Slide 1: Unleashing Profitable Growth
May 2012 Unleashing Profitable Growth
Slide 2: Edwin Boon, Investor Relations & Corporate Strategy
Edwin Boon Vice President Investor Relations & Corporate Strategy
Slide 3: Forward Looking Statements
Forward Looking Statements Statements used in this presentation relating to future plans, events, financial results or performance are forward-looking statements subject to certain risks and uncertainties including, among others, such factors as general and industry economic trends; consumer confide
Slide 4: Video to be played
Video to be played.
Slide 5: Shelly Ibach, COO and Incoming CEO
Shelly Ibach Chief Operating Officer Incoming President & Chief Executive Officer
Slide 6: On path for $1.5+ billion in sales and 15%+ operating margin by 2015
On path for $1.5+ billion in sales and 15%+ operating margin by 2015 • Integrated customer-centric strategy • Proprietary product and exclusive distribution • Unique business model Sleep Number Overview Advantaged Growth Opportunity
Slide 7: Industry Dynamics Favor Sleep Number
Industry Dynamics Favor Sleep Number + $12.4B US mattress category U.S. bedding industry (at Retail) « Projected industry growth 7.1% for next 2 years* $13.1 $13.4 $12.4 $12.2 git $124 « Non-innerspring outpacing overall industry growth $11.2 « Sleep Number early in journey ...0% dollar share (<2% u
Slide 8: Industry Dynamics Favor Sleep Number: Consideration
Consideration* *Company Study Industry Dynamics Favor Sleep Number Non-innerspring consideration now similar to innerspring Consumer acceptance fueled by health and wellness trends Sleep Number is well positioned with differentiated product and controlled distribution • • • Now within 2 pts
Slide 9: Our Long Term Goals
Everyone will know Sleep Number and how it will improve their life Innovative Sleep Number products will move society forward with meaningful consumer benefits. Sleep Number will be easy to find and customers will interact with us when and how they want Customers will love their Sleep Number experie
Slide 10: #1 Growth Opportunity: Broaden Awareness
# 1 Growth Opportunity Everyone Will Know Sleep Number and how it will improve their life Redefine broader target customer Persuasive creative development Increase media reach, effectiveness and inve stment • • • 55 % Leading Innerspring Leading Non-Innerspring 32% 15% Sleep Number* * Unaided Brand
Slide 11: Everyone Will Know Sleep Number: Redefine Target Customer
Everyone Will Know Sleep Number Redefine Target Customer Broader Target Customer « Include prime mattress buying years « Move from need state to aspirational fit Increases target * Propensity to trade up Bet ne « Increase target market 4x Before After
Slide 12: Persuasive TV Campaign: Customer Experience
Everyone Will Know Sleep Number Persuasive TV Campaign: Customer Experience 60 Second Promotional Focus 30 Second Product Launch Video to be played. Video to be played.
Slide 13: Invest in persuasive advertising
Invest in persuasive advertising Shift media investments from less effective types Focus on local development and national advertising Singular brand message • • • • Everyone Will Know Sleep Number Increase media reach Increasing media effectiveness & investment Direct Response National broad Reach
Slide 14: Increasing advertising impact
Everyone Will Know Sleep Number Persuasive creative - consumer benefits versus problems Drive store traffic - customer focused value and urgency versus 1-800 call to action Effective reach - reaching broad target customer with frequency • • • Increased Effectiveness Increasing advertising impact Dir
Slide 15: Leading indicator for market share growth
+ 5 points Everyone Will Know Sleep Number Leading Indicator for market share growth • • • (Q1) + 5 points * Company study
Slide 16: Results: Increased Awareness and Market Share
4% 15% Everyone Will Know Sleep Number Awareness and market share gains - overall and in leading markets Leading markets illustrate long term growth opportunity • • Results: Increased Awareness and Market Share Awareness drives market share Leading market 11% Awareness* Market share 30% 20% 5% 35% 1
Slide 17: Everyone Will Know Sleep Number
Everyone Will Know Sleep Number * Consumer trends support Sleep Number’s premium, non-innerspring individualized positioning + Low awareness; early stage growth company + Integrated growth formula that is building awareness
Slide 18: Innovative Sleep Number Products: Individualizing Sleep
Innovative Sleep Number Products will move society forward with meaningful consumer benefits Sleep Number bed series Proprietary family of products Business model leverages growth • • • Individualizing Sleep
Slide 19: Innovative Sleep Number Products: Sleep Number bed series
Innovative Sleep Number Products • DualAir™ Technology • Clinically proven to improve quality of sleep • Premium good/better/best - starting at $999 queen set Sleep Number bed series
Slide 20: Sleep Number family of products
Innovative Sleep Number Products Sleep Number family of products ¢ Individualized sleep experience « Proprietary solution based bedding collection ¢ Attract and broaden addressable market « Adjustable bases and bedding collection increase average purchase « Higher customer engagement is —- CCl
Slide 21: Family of products adds increased sales and profit
Innovative Sleep Number Products Family of products adds Company- controlled average increased sales and profit selling price Bedding collection & adjustable bases « Accelerated sales growth through higher transaction size and total dollars * Increased gross margin dollars; yet slightly lower gross
Slide 22: DualAir Technology that individualizes comfort
Innovative Sleep Number Products DualAir™ Technology that individualizes comfort Proprietary family of sleep products with exclusive distribution Proven to improve quality of sleep and loved by customers • • • Key advantages
Slide 23: Retail distribution strategy
Sleep Number will be easy to find a nd customers will interact with us when and how they want Integrated local market strategy Optimize existing stores Fill-in gaps with new stores Unique and exclusive store experience • • • Retail distribution strategy • National Retailer Sleep Number store presenc
Slide 24: Local market development Year 1
Sleep Number will be easy to find Local market development Year 1 Heavy-up local media Rapid real estate optimization Store team development Apply strategy to 13 large, underdeveloped markets* Launch 4 markets in 2011, 3 in 2012 and 6 in 2013-2014 • • • Aggressive growth strategy • • Growing 2-3x fa
Slide 25: Aggressive growth sample market
Sleep Number will be easy to find Aggressive growth sample market - actions in Year 1 * Increase local media 4x * Optimize retail distribution: + Remodel 4 locations * Open 2 non-mall stores « Assess and develop team Sample market: results Year 1* D> Awareness Market Revenue 4-Wall *Unaided Brand Aw
Slide 26: Flexible store format
Sleep Number will be easy to find Flexible store format Flexible real estate strategy - mall and non-mall formats Reposition select mall stores to non-mall for visibility and accessibility Remodel, expand and/or reposition select mall stores for improved brand experience • • Optimize existing locati
Slide 27: Fill-in gaps with new stores
2 Sleep Number stores, ~$2-3M per store 6-8 competitor stores, <$1M per store vs. Sleep Number will be easy to find Add 5-8% annually Disciplined approach to real estate selection Leverage national presence Deliver year 1 sales of an average of $2M • • • Fill-in gaps with new stores Destination reta
Slide 28: Unique and exclusive store experience
Sleep Number will be easy to find Relationship-based selling process Experiential store design Lifetime relationship with customers Robust store training program; consistent with selling process High Sleep Professional engagement and lower turnover High Sales productivity • • Unique and exclusive st
Slide 29: 36% of stores over $2M
36% of stores over $2M Sleep Number will be easy to find Average sales per comp store … $1.9M Consistent comp growth - exclusive distribution Highest volume stores achieving top- tier comps Significant profit leverage with higher sales per store • • Retail distribution strategy produces high store p
Slide 30: Key advantages: National premium brand retailer
Sleep Number will be easy to find National premium brand retailer Exclusive company-controlled distribution Unique, relationship-based customer experience • • • Key advantages
Slide 31: Kathy Roedel, Chief Technology & Services Officer
Kathy Roedel Chief Technology & Services Officer
Slide 32: Everyone will love their Sleep Number Experience
Everyone will love their Sleep Number Experience and will enthusiastically recommend to their family and friends
Slide 33: Only Sleep Number can innovate for customers at every touch point
Product R&D Product R&D & Mfg & Mfg Marketing Marketing Sales Sales Services Services Lifetime Lifetime Engagement Engagement Everyone will love their Sleep Number Experience Only Sleep Number can innovate for customers at every touch point
Slide 34: Customers rate Sleep Number in-store experience best
Everyone will love their Sleep Number Experience Customers rate Sleep Number In-store experience best among mattress retailers Relationship-based selling process « Continuous store innovation fueled by customer insights « Sales professional connection unparalleled in the industry « In-store experien
Slide 35: Customer-focused product innovation
Everyone will love their Sleep Number Experience Customer-focused product innovation leverages direct insights and feedback Innovative Products « Deliver customer-focused, individualized sleep experiences « Leverage ~5,000 personal customer interactions per day to inform innovation « Integrated laun
Slide 36: Sleep Number Field Service controls the experience
Everyone will love their Sleep Number Experience Sleep Number Field Service controls the experience…right to the bedroom Sleep Number technicians connect in the most private area of the home Comfort support - helping customers find their perfect level of comfort Seals the deal…best bed-buying decisi
Slide 37: Individualized customer service team
Everyone will love their Sleep Number Experience Individualized customer service team listens and re-engages owners Service where, when and how she wants Transforming service with engaging Sleep Service Professionals Reconnecting with “Insiders” with every contact • • • Your customer service people
Slide 38: Differentiated ownership experience
Everyone will love their Sleep Number Experience Sleep Number advances the relationship with a differentiated ownership experience 7.5 million “Insiders”… 1:1 marketing Reasons to re-engage… Bedding Collection, InnerCircle, Services Sleep Number loyalty communities …Online - web, social, mobile • •
Slide 39: ~$200M Growth in Repeat & Referral
~$200M Growth in Repeat & Referral Repeat Referral Everyone will love their Sleep Number Experience Unparalleled customer service creates loyalty and drives repeat and referral growth Repeat & Referral fuels our growth ~$200M Growth in Repeat & Referral Repeat Referral • Investing and innovating our
Slide 40: Only Sleep Number owns the entire end-to-end customer experience
Only Sleep Number owns the entire end-to-end customer experience Only Sleep Number can innovate across every touch point to benefit our customers Only Sleep Number can deliver an unparalleled brand experience to drive repeat and referral sales • • • Everyone will love their Sleep Number Experience K
Slide 41: Customer testimonial
“Starting with the experience of purchasing the bed at the store; the manager listened to my concerns and needs and he made excellent suggestions to help me make the best decision and selection. No pressure but extremely helpful. This was a big purchase for me and I appreciated the very knowledgeabl
Slide 42: Wendy Schoppert, Chief Financial Officer
Wendy Schoppert Chief Financial Officer
Slide 43: Leveraging our Unique Business Model: Investment proposition
Leveraging our Unique Business Model Investment proposition • Compelling sales growth → $1.5B+ by 2015 • Accelerating margins→ 15%+ by 2015 • Self funding, strong balance sheet, no debt
Slide 44: Proven formula drives growth
Q1 ’12 +36% Leveraging our Unique Business Model Proven formula drives growth (11%) 11% 23% 1-Yr Comp (4%) 19% 26% 8.6% 12.2% GM% SM Exp% 61.6% 62.5% 63.3% 47.6% 44.6% 42.7% 4.4%* $0.57 $1.07 $0.24* *Pro Forma EPS *Pro Forma Operating Margin EPS Net Sales Growth Operating Margin
Slide 45: Growing sales through new and existing stores
• Build awareness • Remodels/Repositions • • • $743M* Open new stores $1.5B+ Product Innovation 12% Operating Margin 15%+ Operating Margin 5-8% annual store growth Year 1 new stores average $2M in sales Leverage existing stores $400M+ $400M+ * Net Sales Leveraging our Unique Business Model Growing s
Slide 46: Continue to enhance store profitability
$140K average sales per store $50M+ total sales 1 Customer per store per week $1M $1.3M $1.7M $2M+ 2012E 2015E $3M+ Average Sales per Store Leveraging our Unique Business Model Continue to enhance store profitability
Slide 47: Strategy supports gross margin rate and $ growth
• Pricing & operational efficiency • Investment in customer experience • Quarterly variability 2015E 61.6% 62.5% 63.3% 65%+ • Focus on gross profit $s • Sourced product has lower gross margin rate, yet accretive to profit $s Q109 Q110 Q111 Q112 Leveraging our Unique Business Model Strategy supports
Slide 48: Leveraging selling & marketing expense
Leveraging our Unique Business Model Leveraging selling & marketing expense Selling & Marketing % 2009 2010 2011 2015E «Investing in media to broaden awareness «Leverages total selling & marketing expense - 70% of selling is fixed «National media more efficient as we grow 48
Slide 49: G&A and R&D opportunity
Leveraging our Unique Business Model G&A and R&D opportunity G&A + R&D% 2009 2010 2011 2015E *R&D a key investment with product innovation G&A focused on core, investing in growth plan 49
Slide 50: Vertical integration provides multiple points of leverage
Leveraging our Unique Business Model Vertical integration provides multiple points of leverage Operating Margin se petal aan NS 13.2%+ 12.2% ae 8.6% 44% 2009 2010 2011 2012E 2015E MANUFACTURER) Maximizing Leveraging gross profit selling costs Vertically-integrated focus on 50
Slide 51: Flow through as we invest in growth
Leveraging our Unique Business Model Flow through as we invest in growth Flow Through Operating Margin 46% 15% + Of + 12.2% 1g 28% 8.6% | 18%-21% 720% | FY10 FY11 FY12E FY15E FY10 FY11 FY12E FY15E * ~20% flow through as growth resumes * Consistent with 15%+ operating margin by 2015
Slide 52: Strong cash flow generation
EBITDA ttm ($ in millions) $ in millions Record EBITDA Cash Balance • Maintain $125M minimum balance • Priority #1: Self-fund profitable growth - fast growing ROIC • Initiated share buyback in April Leveraging our Unique Business Model Strong cash flow generation
Slide 53: Investment proposition
Leveraging our Unique Business Model Investment proposition * Compelling sales growth — $1.5B+ by 2015 ‘) ¢ Accelerating margins— 15%+ by 2015 ¢ Self funding, strong balance sheet, no debt 53
Slide 54: Shelly Ibach, COO and Incoming CEO
sleep @ uumber. Shelly Ibach Chief Operating Officer Incoming President & Chief Executive Officer 4
Slide 55: On path for $1.5+ billion in sales and 15%+ operating margin by 2015
On path for $1.5+ billion in sales and 15%+ operating margin by 2015 • Integrated customer-centric strategy • Proprietary product and exclusive distribution • Unique business model Sleep Number Overview Advantaged Growth Opportunity
Slide 56: Q & A
Q & A Q & A
Slide 57: Appendix
Appendix Appendix
Slide 58: Non-GAAP Financial Measures Reconciliation
Non-GAAP Financial Measures Reconciliation EBITDA for 2009, 2010, 2011 & Q1-2012 (trailing-twelve-month basis)
Slide 59: Non-GAAP Financial Measures Reconciliation
Non-GAAP Financial Measures Reconciliation EBITDA for 2009, 2010, 2011 & Q1-2012 (trailing-twelve-month basis)