UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 28, 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 September 28, 2024, 22,371,000 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 nine months ended

September 28, 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 September 28, 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.

Income Taxes

Recent Issued Accounting Pronouncements Not Yet Adopted

Segment Reporting (Topic 280)

In November 2023, the Financial Accounting Standards Board issued guidance within Accounting Standards Update

(ASU) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU requires

that a public entity that has a single reportable segment provide all the disclosures required by the amendments in this

ASU and all existing disclosures in Topic 280. The Company has determined that its current business and operations

consist of a single business segment and a single reporting unit.

The amendments in this ASU are intended to improve segment disclosure requirements, primarily through enhanced

disclosures about significant segment expenses. The key amendments included in this ASU:

•Require disclosure on an annual and interim basis, of significant segment expenses that are regularly provided to

the chief operating decision maker (CODM) and are included within each reported measure of segment profit

and loss.

•Require disclosure on an annual and interim basis, an amount for other segment items (defined in this ASU) and

a description of its composition.

•Clarify that if the CODM uses more than one measure of the segment’s profit or loss in assessing performance,

one or more of those additional measures may be reported.

•Require disclosure of the title and position of the CODM and an explanation of how the CODM uses the

reported measure(s) of segment profit or loss in assessing performance.

This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning

after December 15, 2024, with early adoption permitted. This guidance is required to be adopted by the Company

beginning with the annual period of 2024. The amendments should be applied retrospectively to all prior periods

presented in the consolidated financial statements. The Company is currently evaluating the impact of this ASU on the

Company’s consolidated financial statements.

Currently, management does not believe that any other recently issued, but not yet effective accounting

pronouncements, if currently adopted, would have a material impact on the Company’s unaudited condensed

consolidated financial statements.

 2. Fair Value Measurements

At September 28, 2024 and December 30, 2023, the Company had $20 million and $19 million, respectively, 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 $20 million and $19 million at September 28,

2024 and December 30, 2023, respectively, 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 September 28, 2024 and December 30, 2023. Indefinite-lived trade name/trademarks

totaled $1.4 million at both September 28, 2024 and December 30, 2023.

Definite-lived Intangible Assets

Patents were $2.0 million at both September 28, 2024 and December 30, 2023. Accumulated amortization was $0.9

million at September 28, 2024 and $0.8 million at December 30, 2023. Amortization expense for both the three months

ended September 28, 2024 and September 30, 2023, was $55 thousand, and for both the nine months ended

September 28, 2024 and September 30, 2023 was $0.2 million.

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

 5. Credit Agreement

As of September 28, 2024, the Company’s credit facility had a total commitment amount of $680 million. The credit

facility is for general corporate purposes and to meet seasonal working capital requirements. The Amended and

Restated Credit and Security Agreement, dated February 14, 2018, among the Company, U.S. Bank National Association

and the several banks and other financial institutions from time to time party thereto (as amended, 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 5.00 to 1.00 for the quarterly period ended

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 until maturity.

The minimum interest coverage ratio permitted by the Credit Agreement is 1.50 to 1.00 for both quarterly reporting

periods ending September 28, 2024 and December 28, 2024; and 3.00 to 1.00 for each quarterly reporting period

occurring thereafter until maturity.

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 September 28, 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 ten years. The Company’s office and

manufacturing leases provide for an initial lease term of up to fifteen 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 September 28, 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 September 28, 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 $17 million of legally binding minimum lease payments for leases signed but not yet

commenced.

(2)Includes the current portion of $82 million for operating lease liabilities.

Other information related to operating leases was as follows:

 7. Repurchases of Common Stock

For the three months ended September 28, 2024 and September 30, 2023, we repurchased $0.1 million and $0.2

million, respectively, of common stock in connection with the vesting of restricted stock grants. For the nine months

ended September 28, 2024 and September 30, 2023, we repurchased $0.7 million and $3.7 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 September 28, 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 September 28, 2024 and September 30, 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 nine months ended September 28, 2024 and September 30, 2023, the Company

recognized revenue of $28 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 nine months ended September 28, 2024 and September 30, 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 September 28, 2024 and

September 30, 2023, the Company’s contributions, net of forfeitures, were $1.9 million and $2.3 million, respectively and

during the nine months ended September 28, 2024 and September 30, 2023, were $5.1 million and $7.5 million,

respectively.

 11. Net (Loss) 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 months ended September 28, 2024 and September 30, 2023, and for the nine months ended

September 28, 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 1.2 million and 1.1 million for the three months ended

September 28, 2024 and September 30, 2023, respectively, and 1.3 million and 1.2 million for the nine months ended

September 28, 2024 and September 30, 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

asset impairment charges and are included in the restructuring costs line in the Company’s condensed consolidated

statement of operations. The Company expects an additional $2 million to $3 million of restructuring costs to be incurred

through the remainder of 2024, primarily due to lease contract termination costs. The following table provides a

summary of the Company’s restructuring costs during the during the three and nine months ended September 28, 2024:

____________________

(1) Primarily comprised of lease termination costs.

(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 condensed consolidated balance sheet

(in thousands):

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

$30.1 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 condensed 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 condensed 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 condensed

consolidated results of operations, financial position or cash flows. The Company expenses legal costs as incurred.

On September 27, 2024, a purported customer served a putative class action complaint on behalf of themself and a

putative class of California consumers against Sleep Number in the United States District Court for the Eastern District of

California alleging that Sleep Number’s beds are perpetually on sale in violation of California law. The Plaintiff seeks

injunctive relief, damages, and attorneys fees. Sleep Number does not believe the Plaintiff’s claims have merit and

intends to vigorously defend this matter.

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.

The Court dismissed the class action complaint with prejudice. The Court sua sponte stayed the PAGA collective action

and the individual plaintiff must prove his claims in arbitration before the stay is lifted. Given the developments in these

proceedings, the matter no longer rises to the level of disclosure in Sleep Number’s periodic reports.

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 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 on Form 10-Q 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 the Company’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;

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

effective personnel;

•The volatility of the Company’s 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 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 nearly 16 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 proprietary 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, at a range of good,

better and best price points. Sleep Number® smart beds provide unique features, benefits and comfort designed for

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, an ecosystem of almost 3 million 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 supports lifelong customer relationships – through digital and in-store touchpoints – to

provide an exceptional brand experience. The Company’s more than 29 billion hours of longitudinal sleep data enables

strategic collaborations with world-leading health and research institutions, including Mayo Clinic and American Cancer

Society. And Sleep Number’s 3,700 purpose-driven team members are dedicated to the Company’s mission of

improving lives by individualizing sleep experiences.

In the fourth quarter of 2023, Sleep Number began transforming its operating model for greater financial resilience

across a range of economic environments. These cost improvement actions are broad-based. The Company’s

transformation progress, combined with rigorous execution of their differentiated strategy, positions it - when market

growth returns - to capitalize on their innovation leadership, accelerate profitable growth, generate strong cash flow, and

deliver increased value for shareholders. 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 September 28, 2024 were as follows:

•Net sales for the three months ended September 28, 2024 of $427 million decreased 10% from $473 million for the

same period one year ago due to the ongoing weakness in the mattress industry and consumers continuing to

scrutinize their spending.

•The net sales change resulted from a 9% comparable sales decrease in Total Retail. For additional details, see the

components of total net sales change on page 19.

•Average 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 September 28, 2024 totaled $2.7 million, compared with $3.0

million for the same period last year.

•Operating income for the three months ended September 28, 2024 was $8 million, compared with $5 million in the

prior-year period. The $3 million increase in operating income was driven by a $15 million reduction in operating

expenses and a 3.4 ppt. increase in the gross profit rate, offset by lower net sales. Operating expenses for the three

months ended September 28, 2024 included $2 million of restructuring costs.

•Adjusted EBITDA for the three months ended September 28, 2024 was $28 million, compared to $25 million in the

prior-year period as ongoing gross margin improvements and cost reduction actions partially offset the year-over-

year net sales decline.

•Gross profit rate of 60.8% was 3.4 ppt. higher than the prior-year period. The increase was primarily due to year-

over-year product cost reductions through value engineering and ongoing supplier negotiations and favorable

product mix. See the gross profit discussion on page 20 for additional details.

•The $15 million year-over-year 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 September 28, 2024 was $3 million, compared with a net loss of $2 million for

the same period one year ago. Net loss per diluted share was $0.14, compared with a net loss per diluted share of

$0.10 for the comparable period one year ago.

•The Company’s adjusted return on invested capital (Adjusted ROIC) was 4.5% on a trailing twelve-month basis for

the period ended September 28, 2024, compared with 14.9% for the comparable period one year ago.

•The Company generated $51 million in cash from operating activities for the nine months ended September 28,

2024, compared with $32 million for the same period one year ago.

•Free cash flow provided $34 million for the nine months ended September 28, 2024, compared with using $16

million for the same period one year ago.

•As of September 28, 2024, the Company had $517 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:

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(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: