UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

For the quarterly period ended June 29, 2024

OR

Commission File Number: 000-25121

_______________________________________________________________________

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (763) 551-7000

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities

Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),

and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted

pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the

registrant was required to submit such files). Yes  ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller

reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller

reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for

complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐ No ☒

As of June 29, 2024, 22,355,000 shares of the registrant’s Common Stock were outstanding.

 

INDEX

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Operations

Condensed Consolidated Statements of Shareholders’ Deficit

Condensed Consolidated Statements of Cash Flows

1.  Business and Summary of Significant Accounting Policies

Business & Basis of Presentation

The Company prepared the condensed consolidated financial statements as of and for the three and six months ended

June 29, 2024 of Sleep Number Corporation and its 100%-owned subsidiaries (Sleep Number or the Company), without

audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and they reflect, in the

opinion of management, all normal recurring adjustments, including the elimination of all significant intra-entity balances

and transactions, necessary to present fairly its financial position as of June 29, 2024 and December 30, 2023, and the

consolidated results of operations and cash flows for the periods presented. The historical and quarterly consolidated

results of operations may not be indicative of the results that may be achieved for the full year or any future period.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S.

generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and

regulations. These condensed consolidated financial statements should be read in conjunction with the most recent

audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for

the fiscal year ended December 30, 2023 and other recent filings with the SEC.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to

make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities,

disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the

reported amounts of sales, expenses and income taxes during the reporting period. Predicting future events is inherently

an imprecise activity and, as such, requires the use of judgment. As future events and their effects cannot be determined

with precision, actual results could differ significantly from these estimates. Changes in these estimates will be reflected

in the consolidated financial statements in future periods and could be material. The Company’s critical accounting

policies consist of stock-based compensation, warranty liabilities and revenue recognition.

2.  Fair Value Measurements

At both June 29, 2024 and December 30, 2023, the Company had $19 million of debt and equity securities that fund the

deferred compensation plan and are classified in other non-current assets. The Company also had corresponding

deferred compensation plan liabilities of $19 million at both June 29, 2024 and December 30, 2023, which are included

in other non-current liabilities. The majority of the debt and equity securities are Level 1 as they trade with sufficient

frequency and volume to enable the Company to obtain pricing information on an ongoing basis. Unrealized gains/

(losses) on the debt and equity securities offset those associated with the corresponding deferred compensation plan

liabilities.

3. Inventories

Inventories consisted of the following (in thousands):

4.  Goodwill and Intangible Assets, Net

Goodwill and Indefinite-lived Intangible Assets

Goodwill was $64 million at June 29, 2024 and December 30, 2023. Indefinite-lived trade name/trademarks totaled $1.4

million at both June 29, 2024 and December 30, 2023.

Definite-lived Intangible Assets

Patents were $2.0 million at both June 29, 2024 and December 30, 2023. Accumulated amortization was $0.9 million at

June 29, 2024 and $0.8 million at December 30, 2023. Amortization expense for both the three months ended June 29,

2024 and July 1, 2023, was $55 thousand, and for both the six months ended June 29, 2024 and July 1, 2023 was

$0.1 million.

Annual amortization for Patents for subsequent years are as follows (in thousands):

5. Credit Agreement

As of June 29, 2024, the Company’s credit facility had a total commitment amount of $680 million. The credit facility is

for general corporate purposes, to meet seasonal working capital requirements and to repurchase its stock. The Credit

Agreement includes an accordion feature which allows the Company to increase the amount of the credit facility from

$680 million to $1.0 billion, subject to lenders’ approval. The Credit Agreement provides the lenders with a collateral

security interest in substantially all of the Company’s assets and those of its subsidiaries and requires the Company to

comply with, among other things, a maximum net leverage ratio and a minimum interest coverage ratio.

The maximum net leverage ratio permitted by the Credit Agreement is 5.50 to 1.00 for the quarterly period ended

June 29, 2024; 5.00 to 1.00 for the quarterly reporting period ending September 28, 2024; 4.80 to 1.00 for the quarterly

reporting period ending December 28, 2024; and 4.00 to 1.00 for each quarterly reporting period occurring thereafter.

The minimum interest coverage ratio permitted by the Credit Agreement is 1.25 to 1.00 for the quarterly period ended

June 29, 2024; 1.50 to 1.00 for the quarterly reporting periods ending September 28, 2024 and December 28, 2024; and

3.00 to 1.00 for each quarterly reporting period occurring thereafter.

The carrying amount of the outstanding borrowings under the Credit Agreement approximates fair value because

interest rates approximate the current rates available to the Company. Under the terms of the Credit Agreement, the

Company pays a variable rate of interest and a commitment fee based on its leverage ratio. The Credit Agreement

matures in December 2026. The Company was in compliance with all financial covenants as of June 29, 2024.

The following table summarizes the Company’s borrowings under the credit facility ($ in thousands):

6.  Leases

The Company leases its retail, office and manufacturing space under operating leases which, in addition to the minimum

lease payments, may require payment of a proportionate share of the real estate taxes and certain building operating

expenses. While the Company’s local market development approach generally results in long-term participation in given

markets, the retail store leases generally provide for an initial lease term of five to 10 years. The Company’s office and

manufacturing leases provide for an initial lease term of up to 15 years. In addition, the Company’s mall-based retail

store leases may require payment of variable rent based on net sales in excess of certain thresholds. Certain leases may

contain options to extend the term of the original lease. The exercise of lease renewal options is at the Company’s sole

discretion. Lease options are included in the lease term only if exercise is reasonably certain at lease commencement.

The Company’s lease agreements do not contain any material residual value guarantees. The Company also leases

vehicles and certain equipment under operating leases with an initial lease term of three to six years.

The Company’s operating lease costs include facility, vehicle and equipment lease costs, but exclude variable lease

costs. Operating lease costs are recognized on a straight-line basis over the lease term, after consideration of rent

escalations and rent holidays. The lease term for purposes of the calculation begins on the earlier of the lease

commencement date or the date the Company takes possession of the property. During lease renewal negotiations that

extend beyond the original lease term, the Company estimates straight-line rent expense based on current market

conditions. Variable lease costs are recorded when it is probable the cost has been incurred and the amount can be

reasonably estimated.

At June 29, 2024, the Company’s finance right-of-use assets and lease liabilities were not significant.

Lease costs were as follows (in thousands):

___________________________

(1)Includes short-term lease costs which are not significant.

(2)Variable lease costs include adjustments to percentage rent.

The maturities of operating lease liabilities as of June 29, 2024, were as follows(1) (in thousands):

___________________________

(1)Future payments for real estate taxes and certain building operating expenses for which the Company is obligated are not included in the operating

lease liabilities. Total operating lease payments exclude $19 million of legally binding minimum lease payments for leases signed but not yet

commenced.

(2)Includes the current portion of $81 million for operating lease liabilities.

Other information related to operating leases was as follows:

7.  Repurchases of Common Stock

For the three months ended June 29, 2024 and July 1, 2023, we repurchased $42 thousand and $138 thousand,

respectively, of common stock in connection with the vesting of restricted stock grants. For the six months ended

June 29, 2024 and July 1, 2023, we repurchased $0.6 million and $3.5 million, respectively, of common stock in

connection with the vesting of restricted stock grants. We made no purchases under the Board-approved stock purchase

plan in either period. As of June 29, 2024, the remaining authorization under the Board-approved $600 million share

repurchase program was $348 million.

8.  Revenue Recognition

Deferred contract assets and deferred contract liabilities are included in the condensed consolidated balance sheets as

follows (in thousands):

Deferred revenue and costs related to SleepIQ® technology are currently recognized on a straight-line basis over the

product's estimated life of 4.5 to 5.0 years because the Company’s inputs are generally expended evenly throughout the

performance period. During both the three months ended June 29, 2024 and July 1, 2023, the Company recognized

revenue of $10 million, that was included in the deferred contract liability balances at the beginning of the respective

periods. During both the six months ended June 29, 2024 and July 1, 2023, the Company recognized revenue of $19

million, that was included in the deferred contract liability balances at the beginning of the respective periods.

Revenue from goods and services transferred to customers at a point in time accounted for approximately 98% of

revenues for both the three and six months ended June 29, 2024 and July 1, 2023.

Net sales were as follows (in thousands):

Obligation for Sales Returns

The activity in the sales returns liability account was as follows (in thousands):

9.  Stock-based Compensation Expense

Total stock-based compensation expense was as follows (in thousands):

___________________________

(1) Changes in stock-based compensation expense include the cumulative impact of the change in the expected achievements of certain performance

targets.

10.  Profit Sharing and 401(k) Plan

Under the Company’s profit sharing and 401(k) plan, eligible employees may defer up to 50% of their compensation on a

pre-tax basis, subject to Internal Revenue Service limitations. Each pay period, the Company makes a contribution equal

to a percentage of the employee’s contribution. During the three months ended June 29, 2024 and July 1, 2023, the

Company’s contributions, net of forfeitures, were $1.2 million and $2.8 million, respectively and during the six months

ended June 29, 2024 and July 1, 2023, were $3.2 million and $5.2 million, respectively.

11. Net Income per Common Share

The components of basic and diluted net (loss) income per share were as follows (in thousands, except per share

amounts):

For the three and six months ended June 29, 2024, otherwise dilutive stock-based awards have been excluded from the

calculation of diluted weighted-average shares outstanding, as their inclusion would have had an anti-dilutive effect on

our net loss per diluted share. Additional potential dilutive stock-based awards totaling 1.3 million for both the three

months ended June 29, 2024 and July 1, 2023, and 1.3 million and 1.2 million for the six months ended June 29, 2024

and July 1, 2023, respectively, have been excluded from the diluted net (loss)/income per share calculations because

these stock-based awards were anti-dilutive.

12.  Restructuring Costs

2024.

During the three and six months ended June 29, 2024, the Company recognized $1.8 million and $12.4 million of

restructuring costs, respectively, as follows (in thousands):

____________________

(1) Primarily comprised of lease termination costs. The three months ended June 29, 2024 include a change in estimate.

(2) Primarily comprised of impairments of property and equipment.

The following table provides the activity in the Company’s restructuring related liabilities, which are included within

accounts payable, compensation and benefits and other current liabilities on the consolidated balance sheet (in

thousands):

Since the initiation of cost reduction actions in the fourth quarter of 2023, the Company has recognized a cumulative

$28.1 million of restructuring costs, as follows (in thousands):

____________________

(1)Primarily comprised of lease termination costs.

(2) Includes impairments of both lease right-of-use assets and property and equipment.

13.  Commitments and Contingencies

Warranty Liabilities

The activity in the accrued warranty liabilities account was as follows (in thousands):

Legal Proceedings

The Company is involved from time to time in various legal proceedings arising in the ordinary course of its business,

including primarily commercial, product liability, employment and intellectual property claims. In accordance with U.S.

generally accepted accounting principles, the Company records a liability in its consolidated financial statements with

respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability

can be reasonably estimated. If a material loss is reasonably possible but not known or probable, and may be reasonably

estimated, the estimated loss or range of loss is disclosed. With respect to currently pending legal proceedings, the

Company has not established an estimated range of reasonably possible material losses either because it believes that is

has valid defenses to claims asserted against it, the proceeding has not advanced to a stage of discovery that would

enable it to establish an estimate, or the potential loss is not material. The Company currently does not expect the

outcome of pending legal proceedings to have a material effect on its consolidated results of operations, financial

position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of

one or more claims asserted against the Company could adversely impact its consolidated results of operations, financial

position or cash flows. The Company expenses legal costs as incurred.

Purported Class Action Complaint

On December 15, 2023, a former Field Services team member filed a purported class action Complaint in the Superior

Court of California, County of Santa Clara, alleging violations of California’s meal and rest break law and additional wage

and hour derivative claims under the California Labor Code. While the representative plaintiff was in the Field Services

workforce, the Complaint does not limit the purported plaintiff class to that group, but rather extends to all non-exempt

Sleep Number employees in the state. The plaintiff alleges that Sleep Number failed to provide compliant meal or rest

breaks, failed to pay wages owed due to alleged off the clock work, failed to pay overtime, minimum wage and wages

due at termination, thus resulting in inaccurate wage statements, all in violation of California law. The Complaint seeks

damages in the form of unpaid regular and premium wages, statutory penalties, pre-judgment and post-judgment

interest, plaintiffs’ attorneys’ fees and costs. On February 22, 2024, the plaintiff filed a related lawsuit in the same county

alleging violations of a broad range of California Labor Code wage and hour violations under the state’s Private Attorney

General Act (PAGA), including the same meal and rest break, and wage and hour, violations as appear in the purported

class action. Sleep Number has a pending motion to compel arbitration which includes a request to enforce the class

action waiver that the former Field Services team member signed when they agreed to arbitrate any employment

disputes. The Court stayed the PAGA case pending resolution of the motion to compel arbitration in the purported class

action case.

Shareholder Class Action Complaints

On December 14, 2021, purported Sleep Number shareholder, Steamfitters Local 449 Pension & Retirement Security

Funds (Steamfitters), filed a putative class action complaint in the United States District Court for the District of

Minnesota (the District of Minnesota) on behalf of all purchasers of Sleep Number common stock between February 18,

2021 and July 20, 2021, inclusive, against Sleep Number, Shelly Ibach and David Callen, the Company’s former

Executive Vice President and Chief Financial Officer. Steamfitters alleges material misstatements and omissions in certain

of Sleep Number’s public disclosures during the purported class period, in violation of Sections 10(b) and 20(a) of the

Securities Exchange Act of 1934, as amended (the Exchange Act). The complaint seeks, among other things, unspecified

monetary damages, reasonable costs and expenses and equitable/injunctive or other relief as deemed appropriate by

the District of Minnesota.

On February 14, 2022, a second purported Sleep Number shareholder, Ricardo Dario Schammas, moved for

appointment as lead plaintiff in the action. On March 24, 2022, the District of Minnesota heard argument on Schammas’s

motion, and subsequently appointed Steamfitters and Schammas as Co-Lead Plaintiffs (together, Co-Lead Plaintiffs). On

July 19, 2022, Co-Lead Plaintiffs filed a consolidated amended complaint, which, like the predecessor complaint, asserts

claims against Sleep Number, Shelly Ibach, and David Callen under Sections 10(b) and 20(a) of the Exchange Act. Co-

Lead Plaintiffs purport to assert these claims on behalf of all purchasers of Sleep Number common stock between

February 18, 2021 and July 20, 2021. On September 19, 2022, Defendants moved to dismiss the consolidated amended

complaint, which motion was heard by the Court on January 17, 2023. On July 10, 2023, the Court issued an order

dismissing the Plaintiffs’ consolidated amended complaint with prejudice.

Shareholder Derivative Complaint

On May 12, 2022, Gwendolyn Calla Moore, as the appointed representative of purported Sleep Number shareholder

Matthew Gelb, filed a derivative action (the Derivative Action) in the District of Minnesota against Jean-Michel Valette,

Shelly Ibach, Barbara Matas, Brenda Lauderback, Daniel Alegre, Deborah Kilpatrick, Julie Howard, Kathleen Nedorostek,

Michael Harrison, Stephen Gulis, Jr., David Callen, and Kevin Brown. Moore purports to assert claims on behalf of Sleep

Number for breaches of fiduciary duty, waste, and contribution under Sections 10(b) and 21(d) of the Exchange Act.

Moore’s allegations generally mirror those asserted in the securities complaint described above. The Moore complaint

seeks damages in an unspecified amount, disgorgement, interest, and costs and expenses, including attorneys’ and

experts’ fees.

On September 13, 2022, the District of Minnesota entered a joint stipulation staying all proceedings in the Derivative

Action pending the outcome of any motion to dismiss the Steamfitters consolidated amended complaint. On July 10,

2023, the District of Minnesota in the Steamfitters case dismissed the consolidated amended complaint with prejudice,

as noted above. The Plaintiff in the Derivative Action subsequently moved the Court to voluntarily dismiss its the

Complaint and on January 22, 2024, the District of Minnesota dismissed the Derivative Action without prejudice.

Stockholder Demand

On March 25, 2022, Sleep Number received a shareholder litigation demand (the “Demand”), requesting that the Board

investigate the allegations in the Steamfitters complaint and pursue claims on Sleep Number’s behalf based on those

allegations. On May 12, 2022, the Board established a special litigation committee to investigate the demand.

On October 5 and October 12, 2022, Sleep Number received two additional shareholder litigation demands, which

adopted and incorporated the allegations and requests in the Demand. Both of these additional litigation demands were

referred to the special litigation committee.

Subsequently, the special litigation committee determined that it would not be in the best interests of the Company and

its shareholders to take the actions requested in the demands and, thus, rejected the demands in their entirety.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide

a reader of the Company’s condensed consolidated financial statements with a narrative from the perspective of

management on its financial condition, results of operations, liquidity and certain other factors that may affect the

Company’s future results. MD&A is presented in seven sections:

•Forward-Looking Statements and Risk Factors

•Business Overview

•Results of Operations

•Liquidity and Capital Resources

•Non-GAAP Data Reconciliations

•Off-Balance-Sheet Arrangements and Contractual Obligations

•Critical Accounting Policies

Forward-looking Statements and Risk Factors

 

The discussion in this Quarterly Report contains certain forward-looking statements that relate to future plans,

events, financial results or performance. You can identify forward-looking statements by those that are not

historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “could,” “expect,”

“anticipate,” “believe,” “estimate,” “plan,” “project,” “predict,” “intend,” “potential,” “continue” or the negative

of these or similar terms. These statements are subject to certain risks and uncertainties that could cause actual

results to differ materially from the Company’s historical experience and its present expectations or projections.

These risks and uncertainties include, among others:

•Changes in economic conditions and consumer sentiment and related impacts on discretionary consumer spending;

•Increases in interest rates, which have increased the cost of servicing the Company’s indebtedness;

•Availability of attractive and cost-effective consumer credit options;

•Ability to achieve savings and efficiencies from cost savings plans related to business restructuring actions and to

avoid unexpected adverse effects;

•Dependence on, and ability to maintain working relationships and favorable contractual terms with key suppliers and

third parties;

•Fluctuations in commodity costs or third-party delivery or logistics costs and other inflationary pressures;

•Risks inherent in global-sourcing activities, including tariffs, foreign regulation, geo-political turmoil, war, pandemics,

labor challenges, foreign currency fluctuations, inflation, and climate or other disasters, and resulting supply

shortages and production and delivery delays and disruptions;

•Operating with minimal levels of inventory, which may leave the Company vulnerable to supply shortages, as well as

carrying excess levels of inventory for various products from time to time, which may leave the Company vulnerable

to inventory obsolescence and write-downs;

•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 and to improve and expand the product line;

•Ability to protect the Company’s technology, trademarks, and brand and the adequacy of its intellectual property

rights;

•Ability to effectively compete;

•Risks of disruption in the operation of any of the Company’s facilities and operations, including manufacturing,

assembly, distribution, logistics, field services, home delivery, headquarters, product development, retail or customer

service operations;

•Ability to comply with existing and changing government regulations and laws;

•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 identify and withstand cyber threats that could compromise the security of its systems,

result in a data breach or business disruption;

•Risks associated with advancements in or adoption of artificial intelligence technologies;

•Sleep Number’s ability, and the ability of its suppliers and vendors, to attract, retain and motivate qualified and

effective personnel;

•The volatility of Sleep Number stock, its removal from various stock indices, and the potential negative effects of

shareholder activism or of changes in coverage by securities analysts;

•Environmental, social and governance 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 under the caption “Risk

Factors” in Part I, Item 1A. in the Company’s Annual Report on Form 10-K and in Part II. Item 1A. in subsequent

Quarterly Reports on Form 10-Q.

The Company has no obligation to publicly update or revise any of the forward-looking statements contained in this

Quarterly Report on Form 10-Q.

Business Overview

Sleep Number is a wellness technology company and market leader in the design, manufacturing, marketing and

distribution of highly innovative sleep solutions. The Company’s purpose is to improve the health and wellbeing of

society through higher quality sleep; to date, it has improved the lives of over 15 million people. Sleep Number’s Smart

Sleepers benefit from individualized sleep experiences, night after night, and are experiencing the physical, mental and

emotional benefits of life-changing sleep.

Sleep Number’s life-changing, differentiated smart beds combine physical and digital innovations, integrating

unparalleled physical comfort with a highly advanced technology platform. The smart beds offer the Company’s

signature firmness adjustability, enabling each sleeper adjustable comfort. Embedded digital sensors learn the sleep

needs of each individual; “sense and do” technology uses the sensed data to automatically adjust the smart bed to keep

the sleeper comfortable throughout the night. Active temperature balancing technology supports the ideal climate for

both sleepers and solves a prevalent sleep challenge. Additionally, the smart beds are an exceptional value, with

personalized sleep insights delivered daily, new features regularly added to all smart beds through over-the-air updates,

and prices to meet most budgets. Sleep Number® smart beds provide unmatched features, benefits and comfort that

can lead to improved sleep health and wellness for both sleepers.

The Company’s advantaged business model is supported by its consumer innovation strategy: an individualized sleep

wellness platform, a network of highly engaged Smart Sleepers, a vertically integrated operating model, and a culture of

individuality, with an ambitious vision to become one of the world’s most beloved brands. Sleep Number’s exclusive

distribution meets its customers whenever and wherever they choose – through digital and in-store touchpoints – to

provide an exceptional experience and a lifelong relationship. The Company partners with world-leading institutions to

bring the power of nearly 28 billion hours of longitudinal sleep data to sleep science and research. And Sleep Number’s

3,800 purpose-driven team members are dedicated to the Company’s mission of improving lives by individualizing sleep

experiences.

Sleep Number is focused on cost improvement through broad-based restructuring actions to become a stronger, more

durable company, poised for accelerating growth and superior shareholder returns as the bedding industry demand

environment improves. The Company generates revenue by marketing and selling its innovative smart beds directly to

new and existing customers through its vertically integrated, exclusive, direct-to-consumer retail touch points including

Stores, Online, Phone, and Chat (Total Retail).

Results of Operations

Quarterly and Year-to-Date Results

Quarterly and year-to-date operating results may fluctuate significantly as a result of a variety of factors, including

increases or decreases in sales, timing, amount and effectiveness of advertising expenditures, changes in sales return

rates or warranty experience, timing of investments in growth initiatives and infrastructure, timing of store openings/

closings and related expenses, changes in net sales resulting from changes in the Company’s store base, timing of new

product introductions and related expenses, timing of promotional offerings, competitive factors, changes in commodity

costs, disruptions in global supplies or third-party service providers, seasonality of retail and bedding industry sales,

consumer sentiment and general economic conditions. The extent to which these external factors will impact the

Company’s business and its consolidated financial results will depend on future developments, which are highly

uncertain and cannot be predicted. Therefore, the historical results of operations may not be indicative of the results that

may be achieved for any future period.

Highlights

Financial highlights for the three months ended June 29, 2024 were as follows:

•Net sales for the three months ended June 29, 2024 of $408 million decreased 11% from $459 million for the same

period one year ago. The mattress industry is in a historic recession, consumer purchasing power remains limited,

and consumers are scrutinizing their spending.

•The net sales change resulted from an 11% comparable sales decrease in Total Retail. For additional details, see the

components of total net sales change on page 19.

•Sales per store (sales for stores open at least one year, Total Retail, including online, phone and chat) on a trailing

twelve-month basis for the period ended June 29, 2024 totaled $2.7 million, compared with $3.1 million for the

same period last year.

•Operating income for the three months ended June 29, 2024 was $6 million, compared with $11 million in the prior-

year period. The $5 million decrease in operating income was driven by the lower net sales offset by a 1.5 ppt.

increase in the gross profit rate, and an $18 million reduction in operating expenses. Operating expenses for the

three months ended June 29, 2024 included $2 million of restructuring costs.

•Adjusted EBITDA for the three months ended June 29, 2024 was $28 million, compared to $35 million in the prior-

year period as ongoing cost reduction actions partially offset the year-over-year net sales decline.

•The 1.5 ppt. gross profit rate increase was primarily due to improvement in commodity prices and operating

efficiencies. See the Gross profit discussion on page 20 for additional details.

•The $18 million reduction in the Company’s operating expenses was due to lower sales and marketing and research

and development expenses, partly offset by $2 million of restructuring costs.

•Net loss for the three months ended June 29, 2024 was $5 million, compared with net income of $1 million for the

same period one year ago. Net loss per diluted share was $0.22, compared with net income per diluted share of

$0.03 for the comparable period one year ago.

•The Company’s adjusted return on invested capital (Adjusted ROIC) was 3.7% on a trailing twelve-month basis for

the period ended June 29, 2024, compared with 12.3% for the comparable period one year ago.

•The Company generated $24 million in cash from operating activities for the six months ended June 29, 2024,

compared with $19 million for the same period one year ago.

•Free cash flow provided $9 million for the six months ended June 29, 2024, compared with using $11 million for the

same period one year ago.

•As of June 29, 2024, the Company had $540 million of borrowings under its revolving credit facility.

The following table sets forth the Company’s results of operations expressed as dollars and percentages of net sales.

Figures are in millions, except percentages and per share amounts. Amounts may not add due to rounding differences.

The percentage of total net sales, by dollar volume, was as follows:

The components of total net sales change, including comparable net sales changes, were as follows:

___________________________

(1)Stores are included in the comparable-store calculations in the 13th full month of operations. Stores that have been remodeled or repositioned

within the same shopping center remain in the comparable-store base.

Other sales metrics were as follows:

___________________________

(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 net sales divided by Total Retail smart bed units.

The number of retail stores operating was as follows:

Comparison of Three Months Ended June 29, 2024 with Three Months Ended July 1, 2023

Net sales for the three months ended June 29, 2024 of $408 million decreased 11% from $459 million for the same

period one year ago. The mattress industry is in a historic recession, consumer purchasing power remains limited, and

consumers are scrutinizing their spending.

The net sales change consisted primarily of an 11% comparable sales decrease in Total Retail.

The $50.4 million net sales decrease compared with the same period one year ago was comprised of the following: (i) a

$40.2 million decrease in Retail comparable net sales; (ii) a $7.0 million decrease from online, phone and chat; and (iii) a

$3.2 million decrease from net store closings and other. Total Retail smart bed unit sales decreased 8% compared with

the prior year. Total Retail average revenue per smart bed unit decreased by 3% to $5,802, compared with $5,990 in the

prior-year period.

Gross profit of $241 million for the three months ended June 29, 2024 decreased by $23 million, or 9%, compared with

$264 million for the same period one year ago. The gross profit rate increased to 59.1% of net sales for the three months

ended June 29, 2024, compared with 57.6% for the prior-year comparable period.

The current-year gross profit rate increase of 1.5 ppt. was mainly due to: (i) improvement in commodity prices and

operating efficiencies, increased the rate by 2.2 ppt.; (ii) favorability in sales return and exchange costs, increased the

rate by 0.7 ppt.; partly offset by (iii) product mix of our FlexFit smart adjustable bases, which pressured the rate by 1.3

compensation.

Sales and marketing expenses for the three months ended June 29, 2024 were $182 million, or 44.7% of net sales,

compared with $198 million, or 43.1% of net sales, for the same period one year ago. The current-year sales and

marketing expenses rate increase of 1.6 ppt. was primarily due to the deleveraging impact of an 11% net sales decline

offset by an 8% decrease in expenses including a 7% lower media spend.

General and administrative (G&A) expenses totaled $40 million, or 9.7% of net sales, for the three months ended

June 29, 2024, compared with $40 million, or 8.7% of net sales, in the prior-year period. The $0.2 million decrease in

G&A expenses consisted mainly of: (i) a $1.8 million decrease in employee compensation on lower headcount; offset by

(ii) a $1.0 million year-over-year increase in company-wide, performance-based incentive compensation due to the

expected performance against the full-year targets in the current year; and (iii) $0.6 increase in other miscellaneous

expenses. The G&A expenses rate increased by 1.0 ppt. in the current-year period, compared with the same period one

year ago due to the items discussed above offset by the deleveraging impact of lower net sales.

Research and development (R&D) expenses decreased to $12 million for the three months ended June 29, 2024,

compared with $15 million with the same period last year primarily due to lower headcount and outside services. While

the Company’s consumer innovation pipeline remains robust, it is re-prioritizing R&D resources in this highly constrained

environment.

Interest expense, net increased to $12 million for the three months ended June 29, 2024, compared with $10 million for

the same period one year ago. The $2 million increase was mainly driven by a higher weighted-average interest rate

2024.

Income tax benefit totaled $1.1 million for the three months ended June 29, 2024, compared with income tax expense

of $0.5 million for the same period last year. The change in income tax benefit/expense was primarily due to the impact

of (loss) income before income tax levels.

Comparison of Six Months Ended June 29, 2024 with Six Months Ended July 1, 2023

Net sales for the six months ended June 29, 2024 decreased by $106 million, or 11%, to $879 million, compared with

$985 million for the same period one year ago. The mattress industry is in a historic recession, consumer purchasing

power remains limited, and consumers are scrutinizing their spending.

The net sales decrease consisted primarily of an 11% comparable sales decrease in Total Retail. For additional details,

see the components of total net sales change on page 19.

The $106 million net sales decrease compared with the same period one year ago was comprised of the following: (i) an

$84 million decrease in Retail comparable net sales; (ii) a $19 million decrease in online, phone and other sales; and (iii) a

$3 million decrease resulting from net store closings. Total smart bed unit sales declined 9% compared with the same

period one year ago. Average revenue per smart bed unit in Total Retail decreased by 2% to $5,782, compared with

$5,913 in the prior-year period.

Gross profit of $518 million for the six months ended June 29, 2024 decreased by $57 million, or 10%, compared with

$575 million for the same period one year ago. The gross profit rate increased to 58.9% of net sales for the six months

ended June 29, 2024, compared to 58.3% in the prior-year comparable period.

The current-year gross profit rate increase of 0.6 ppt. was impacted by: (i) improvement in commodity prices and

operating efficiencies, increased the rate by 1.6 ppt.; (ii) favorability in sales return and exchange costs, increased the

rate by 0.3 ppt.; partly offset by (iii) product mix of our FlexFit smart adjustable bases, which pressured the rate by 1.3

compensation.

Sales and marketing expenses for the six months ended June 29, 2024 were $391 million, or 44.5% of net sales,

compared with $428 million, or 43.5% of net sales, for the same period one year ago. The current-year sales and

marketing expenses rate increase of 1.0 ppt. was primarily due to deleveraging impact of a 11% net sales decline offset

by a 9% decrease in expenses including 8% lower media spend.

General and administrative (G&A) expenses totaled $79 million, or 8.9% of net sales, for the six months ended June 29,

2024, compared with $79 million, or 8.0% of net sales, in the prior-year period. The $0.5 million decrease in G&A

expenses consisted of: (i) a $3.0 million reduction in employee compensation on lower headcount; (ii) a $1.2 million

decrease in other occupancy expenses; largely offset by (iii) an increase in miscellaneous other expenses, which

benefited during the same period one year ago from legal and insurance settlements of $1.8 million; and (iv) a $1.1

million increase in depreciation and amortization. The G&A expenses rate increased by 0.9 ppt. in the current-year

period, compared with the same period one year ago due to the deleveraging impact of the 11% net sales decrease

partially offset by the net expense reductions discussed above.

Research and development (R&D) expenses decreased by 20% to $24 million for the six months ended June 29, 2024,

compared with $30 million for the same period one year ago on lower outside services and headcount. While the

Company’s consumer innovation pipeline remains robust, it is reprioritizing R&D resources in this highly constrained

environment.

Interest expense, net increased to $25 million for the six months ended June 29, 2024, compared with $19 million for the

same period one year ago. The $6 million increase was mainly driven by a higher weighted-average interest rate

incurred in 2023, the Company incurred $12.4 million of restructuring costs in the first six months of 2024. Charges

incurred related to this initiative were comprised of contract termination costs, severance and employee-related benefits,

professional fees and other, and asset impairment charges and are included in the restructuring costs line in the

Company’s consolidated statement of operations. The Company expects an additional $1 million to $2 million of

restructuring costs to be incurred through the remainder of 2024.

Income tax benefit totaled $0.4 million for the six months ended June 29, 2024, compared with income tax expense of

$6 million last year. The change in income tax expense was primarily due to the change in (loss) income before income

taxes levels and the impact of discrete tax expenses. Discrete tax expense, primarily stock-based compensation tax

shortfalls, was $2.4 million for the six months ended June 29, 2024, compared to $1.0 million for the same period last

year.

Liquidity and Capital Resources

Managing liquidity and capital resources is an important part of the Company’s commitment to deliver superior

shareholder value over time. The Company’s primary sources of liquidity are cash flows provided by operating activities

and cash available under its $680 million revolving credit facility, as amended. As of June 29, 2024, the Company does

not have any off-balance sheet financing other than its $7 million in outstanding letters of credit. The cash generated

from ongoing operations and cash available under the revolving credit facility are expected to be adequate to maintain

operations, and fund anticipated expansion, strategic initiatives and contractual obligations such as lease payments and

capital commitments for new retail stores for the foreseeable future.

Changes in cash and cash equivalents during the six months ended June 29, 2024 primarily consisted of $24 million of

cash provided by operating activities, a $6 million decrease in short-term borrowings which included a decrease of $7

million in book overdrafts, partly offset by an increase of $1 million in the revolving credit facility, $14 million of cash

used to purchase property and equipment and $3 million of cash used to issue notes receivable.

The following table summarizes cash flows (in millions). Amounts may not add due to rounding differences:

Cash provided by operating activities for the six months ended June 29, 2024 was $24 million, compared with $19