Sleep Number Announces Second Quarter 2024 Results

About this update from Sleep Number Corporation

Generated adjusted EBITDA of $28 million for the second quarter Delivered gross margin rate of 59.1% for the second quarter, up 150 basis points versus last year and ahead of expectations Reduced operating expenses by $19 million year-over-year for the quarter and $44 million year-to-date (both periods before restructuring costs) Year-to-date free cash flow increased $21 million compared with the same period last year 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 June 29, 2024 . “The implementation of our transformative initiatives is improving gross margin, operating expenses and free cash flow, as our teams continue to execute sustainable changes across the business. In the second quarter, we delivered gross margin rate expansion and adjusted EBITDA slightly ahead of expectations, despite facing a more challenging industry sales environment than anticipated,” said Shelly Ibach , Chair, President and CEO. “In this environment, we continue to prioritize paying down debt and reducing leverage. Our more durable operating model is enabling us to effectively navigate the persistent macroeconomic headwinds and prolonged industry recession, while positioning us for even greater profitability when the industry recovers.” Second Quarter Overview Net sales of $408 million were down 11% versus the prior year, including approximately six percentage points of pressure from year-over-year order backlog changes Gross margin of 59.1% was up 150 basis points versus the prior year, driven by ongoing product cost reductions through value engineering and supplier negotiations, efficiency gains in our home delivery and logistics operations and improved product returns rates Operating expenses of $234 million (before restructuring charges) were down $19 million versus the prior year’s second quarter, including broad-based cost reductions across the business Adjusted EBITDA of $28 million compared to $35 million last year, with a higher gross margin rate and $19 million operating expense improvement, partially offsetting the year-over-year net sales decline Cash Flows and Liquidity Review Net cash provided by operating activities of $24 million for the first six months of the year, a $5 million increase versus the same period last year Free cash flow of $9 million for the first six months of the year, up $21 million versus the same period last year Leverage ratio of 4.4x EBITDAR at the end of the second quarter versus covenant maximum of 5.5x for the quarter Financial Outlook The company reiterates its outlook for 2024 adjusted EBITDA of $125 million to $145 million . We expect a mid-single digit net sales decline for the year. For the second half of the year, we expect demand and net sales to be flat to down low-single digits versus the prior year, as we lap easier comparisons from the prior year and benefit from demand driving initiatives. The company expects at least 100 basis points of gross margin rate improvement and $14 million of restructuring charges for the year. The company now expects to generate $50 million to $70 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. We have also posted an updated investor presentation to the investor relations area of the Sleep Number website. 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 28 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 3,800 mission-driven team members passionately innovate to drive value creation through our vertically integrated business model, including our exclusive direct-to-consumer selling in nearly 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 continues to prioritize paying down debt and reducing leverage and that the company’s more durable operating model is enabling the company to effectively navigate the persistent macroeconomic headwinds and prolonged industry recession, while positioning the company for even greater profitability, and the company’s financial outlook, including the company’s expected 2024 adjusted EBITDA and future net sales, demand, gross margin, and free cash flow expectations, are forward-looking statements subject to certain risks and uncertainties which could cause the company’s results to differ materially. The most important risks and uncertainties are described in the company’s filings with the Securities and Exchange Commission , including in Item 1A of the company’s Annual Report on Form 10-K and other periodic reports. Forward-looking statements speak only as of the date they are made, and the company does not undertake any obligation to update any forward-looking statement. SLEEP NUMBER CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (unaudited – in thousands, except per share amounts) Three Months Ended June 29 , 2024 % of Net Sales July 1 , 2023 % of Net Sales Net sales $ 408,413 100.0 % $ 458,789 100.0 % Cost of sales 166,923 40.9 % 194,544 42.4 % Gross profit 241,490 59.1 % 264,245 57.6 % Operating expenses: Sales and marketing 182,400 44.7 % 197,779 43.1 % General and administrative 39,573 9.7 % 39,795 8.7 % Research and development 11,578 2.8 % 15,445 3.4 % Restructuring costs 1,819 0.4 % — 0.0 % Total operating expenses 235,370 57.6 % 253,019 55.1 % Operating income 6,120 1.5 % 11,226 2.4 % Interest expense, net 12,270 3.0 % 9,948 2.2 % (Loss) income before income taxes (6,150 ) (1.5 %) 1,278 0.3 % Income tax (benefit) expense (1,099 ) (0.3 %) 524 0.1 % Net (loss) income $ (5,051 ) (1.2 %) $ 754 0.2 % Net (loss) income per share – basic $ (0.22 ) $ 0.03 Net (loss) income per share – diluted $ (0.22 ) $ 0.03 Reconciliation of weighted-average shares outstanding: Basic weighted-average shares outstanding 22,614 22,460 Dilutive effect of stock-based awards — 42 Diluted weighted-average shares outstanding 22,614 22,502 For the three months ended June 29, 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 Statements of Operations (unaudited – in thousands, except per share amounts) Six Months Ended June 29 , 2024 % of Net Sales July 1 , 2023 % of Net Sales Net sales $ 878,862 100.0 % $ 985,316 100.0 % Cost of sales 361,198 41.1 % 410,806 41.7 % Gross profit 517,664 58.9 % 574,510 58.3 % Operating expenses: Sales and marketing 390,912 44.5 % 428,267 43.5 % General and administrative 78,652 8.9 % 79,196 8.0 % Research and development 24,019 2.7 % 29,888 3.0 % Restructuring costs 12,419 1.4 % — 0.0 % Total operating expenses 506,002 57.6 % 537,351 54.5 % Operating income 11,662 1.3 % 37,159 3.8 % Interest expense, net 24,569 2.8 % 19,050 1.9 % (Loss) income before income taxes (12,907 ) (1.5 %) 18,109 1.8 % Income tax (benefit) expense (374 ) 0.0 % 5,890 0.6 % Net (loss) income $ (12,533 ) (1.4 %) $ 12,219 1.2 % Net (loss) income per share – basic $ (0.56 ) $ 0.55 Net (loss) income per share – diluted $ (0.56 ) $ 0.54 Reconciliation of weighted-average shares outstanding: Basic weighted-average shares outstanding 22,560 22,378 Dilutive effect of stock-based awards — 165 Diluted weighted-average shares outstanding 22,560 22,543 For the six months ended June 29, 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 June 29 , 2024 December 30 , 2023 Assets Current assets: Cash and cash equivalents $ 2,020 $ 2,539 Accounts receivable, net of allowances of $1,098 and $1,437 , respectively 20,272 26,859 Inventories 95,845 115,433 Prepaid expenses 21,322 16,660 Other current assets 37,925 44,637 Total current assets 177,384 206,128 Non-current assets: Property and equipment, net 153,676 179,503 Operating lease right-of-use assets 373,518 395,411 Goodwill and intangible assets, net 66,523 66,634 Deferred income taxes 25,397 20,253 Other non-current assets 87,147 82,951 Total assets $ 883,645 $ 950,880 Liabilities and Shareholders’ Deficit Current liabilities: Borrowings under revolving credit facility $ 540,200 $ 539,500 Accounts payable 106,039 135,901 Customer prepayments 44,518 49,143 Accrued sales returns 20,531 22,402 Compensation and benefits 35,305 28,273 Taxes and withholding 16,563 17,134 Operating lease liabilities 80,914 81,760 Other current liabilities 56,500 61,958 Total current liabilities 900,570 936,071 Non-current liabilities: Operating lease liabilities 327,810 351,394 Other non-current liabilities 102,229 105,343 Total non-current liabilities 430,039 456,737 Total liabilities 1,330,609 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, 22,355 and 22,235 shares issued and outstanding, respectively 224 222 Additional paid-in capital 24,211 16,716 Accumulated deficit (471,399 ) (458,866 ) Total shareholders’ deficit (446,964 ) (441,928 ) Total liabilities and shareholders’ deficit $ 883,645 $ 950,880 SLEEP NUMBER CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited – in thousands) subject to reclassification Six Months Ended June 29 , 2024 July 1 , 2023 Cash flows from operating activities: Net (loss) income $ (12,533 ) $ 12,219 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 34,177 36,749 Stock-based compensation 8,109 9,890 Net loss on disposals and impairments of assets 2,500 181 Deferred income taxes (5,144 ) (8,272 ) Changes in operating assets and liabilities: Accounts receivable 6,587 1,903 Inventories 19,588 (7,412 ) Income taxes 774 1,808 Prepaid expenses and other assets (1,483 ) (5,824 ) Accounts payable (18,464 ) (10,244 ) Customer prepayments (4,625 ) (14,683 ) Accrued compensation and benefits 7,153 7,594 Other taxes and withholding (1,345 ) (2,074 ) Other accruals and liabilities (11,776 ) (3,115 ) Net cash provided by operating activities 23,518 18,720 Cash flows from investing activities: Purchases of property and equipment (14,075 ) (29,899 ) Issuance of notes receivable (2,942 ) (435 ) Net cash used in investing activities (17,017 ) (30,334 ) Cash flows from financing activities: Net (decrease) increase in short-term borrowings (6,408 ) 14,693 Repurchases of common stock (612 ) (3,501 ) Proceeds from issuance of common stock — 428 Net cash (used in) provided by financing activities (7,020 ) 11,620 Net (decrease) increase in cash and cash equivalents (519 ) 6 Cash and cash equivalents, at beginning of period 2,539 1,792 Cash and cash equivalents, at end of period $ 2,020 $ 1,798 SLEEP NUMBER CORPORATION AND SUBSIDIARIES Supplemental Financial Information (unaudited) Three Months Ended Six Months Ended June 29 , 2024 July 1 , 2023 June 29 , 2024 July 1 , 2023 Percent of sales: Retail stores 87.8 % 87.7 % 88.0 % 87.4 % Online, phone, chat and other 12.2 % 12.3 % 12.0 % 12.6 % Total Company 100.0 % 100.0 % 100.0 % 100.0 % Sales change rates: Retail comparable-store sales (11 %) (20 %) (10 %) (10 %) Online, phone and chat (13 %) (3 %) (16 %) (12 %) Total Retail comparable sales change (11 %) (18 %) (11 %) (10 %) Net opened/closed stores and other 0 % 2 % 0 % 2 % Total Company (11 %) (16 %) (11 %) (8 %) Stores open: Beginning of period 661 671 672 670 Opened 4 7 10 19 Closed (19 ) (6 ) (36 ) (17 ) End of period 646 672 646 672 Other metrics: Average sales per store ($ in 000's) 1 $ 2,732 $ 3,089 Average sales per square foot 1 $ 883 $ 1,007 Stores > $2 million net sales 2 62 % 71 % Stores > $3 million net sales 2 21 % 31 % Average revenue per smart bed unit 3 $ 5,802 $ 5,990 $ 5,782 $ 5,913 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 June 29 , 2024 July 1 , 2023 June 29 , 2024 July 1 , 2023 Net (loss) income $ (5,051 ) $ 754 $ (40,039 ) $ 11,822 Income tax (benefit) expense (1,099 ) 524 (10,730 ) 6,602 Interest expense 12,270 9,948 48,214 32,289 Depreciation and amortization 16,347 18,304 69,676 71,318 Stock-based compensation 3,992 5,252 13,073 15,071 Restructuring costs 1 1,819 — 28,147 — Asset impairments — 170 490 294 Adjusted EBITDA $ 28,278 $ 34,952 $ 108,831 $ 137,396 1 Represents costs related to business restructuring actions initiated in the fourth quarter of fiscal 2023. Free Cash Flow (in thousands) Six Months Ended Trailing Twelve Months Ended June 29 , 2024 July 1 , 2023 June 29 , 2024 July 1 , 2023 Net cash provided by (used in) operating activities $ 23,518 $ 18,720 $ (4,230 ) $ 26,167 Subtract: Purchases of property and equipment 14,075 29,899 41,232 62,794 Free cash flow $ 9,443 $ (11,179 ) $ (45,462 ) $ (36,627 ) 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 June 29 , 2024 July 1 , 2023 Borrowings under revolving credit facility $ 540,200 $ 483,800 Outstanding letters of credit 7,147 7,147 Finance lease obligations 280 361 Consolidated funded indebtedness $ 547,627 $ 491,308 Operating lease liabilities 1 408,724 438,483 Total debt including operating lease liabilities (a) $ 956,351 $ 929,791 Adjusted EBITDA (see above) $ 108,831 $ 137,396 Consolidated rent expense 110,937 112,518 Consolidated EBITDAR (b) $ 219,768 $ 249,914 Net Leverage Ratio under revolving credit facility (a divided by b) 4.4 to 1.0 3.7 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 June 29 , 2024 July 1 , 2023 Adjusted net operating profit after taxes (Adjusted NOPAT) Operating (loss) income $ (2,555 ) $ 50,713 Add: Operating lease interest 1 27,750 27,040 Less: Income taxes 2 (6,104 ) (21,993 ) Adjusted NOPAT $ 19,091 $ 55,760 Average adjusted invested capital Total deficit $ (446,964 ) $ (419,141 ) Add: Long-term debt 3 540,480 484,161 Add: Operating lease liabilities 4 408,724 438,483 Total adjusted invested capital at end of period $ 502,240 $ 503,503 Average adjusted invested capital 5 $ 509,369 $ 452,573 Adjusted ROIC 6 3.7 % 12.3 % 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 24.2% and 28.3% for June 29, 2024 and July 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 June 29, 2024 July 1, 2023 As Reported Restructuring Costs 1,2 As Adjusted As Reported Operating income $ 6,120 $ 1,819 $ 7,939 $ 11,226 Interest expense, net 12,270 — 12,270 9,948 (Loss) income before income taxes (6,150 ) 1,819 (4,331 ) 1,278 Income tax (benefit) expense (1,099 ) 431 (668 ) 524 Net (loss) income $ (5,051 ) $ 1,388 $ (3,663 ) $ 754 Net (loss) income per share: Basic $ (0.22 ) $ 0.06 $ (0.16 ) $ 0.03 Diluted $ (0.22 ) $ 0.06 $ (0.16 ) $ 0.03 Basic Shares 22,614 22,614 22,614 22,460 Diluted Shares 22,614 22,614 22,614 22,502 Six Months Ended June 29, 2024 July 1, 2023 As Reported Restructuring Costs 1,2 As Adjusted As Reported Operating income $ 11,662 $ 12,419 $ 24,081 $ 37,159 Interest expense, net 24,569 — 24,569 19,050 (Loss) income before income taxes (12,907 ) 12,419 (488 ) 18,109 Income tax (benefit) expense (374 ) 2,943 2,569 5,890 Net (loss) income $ (12,533 ) $ 9,476 $ (3,057 ) $ 12,219 Net (loss) income per share: Basic $ (0.56 ) $ 0.42 $ (0.14 ) $ 0.55 Diluted $ (0.56 ) $ 0.42 $ (0.14 ) $ 0.54 Basic Shares 22,560 22,560 22,560 22,378 Diluted Shares 22,560 22,560 22,560 22,543 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 in the U.S. View source version on businesswire.com : https://www.businesswire.com/news/home/20240731365319/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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