cash flow for the year and positive free cash flows. The company anticipates 2023 capital expenditures of $50 million to $60 million.

Management will host its regularly scheduled conference call to discuss the company’s results at 5 p.m. EDT (4 p.m. CDT; 2 p.m. PDT) today. To access the webcast, please visit the investor relations area of the Sleep Number website at https://ir.sleepnumber.com. The webcast replay will remain available for approximately 60 days.

Sleep Number is a wellness technology company. We are guided by our purpose to improve the health and wellbeing of society through higher quality sleep; to date, our innovations have improved over 14.5 million lives. Our wellness technology platform helps solve sleep problems, whether it’s providing individualized temperature control for each sleeper through our Climate360® smart bed or applying our 21 billion hours of longitudinal sleep data and expertise to research with global institutions.

Our smart bed ecosystem drives best-in-class engagement through dynamic, adjustable, and effortless sleep with personalized digital sleep and health insights; our millions of smart sleepers are loyal brand advocates. And our nearly 5,000 mission-driven team members passionately innovate to drive value creation through our vertically integrated business model, including our exclusive direct-to-consumer selling in 670 stores and online.

To learn more about life-changing, individualized sleep, visit a Sleep Number store near you, our newsroom and investor relations sites, or SleepNumber.com

Statements used in this news release relating to future plans, events, financial results or performance, such as the company’s financial outlook for full-year 2023, including diluted EPS, are forward-looking statements subject to certain risks and uncertainties including, among others, such factors as current and future economic conditions and consumer sentiment; bank failures or other events affecting financial institutions; increases in interest rates, which have increased the cost of servicing the company’s indebtedness; availability of attractive and cost-effective consumer credit options; operating with minimal levels of inventory, which may leave the company vulnerable to supply shortages; Sleep Number’s dependence on, and ability to maintain strong working relationships with key suppliers and third parties; rising commodity costs or third-party logistics costs and other inflationary pressures; risks inherent in global-sourcing activities, including tariffs, geo-political turmoil, war, strikes, labor challenges, government-mandated work closures, outbreaks of pandemics or contagious diseases, and resulting supply shortages and production and delivery delays and disruptions; risks of disruption due to health epidemics or pandemics, such as the COVID-19 pandemic; regional risks related to having global operations and suppliers, including climate and other disasters; the effectiveness of the company’s marketing strategy and promotional efforts; the execution of Sleep Number’s Total Retail distribution strategy; ability to achieve and maintain high levels of product quality; ability to improve and expand Sleep Number’s product line and execute successful new product introductions; ability to prevent third parties from using the company’s technology or trademarks, and the adequacy of its intellectual property rights to protect its products and brand; ability to compete; risks of disruption in the operation of any of the company’s main manufacturing, distribution, logistics, home delivery, product development or customer service operations; the company’s ability to comply with existing and changing government regulation; pending or unforeseen litigation and the potential for associated adverse publicity; the adequacy of the company’s and third-party information systems and costs and disruptions related to upgrading or maintaining these systems; the company’s ability to withstand cyber threats that could compromise the security of its systems, result in a data breach or business disruption; Sleep Number’s ability, and the ability of its suppliers and vendors, to attract, retain and motivate qualified personnel; the volatility of Sleep Number stock; environmental, social and governance (ESG) risks, including increasing regulation and stakeholder expectations; and the company’s ability to adapt to climate change and readiness for legal or regulatory responses thereto. Additional information concerning these and other risks and uncertainties is contained in the company’s filings with the Securities and Exchange Commission (SEC), including the Annual Report on Form 10-K, and other periodic reports filed with the SEC. The company has no obligation to publicly update or revise any of the forward-looking statements in this news release.

# # #

Investor Contact: Dave Schwantes; (763) 551-7498; investorrelations@sleepnumber.com

Media Contact: Julie Elepano; julie.elepano@sleepnumber.com

 

			Three Months Ended
			July 1, 2023						% of Net Sales						July 2, 2022						% of Net Sales
Net sales			$	458,789					100.0		%				$	549,073					100.0		%
Cost of sales			194,544						42.4		%				224,128						40.8		%
Gross profit			264,245						57.6		%				324,945						59.2		%
Operating expenses:
Sales and marketing			197,779						43.1		%				220,490						40.2		%
General and administrative			39,795						8.7		%				38,727						7.1		%
Research and development			15,445						3.4		%				15,817						2.9		%
Total operating expenses			253,019						55.1		%				275,034						50.1		%
Operating income			11,226						2.4		%				49,911						9.1		%
Interest expense, net			9,948						2.2		%				3,619						0.7		%
Income before income taxes			1,278						0.3		%				46,292						8.4		%
Income tax expense			524						0.1		%				11,359						2.1		%
Net income			$	754					0.2		%				$	34,933					6.4		%
Net income per share – basic			$	0.03											$	1.56
Net income per share – diluted			$	0.03											$	1.54
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding			22,460												22,355
Dilutive effect of stock-based awards			42												358
Diluted weighted-average shares outstanding			22,502												22,713

 

			Six Months Ended
			July 1, 2023						% of Net Sales						July 2, 2022						% of Net Sales
Net sales			$	985,316					100.0		%				$	1,076,203					100.0		%
Cost of sales			410,806						41.7		%				448,960						41.7		%
Gross profit			574,510						58.3		%				627,243						58.3		%
Operating expenses:
Sales and marketing			428,267						43.5		%				460,749						42.8		%
General and administrative			79,196						8.0		%				80,046						7.4		%
Research and development			29,888						3.0		%				32,122						3.0		%
Total operating expenses			537,351						54.5		%				572,917						53.2		%
Operating income			37,159						3.8		%				54,326						5.0		%
Interest expense, net			19,050						1.9		%				5,746						0.5		%
Income before income taxes			18,109						1.8		%				48,580						4.5		%
Income tax expense			5,890						0.6		%				11,573						1.1		%
Net income			$	12,219					1.2		%				$	37,007					3.4		%
Net income per share – basic			$	0.55											$	1.64
Net income per share – diluted			$	0.54											$	1.60
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding			22,378												22,558
Dilutive effect of stock-based awards			165												594
Diluted weighted-average shares outstanding			22,543												23,152

  

			July 1, 2023						December 31, 2022
Assets
Current assets:
Cash and cash equivalents			$	1,798					$	1,792
Accounts receivable, net of allowances of $1,475 and $1,267, respectively			24,102						26,005
Inventories			121,446						114,034
Prepaid expenses			21,029						16,006
Other current assets			40,142						39,921
Total current assets			208,517						197,758
Non-current assets:
Property and equipment, net			191,067						200,605
Operating lease right-of-use assets			399,989						397,755
Goodwill and intangible assets, net			67,086						68,065
Deferred income taxes			16,230						7,958
Other non-current assets			82,266						81,795
Total assets			$	965,155					$	953,936
Liabilities and Shareholders’ Deficit
Current liabilities:
Borrowings under revolving credit facility			$	483,800					$	459,600
Accounts payable			152,205						176,207
Customer prepayments			58,498						73,181
Accrued sales returns			25,476						25,594
Compensation and benefits			38,934						31,291
Taxes and withholding			23,356						23,622
Operating lease liabilities			82,439						79,533
Other current liabilities			57,054						60,785
Total current liabilities			921,762						929,813
Non-current liabilities:
Operating lease liabilities			356,044						356,879
Other non-current liabilities			106,490						105,421
Total non-current liabilities			462,534						462,300
Total liabilities			1,384,296						1,392,113
Shareholders’ deficit:
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding
Common stock, $0.01 par value; 142,500 shares authorized, 22,214 and 22,014 shares issued and outstanding, respectively			222						220
Additional paid-in capital			11,997						5,182
Accumulated deficit			(431,360)						(443,579)
Total shareholders’ deficit			(419,141)						(438,177)
Total liabilities and shareholders’ deficit			$	965,155					$	953,936

 

			Six Months Ended
			July 1, 2023						July 2, 2022
Cash flows from operating activities:
Net income			$	12,219					$	37,007
Adjustments to reconcile net income to net cash provided by    operating activities:
Depreciation and amortization			36,749						31,975
Stock-based compensation			9,890						8,043
Net loss on disposals and impairments of assets			181						179
Deferred income taxes			(8,272)						(3,794)
Changes in operating assets and liabilities:
Accounts receivable			1,903						(2,898)
Inventories			(7,412)						(15,674)
Income taxes			1,808						4,368
Prepaid expenses and other assets			(5,824)						6,266
Accounts payable			(10,244)						(1,713)
Customer prepayments			(14,683)						(14,754)
Accrued compensation and benefits			7,594						(17,789)
Other taxes and withholding			(2,074)						971
Other accruals and liabilities			(3,115)						(3,496)
Net cash provided by operating activities			18,720						28,691
Cash flows from investing activities:
Purchases of property and equipment			(29,899)						(36,559)
Proceeds from sales of property and equipment			—						23
Issuance of note receivable			(435)						—
Net cash used in investing activities			(30,334)						(36,536)
Cash flows from financing activities:
Net increase in short-term borrowings			14,693						70,836
Repurchases of common stock			(3,501)						(63,644)
Proceeds from issuance of common stock			428						585
Debt issuance costs			—						(42)
Net cash provided by financing activities			11,620						7,735
Net increase (decrease) in cash and cash equivalents			6						(110)
Cash and cash equivalents, at beginning of period			1,792						2,389
Cash and cash equivalents, at end of period			$	1,798					$	2,279

 

			Three Months Ended												Six Months Ended
			July 1, 2023						July 2, 2022						July 1, 2023						July 2, 2022
Percent of sales:
Retail stores			87.7		%				89.4		%				87.4		%				86.9		%
Online, phone, chat and other			12.3		%				10.6		%				12.6		%				13.1		%
Total Company			100.0		%				100.0		%				100.0		%				100.0		%
Sales change rates:
Retail comparable-store sales			(20		%)				10		%				(10		%)				(3		%)
Online, phone and chat			(3		%)				2		%				(12		%)				4		%
Total Retail comparable sales change			(18		%)				9		%				(10		%)				(2		%)
Net opened/closed stores and other			2		%				4		%				2		%				4		%
Total Company			(16		%)				13		%				(8		%)				2		%
Stores open:
Beginning of period			671						653						670						648
Opened			7						10						19						23
Closed			(6)						(4)						(17)						(12)
End of period			672						659						672						659
Other metrics:
Average sales per store ($ in 000's) 1			$	3,089					$	3,526
Average sales per square foot 1			$	1,007					$	1,172
Stores > $2 million net sales 2			71		%				82		%
Stores > $3 million net sales 2			31		%				45		%
Average revenue per smart bed unit 3			$	5,990					$	6,485					$	5,913					$	5,601

1 Trailing twelve months Total Retail comparable sales per store open at least one year.

2 Trailing twelve months for stores open at least one year (excludes online, phone and chat sales).

3 Represents Total Retail (stores, online, phone and chat) net sales divided by Total Retail smart bed units.

We define earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation and asset impairments. Management believes Adjusted EBITDA is a useful indicator of our financial performance and our ability to generate cash from operating activities. Our definition of Adjusted EBITDA may not be comparable to similarly titled definitions used by other companies. The table below reconciles Adjusted EBITDA, which is a non-GAAP financial measure, to the comparable GAAP financial measure:

			Three Months Ended												Trailing Twelve Months Ended
			July 1, 2023						July 2, 2022						July 1, 2023						July 2, 2022
Net income			$	754					$	34,933					$	11,822					$	101,869
Income tax expense			524						11,359						6,602						30,442
Interest expense			9,948						3,619						32,289						9,406
Depreciation and amortization			18,304						15,920						71,318						61,857
Stock-based compensation			5,252						3,910						15,071						18,872
Asset impairments			170						80						294						266
Adjusted EBITDA			$	34,952					$	69,821					$	137,396					$	222,712

 

 

1A multiple of six times annual rent expense is used as an estimate for capitalizing our operating lease obligations in accordance with our credit facility.

Note - Our Adjusted EBITDA and EBITDAR calculations, Free Cash Flow data and Calculation of Net Leverage Ratio under Revolving Credit Facility are considered non-GAAP financial measures and are not in accordance with, or preferable to, "as reported," or GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts.

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

 

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

			Trailing Twelve Months Ended
			July 1, 2023						July 2, 2022
Adjusted net operating profit after taxes (Adjusted NOPAT)
Operating income			$	50,713					$	141,718
Add: Operating lease interest 1			27,040						25,079
Less: Income taxes 2			(21,993)						(39,798)
Adjusted NOPAT			$	55,760					$	126,999
Average adjusted invested capital
Total deficit			$	(419,141)					$	(442,962)
Add: Long-term debt 3			484,161						443,779
Add: Operating lease obligations 4			438,483						420,516
Total adjusted invested capital at end of period			$	503,503					$	421,333
Average adjusted invested capital 5			$	452,573					$	363,986
Adjusted ROIC 6			12.3		%				34.9		%