Sleep Number Announces First Quarter 2024 Results

About this update from Sleep Number Corporation

Net sales of $470 million ; adjusted EBITDA of $37 million slightly ahead of expectations Reduced operating expenses by $24 million year-over-year (before restructuring costs) and remain on track to deliver $40 million to $45 million of operating expense reductions for the year Free cash flow increased $21 million compared with the prior year’s first quarter Reiterate full-year 2024 adjusted EBITDA outlook of $125 million to $145 million MINNEAPOLIS --(BUSINESS WIRE)-- Sleep Number Corporation (Nasdaq: SNBR) today reported results for the quarter ended March 30, 2024 . “Our actions to increase operating model efficiencies drove first quarter adjusted EBITDA and gross margin rate ahead of our expectations. We also generated a significant year-over-year increase in free cash flow, as planned, and continue to prioritize paying down debt and reducing leverage,” said Shelly Ibach , Chair, President and CEO. “As we build a more durable operating model and as demand for our category improves from recessionary levels, we expect to capitalize on our significant opportunity as a sleep wellness technology company.” First Quarter Overview Net sales of $470 million declined 11% versus the prior year, including approximately four percentage points of pressure from year-over-year order backlog changes Gross margin of 58.7% compared with 58.9% last year; the first quarter gross margin rate represented a significant sequential improvement from the back-half of the prior year Operating expenses were reduced by $24 million to $260 million (before restructuring charges) compared with $284 million last year Adjusted EBITDA of $37 million compared to $49 million last year, as ongoing cost reduction actions partially offset the year-over-year net sales decline Cash Flows and Liquidity Review Net cash provided by operating activities of $34 million in the first quarter, compared with $19 million for the same period last year Free cash flow of $24 million in the first quarter, compared with $3 million for the same period last year Leverage ratio of 4.2x EBITDAR at the end of the first quarter versus covenant maximum of 5.0x Financial Outlook The company reiterates its outlook for 2024 adjusted EBITDA of $125 million to $145 million . We continue to expect a mid-single digit net sales decline for the year on a low-single digit demand decline. The company expects approximately 100 basis points of gross margin rate improvement and $14 million of restructuring charges for the year. The company expects to generate $60 million to $80 million of free cash flow with capital expenditures of $30 million . Conference Call Information Management will host its regularly scheduled conference call to discuss the company’s results at 5 p.m. EDT ( 4 p.m. CDT ; 2 p.m. PDT ) today. To access the webcast, please visit the investor relations area of the Sleep Number website at https://ir.sleepnumber.com . The webcast replay will remain available for approximately 60 days. About Sleep Number Corporation Sleep Number is a wellness technology company. We are guided by our purpose to improve the health and wellbeing of society through higher quality sleep; to date, our innovations have improved over 15 million lives. Our wellness technology platform helps solve sleep problems, whether it’s providing individualized temperature control for each sleeper through our Climate360® smart bed or applying our nearly 26 billion hours of longitudinal sleep data and expertise to research with global institutions. Our smart bed ecosystem drives best-in-class engagement through dynamic, adjustable, and effortless sleep with personalized digital sleep and health insights; our millions of Smart Sleepers are loyal brand advocates. And our 4,000 mission-driven team members passionately innovate to drive value creation through our vertically integrated business model, including our exclusive direct-to-consumer selling in over 650 stores and online. To learn more about life-changing, individualized sleep, visit a Sleep Number® store near you, our newsroom . and investor relations sites, or SleepNumber.com Forward-looking Statements Statements used in this news release relating to future plans, events, financial results or performance, such as the statement that the company is building a more durable business model as the bedding industry demand environment improves from recessionary levels and the company’s financial outlook, including the company’s expected adjusted EBITDA, in 2024 and future capital expenditures and operating expenses, are forward-looking statements subject to certain risks and uncertainties including, 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 our indebtedness; availability of attractive and cost-effective consumer credit options; ability to achieve savings and efficiencies from cost savings plans related to operating model transformation and to avoid unexpected adverse effects; dependence on, and ability to maintain working relationships 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 us vulnerable to supply shortages; the effectiveness of our marketing strategy and promotional efforts; the execution of our 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 our technology, trademarks, and brand and the adequacy of our intellectual property rights; ability to effectively compete; risks of disruption in the operation of our 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; our ability to identify and withstand cyber threats that could compromise the security of our systems, result in a data breach or business disruption; risks associated with advancements in or adoption of artificial intelligence technologies; our ability, and the ability of our suppliers and vendors, to attract, retain and motivate qualified and effective personnel; the volatility of Sleep Number stock, our 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 our ability to adapt to climate change and readiness for legal or regulatory responses thereto.​ Additional information concerning these and other risks and uncertainties is contained in the company’s filings with the Securities and Exchange Commission , including the Annual Report on Form 10-K and other periodic reports. We have no obligation to publicly update or revise any of these forward-looking statements. SLEEP NUMBER CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (unaudited – in thousands, except per share amounts) Three Months Ended March 30 , 2024 % of Net Sales April 1 , 2023 % of Net Sales Net sales $ 470,449 100.0 % $ 526,527 100.0 % Cost of sales 194,275 41.3 % 216,262 41.1 % Gross profit 276,174 58.7 % 310,265 58.9 % Operating expenses: Sales and marketing 208,512 44.3 % 230,488 43.8 % General and administrative 39,079 8.3 % 39,401 7.5 % Research and development 12,441 2.6 % 14,443 2.7 % Restructuring costs 10,600 2.3 % — — % Total operating expenses 270,632 57.5 % 284,332 54.0 % Operating income 5,542 1.2 % 25,933 4.9 % Interest expense, net 12,299 2.6 % 9,102 1.7 % (Loss) income before income taxes (6,757 ) (1.4 %) 16,831 3.2 % Income tax expense 725 0.2 % 5,366 1.0 % Net (loss) income $ (7,482 ) (1.6 %) $ 11,465 2.2 % Net (loss) income per share – basic $ (0.33 ) $ 0.51 Net (loss) income per share – diluted $ (0.33 ) $ 0.51 Reconciliation of weighted-average shares outstanding: Basic weighted-average shares outstanding 22,506 22,296 Dilutive effect of stock-based awards — 287 Diluted weighted-average shares outstanding 22,506 22,583 For the three months ended March 30, 2024 , potentially 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. SLEEP NUMBER CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (unaudited – in thousands, except per share amounts) subject to reclassification March 30 , 2024 December 30 , 2023 Assets Current assets: Cash and cash equivalents $ 2,068 $ 2,539 Accounts receivable, net of allowances of $1,090 and $1,437 , respectively 21,833 26,859 Inventories 100,904 115,433 Prepaid expenses 20,655 16,660 Other current assets 35,589 44,637 Total current assets 181,049 206,128 Non-current assets: Property and equipment, net 167,037 179,503 Operating lease right-of-use assets 387,942 395,411 Goodwill and intangible assets, net 66,579 66,634 Deferred income taxes 21,181 20,253 Other non-current assets 84,685 82,951 Total assets $ 908,473 $ 950,880 Liabilities and Shareholders’ Deficit Current liabilities: Borrowings under revolving credit facility $ 523,500 $ 539,500 Accounts payable 125,304 135,901 Customer prepayments 50,262 49,143 Accrued sales returns 22,415 22,402 Compensation and benefits 28,296 28,273 Taxes and withholding 16,661 17,134 Operating lease liabilities 81,300 81,760 Other current liabilities 58,454 61,958 Total current liabilities 906,192 936,071 Non-current liabilities: Operating lease liabilities 343,447 351,394 Other non-current liabilities 104,697 105,343 Total non-current liabilities 448,144 456,737 Total liabilities 1,354,336 1,392,808 Shareholders’ deficit: Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding — — Common stock, $0.01 par value; 142,500 shares authorized, 22,326 and 22,235 shares issued and outstanding, respectively 223 222 Additional paid-in capital 20,262 16,716 Accumulated deficit (466,348 ) (458,866 ) Total shareholders’ deficit (445,863 ) (441,928 ) Total liabilities and shareholders’ deficit $ 908,473 $ 950,880 SLEEP NUMBER CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited – in thousands) subject to reclassification Three Months Ended March 30 , 2024 April 1 , 2023 Cash flows from operating activities: Net (loss) income $ (7,482 ) $ 11,465 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 17,487 18,218 Stock-based compensation 4,117 4,639 Net loss on disposals and impairments of assets 2,500 12 Deferred income taxes (928 ) (3,252 ) Changes in operating assets and liabilities: Accounts receivable 5,026 2,717 Inventories 14,529 (2,747 ) Income taxes 1,587 8,736 Prepaid expenses and other assets 5,473 (11,056 ) Accounts payable (2,765 ) (574 ) Customer prepayments 1,119 (4,639 ) Accrued compensation and benefits 30 (593 ) Other taxes and withholding (2,060 ) (711 ) Other accruals and liabilities (4,888 ) (3,634 ) Net cash provided by operating activities 33,745 18,581 Cash flows from investing activities: Purchases of property and equipment (9,308 ) (15,556 ) Issuance of notes receivable (2,942 ) — Net cash used in investing activities (12,250 ) (15,556 ) Cash flows from financing activities: Net decrease in short-term borrowings (21,396 ) (384 ) Repurchases of common stock (570 ) (3,363 ) Proceeds from issuance of common stock — 389 Net cash used in financing activities (21,966 ) (3,358 ) Net decrease in cash and cash equivalents (471 ) (333 ) Cash and cash equivalents, at beginning of period 2,539 1,792 Cash and cash equivalents, at end of period $ 2,068 $ 1,459 SLEEP NUMBER CORPORATION AND SUBSIDIARIES Supplemental Financial Information (unaudited) Three Months Ended March 30 , 2024 April 1 , 2023 Percent of sales: Retail stores 88.2 % 87.1 % Online, phone, chat and other 11.8 % 12.9 % Total Company 100.0 % 100.0 % Sales change rates: Retail comparable-store sales (10 %) 1 % Online, phone and chat (19 %) (18 %) Total Retail comparable sales change (11 %) (2 %) Net opened/closed stores and other 0 % 2 % Total Company (11 %) 0 % Stores open: Beginning of period 672 670 Opened 6 12 Closed (17 ) (11 ) End of period 661 671 Other metrics: Average sales per store ($ in 000's) 1 $ 2,786 $ 3,239 Average sales per square foot 1 $ 903 $ 1,060 Stores > $2 million net sales 2 63 % 75 % Stores > $3 million net sales 2 23 % 36 % Average revenue per smart bed unit 3 $ 5,765 $ 5,848 1 Trailing twelve months Total Retail comparable sales per store open at least one year. 2 Trailing twelve months for stores open at least one year (excludes online, phone and chat sales). 3 Represents Total Retail (stores, online, phone and chat) net sales divided by Total Retail smart bed units. SLEEP NUMBER CORPORATION AND SUBSIDIARIES Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) (in thousands) We define earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation, restructuring costs and asset impairments. Management believes Adjusted EBITDA is a useful indicator of our financial performance and our ability to generate cash from operating activities. Our definition of Adjusted EBITDA may not be comparable to similarly titled definitions used by other companies. The table below reconciles Adjusted EBITDA, which is a non-GAAP financial measure, to the comparable GAAP financial measure: Three Months Ended Trailing Twelve Months Ended March 30 , 2024 April 1 , 2023 March 30 , 2024 April 1 , 2023 Net (loss) income $ (7,482 ) $ 11,465 $ (34,234 ) $ 46,001 Income tax expense (benefit) 725 5,366 (9,107 ) 17,437 Interest expense 12,299 9,102 45,892 25,960 Depreciation and amortization 17,145 17,991 71,633 68,934 Stock-based compensation 4,117 4,639 14,333 13,729 Restructuring costs 1 10,600 — 26,328 — Asset impairments — 12 660 204 Adjusted EBITDA $ 37,404 $ 48,575 $ 115,505 $ 172,265 1 Represents costs related to business restructuring actions initiated in the fourth quarter of fiscal 2023. Free Cash Flow (in thousands) Three Months Ended Trailing Twelve Months Ended March 30 , 2024 April 1 , 2023 March 30 , 2024 April 1 , 2023 Net cash provided by operating activities $ 33,745 $ 18,581 $ 6,136 $ 30,161 Subtract: Purchases of property and equipment 9,308 15,556 50,808 65,406 Free cash flow $ 24,437 $ 3,025 $ (44,672 ) $ (35,245 ) Note - Our Adjusted EBITDA calculations and Free Cash Flow data are considered non-GAAP financial measures and are not in accordance with, or preferable to, "as reported," or GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts. GAAP - generally accepted accounting principles in the U.S. SLEEP NUMBER CORPORATION AND SUBSIDIARIES Calculation of Net Leverage Ratio under Revolving Credit Facility (in thousands) Our calculation of Net Leverage Ratio under Revolving Credit Facility was changed effective with the amendment of our credit facility on November 2, 2023 . Prior to the amendment, the calculation included capitalized operating lease obligations based on a multiple of six times annual rent expense. The amendment replaced this line item with operating lease liabilities included in our financial statements under ASC 842. The calculations in accordance with the November 2, 2023 amendment are presented below. The prior year is presented in conformity with the November 2, 2023 amendment. Trailing Twelve Months Ended March 30 , 2024 April 1 , 2023 Borrowings under revolving credit facility $ 523,500 $ 470,600 Outstanding letters of credit 7,147 7,147 Finance lease obligations 300 392 Consolidated funded indebtedness $ 530,947 $ 478,139 Operating lease liabilities 1 424,746 436,939 Total debt including operating lease liabilities (a) $ 955,693 $ 915,078 Adjusted EBITDA (see above) $ 115,505 $ 172,265 Consolidated rent expense 112,233 111,593 Consolidated EBITDAR (b) $ 227,738 $ 283,858 Net Leverage Ratio under revolving credit facility (a divided by b) 4.2 to 1.0 3.2 to 1.0 1 Reflects operating lease liabilities included in our financial statements under ASC 842. The prior period has been updated to reflect this calculation. Note - Our Net Leverage Ratio under Revolving Credit Facility, Adjusted EBITDA and EBITDAR calculations are considered non-GAAP financial measures and are not in accordance with, or preferable to, "as reported," or GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts. GAAP - generally accepted accounting principles in the U.S. SLEEP NUMBER CORPORATION AND SUBSIDIARIES Calculation of Return on Invested Capital (Adjusted ROIC) (in thousands) Adjusted ROIC is a financial measure we use to determine how efficiently we deploy our capital. It quantifies the return we earn on our adjusted invested capital. Management believes Adjusted ROIC is also a useful metric for investors and financial analysts. We compute Adjusted ROIC as outlined below. Our definition and calculation of Adjusted ROIC may not be comparable to similarly titled definitions and calculations used by other companies. The tables below reconcile adjusted net operating profit after taxes (Adjusted NOPAT) and total adjusted invested capital, which are non-GAAP financial measures, to the comparable GAAP financial measures: Trailing Twelve Months Ended March 30 , 2024 April 1 , 2023 Adjusted net operating profit after taxes (Adjusted NOPAT) Operating income $ 2,550 $ 89,398 Add: Operating lease interest 1 27,882 26,487 Less: Income taxes 2 (7,479 ) (29,674 ) Adjusted NOPAT $ 22,953 $ 86,211 Average adjusted invested capital Total deficit $ (445,863 ) $ (425,047 ) Add: Long-term debt 3 523,800 470,991 Add: Operating lease liabilities 4 424,746 436,939 Total adjusted invested capital at end of period $ 502,683 $ 482,883 Average adjusted invested capital 5 $ 505,498 $ 423,287 Adjusted ROIC 6 4.5 % 20.4 % 1 Represents the interest expense component of lease expense included in our financial statements under ASC 842, Leases. 2 Reflects annual effective income tax rates, before discrete adjustments, of 24.6% and 25.6% for March 30, 2024 and April 1, 2023 , respectively. 3 Long-term debt includes existing finance lease liabilities. 4 Reflects operating lease liabilities included in our financial statements under ASC 842. 5 Average adjusted invested capital represents the average of the last five fiscal quarters' ending adjusted invested capital balances. 6 Adjusted ROIC equals Adjusted NOPAT divided by average adjusted invested capital. Note - the Company's adjusted ROIC calculation and data are considered non-GAAP financial measures and are not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts. The Company updated its Adjusted ROIC calculation effective beginning with the reporting period ended December 31, 2022 , to reflect adjustments consistent with ASC 842. GAAP - generally accepted accounting principles in the U.S. SLEEP NUMBER CORPORATION AND SUBSIDIARIES Reported to Adjusted Statements of Operations Data Reconciliation (in thousands, except per share amounts) Three Months Ended March 30, 2024 April 1, 2023 As Reported Restructuring Costs 1, 2 As Adjusted As Reported Operating income $ 5,542 $ 10,600 $ 16,142 $ 25,933 Interest expense, net 12,299 — 12,299 9,102 (Loss) income before income taxes (6,757 ) 10,600 3,843 16,831 Income tax expense 725 2,512 3,237 5,366 Net (loss) income $ (7,482 ) $ 8,088 $ 606 $ 11,465 Net (loss) income per share: Basic $ (0.33 ) $ 0.36 $ 0.03 $ 0.51 Diluted $ (0.33 ) $ 0.36 $ 0.03 $ 0.51 Basic Shares 22,506 22,506 22,506 22,296 Diluted Shares 22,506 22,506 22,506 22,583 1 Represents costs related to business restructuring actions initiated in the fourth quarter of fiscal 2023. 2 The income tax expense is calculated using the estimated U.S. federal and state statutory tax rate of 23.7%. Note - Our "as adjusted" data is considered a non-GAAP financial measure and is not in accordance with, or preferable to, "as reported," or GAAP financial data. However, we are providing this information as we believe it facilitates year-over-year comparisons for investors and financial analysts. GAAP - generally accepted accounting principles View source version on businesswire.com : https://www.businesswire.com/news/home/20240424397878/en/ Investor Contact: Dave Schwantes ; (763) 551-7498; [email protected] Media Contact: Julie Elepano ; (414) 732-9840; [email protected] Source: Sleep Number Corporation

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