Sleep Number Corporation

10/30/2024 | Press release | Distributed by Public on 10/30/2024 14:01

Sleep Number Announces Third Quarter 2024 Results

COMPANY ALSO ANNOUNCES CHAIR, PRESIDENT AND CEO SHELLY IBACH TO RETIRE

  • Reported third quarter net sales of $427 million; delivered adjusted EBITDA of $28 million for the quarter which was consistent with expectations
  • Achieved gross margin rate of 60.8% for the third quarter, up 340 basis points versus last year, ahead of expectations and the highest quarterly gross margin rate since the third quarter of 2021
  • Reduced operating expenses by $17 million for the third quarter and $60 million year-to-date (before restructuring costs)
  • Increased year-to-date free cash flow by $50 million compared with the same period last year
  • Updated full-year 2024 adjusted EBITDA outlook to a revised range of $115 million to $125 million

MINNEAPOLIS--(BUSINESS WIRE)-- Sleep Number Corporation (Nasdaq: SNBR) today reported results for the quarter ended September 28, 2024.

"Our actions throughout the business over the past year are driving sustainable operating model improvements and contributing to our increased financial flexibility and durability. Our initiatives drove broad cost efficiencies and a gross margin rate improvement to 60.8%, resulting in third quarter adjusted EBITDA of $28 million, which was in-line with expectations even with persistent consumer demand weakness," said Shelly Ibach, Chair, President and CEO. "At the same time, we continue to leverage our innovation superiority to provide customers with life-changing sleep solutions, like our new ClimateCool™ smart bed."

"Throughout my tenure, I have been inspired by our team's commitment to our purpose, beloved brand, and pioneering smart beds that deliver proven quality sleep," added Ibach. "As I transition to retirement, our talented team and strong competitive advantages, combined with our increased financial resilience, give me confidence in Sleep Number's continued market leadership and its ability to accelerate profitable growth and value creation for all stakeholders when industry demand recovers."

Third Quarter Overview

  • Net sales of $427 million were down 10% versus the prior year, including approximately two percentage points of pressure from year-over-year order backlog changes and one-point of pressure from lower store count versus the prior year
  • Gross margin of 60.8% was up 340 basis points versus the prior year, driven by year-over-year product cost reductions through value engineering and ongoing supplier negotiations, favorable product mix, and efficiency gains in our home delivery and logistics operations
  • Operating expenses of $249 million (before restructuring charges) were down $17 million versus the prior year's third quarter, with year-to-date operating expenses down $60 million (before restructuring charges)
  • Adjusted EBITDA of $28 million was up 11% compared to the prior year, with an adjusted EBITDA margin of 6.5%, up 120 bp versus the prior year

Cash Flow Review

  • Net cash provided by operating activities of $51 million for the first nine months of the year, up $19 million, or 60%, versus the same period last year
  • Free cash flow of $34 million for the first nine months of the year, up $50 million versus the same period last year
  • Leverage ratio of 4.2x EBITDAR at the end of the third quarter versus covenant maximum of 5.0x for the quarter

Financial Outlook

With ongoing weakness in the bedding industry, the company has updated its full-year 2024 adjusted EBITDA outlook to a revised range of $115 million to $125 million. The company expects 2024 full-year net sales to be down approximately 10%, consistent with year-to-date net sales performance. The company's outlook includes at least 150 basis points of gross margin rate improvement for the year. The company expects to generate $10 million to $20 million of free cash flow for the year with capital expenditures of approximately $25 million.

CEO Retirement and Board and Governance Changes

In a separate release today, the company announced the following:

  • Ibach to retire no later than the 2025 Annual Meeting of Shareholders (the "2025 Annual Meeting"), following a comprehensive search to identify her successor conducted by an independent executive search firm
  • Ibach will not stand for reelection to the Board at the 2025 Annual Meeting, at which time, the Board intends to appoint Michael J. Harrison as independent Chair of the Board
  • The Board intends to reduce its size, with two longer serving directors to retire at or before the 2026 Annual Meeting
  • The Board intends to amend the company's governing documents, requesting shareholder approval at the 2025 Annual Meeting to begin a process to declassify the Board and adopt a majority voting standard for approval of mergers and amendments to the company's Articles of Incorporation

The full announcement is available here: https://www.businesswire.com/news/home/54144842/en

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 nearly 16 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 more than 29 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 3,700 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 statements that the company is driving sustainable operating model improvements and contributing to its increased financial flexibility and durability, continues to leverage its innovation superiority to provide customers with life-changing sleep solutions, and is positioned for continued market leadership and to accelerate profitable growth and value creation for all stakeholders when demand recovers; statements about 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; and statements about its CEO and Board retirements and governance changes 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

September 28,
2024

% of

Net Sales

September 30,
2023

% of

Net Sales

Net sales

$

426,617

100.0

%

$

472,648

100.0

%

Cost of sales

167,089

39.2

%

201,537

42.6

%

Gross profit

259,528

60.8

%

271,111

57.4

%

Operating expenses:

Sales and marketing

205,480

48.2

%

221,143

46.8

%

General and administrative

33,070

7.8

%

31,948

6.8

%

Research and development

10,583

2.5

%

12,633

2.7

%

Restructuring costs

1,963

0.5

%

-

0.0

%

Total operating expenses

251,096

58.9

%

265,724

56.2

%

Operating income

8,432

2.0

%

5,387

1.1

%

Interest expense, net

12,057

2.8

%

10,958

2.3

%

Loss before income taxes

(3,625

)

(0.8

%)

(5,571

)

(1.2

%)

Income tax benefit

(489

)

(0.1

%)

(3,253

)

(0.7

%)

Net loss

$

(3,136

)

(0.7

%)

$

(2,318

)

(0.5

%)

Net loss per share - basic

$

(0.14

)

$

(0.10

)

Net loss per share - diluted

$

(0.14

)

$

(0.10

)

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding

22,643

22,479

Dilutive effect of stock-based awards

-

-

Diluted weighted-average shares outstanding

22,643

22,479

For the three months ended September 28, 2024 and September 30,2023, 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)

Nine Months Ended

September 28,
2024

% of

Net Sales

September 30,
2023

% of

Net Sales

Net sales

$

1,305,479

100.0

%

$

1,457,964

100.0

%

Cost of sales

528,287

40.5

%

612,343

42.0

%

Gross profit

777,192

59.5

%

845,621

58.0

%

Operating expenses:

Sales and marketing

596,392

45.7

%

649,410

44.5

%

General and administrative

111,722

8.6

%

111,144

7.6

%

Research and development

34,602

2.7

%

42,521

2.9

%

Restructuring costs

14,382

1.1

%

-

0.0

%

Total operating expenses

757,098

58.0

%

803,075

55.1

%

Operating income

20,094

1.5

%

42,546

2.9

%

Interest expense, net

36,626

2.8

%

30,008

2.1

%

(Loss) income before income taxes

(16,532

)

(1.3

%)

12,538

0.9

%

Income tax (benefit) expense

(863

)

(0.1

%)

2,637

0.2

%

Net (loss) income

$

(15,669

)

(1.2

%)

$

9,901

0.7

%

Net (loss) income per share - basic

$

(0.69

)

$

0.44

Net (loss) income per share - diluted

$

(0.69

)

$

0.44

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding

22,588

22,412

Dilutive effect of stock-based awards

-

146

Diluted weighted-average shares outstanding

22,588

22,558

For the nine months ended September 28, 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

September 28,
2024

December 30,
2023

Assets

Current assets:

Cash and cash equivalents

$

1,592

$

2,539

Accounts receivable, net of allowances of $1,134 and $1,437, respectively

17,026

26,859

Inventories

93,039

115,433

Prepaid expenses

17,827

16,660

Other current assets

40,784

44,637

Total current assets

170,268

206,128

Non-current assets:

Property and equipment, net

140,406

179,503

Operating lease right-of-use assets

367,133

395,411

Goodwill and intangible assets, net

66,468

66,634

Deferred income taxes

27,267

20,253

Other non-current assets

93,109

82,951

Total assets

$

864,651

$

950,880

Liabilities and Shareholders' Deficit

Current liabilities:

Borrowings under revolving credit facility

$

516,500

$

539,500

Accounts payable

127,990

135,901

Customer prepayments

43,514

49,143

Accrued sales returns

19,688

22,402

Compensation and benefits

28,909

28,273

Taxes and withholding

17,685

17,134

Operating lease liabilities

82,488

81,760

Other current liabilities

57,268

61,958

Total current liabilities

894,042

936,071

Non-current liabilities:

Operating lease liabilities

318,665

351,394

Other non-current liabilities

100,728

105,343

Total non-current liabilities

419,393

456,737

Total liabilities

1,313,435

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, 22,371 and 22,235 shares issued and outstanding, respectively

224

222

Additional paid-in capital

25,527

16,716

Accumulated deficit

(474,535

)

(458,866

)

Total shareholders' deficit

(448,784

)

(441,928

)

Total liabilities and shareholders' deficit

$

864,651

$

950,880

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited - in thousands)

subject to reclassification

Nine Months Ended

September 28,
2024

September 30,
2023

Cash flows from operating activities:

Net (loss) income

$

(15,669

)

$

9,901

Adjustments to reconcile net (loss) income to net cash provided by

operating activities:

Depreciation and amortization

50,379

55,196

Stock-based compensation

9,541

10,872

Net loss on disposals and impairments of assets

2,457

464

Deferred income taxes

(7,014

)

(13,433

)

Changes in operating assets and liabilities:

Accounts receivable

9,833

7,374

Inventories

22,394

(2,190

)

Income taxes

1,708

3,571

Prepaid expenses and other assets

(8,012

)

(5,903

)

Accounts payable

4,980

5,199

Customer prepayments

(5,629

)

(27,279

)

Accrued compensation and benefits

788

(6,923

)

Other taxes and withholding

(1,157

)

5

Other accruals and liabilities

(13,775

)

(5,038

)

Net cash provided by operating activities

50,824

31,816

Cash flows from investing activities:

Purchases of property and equipment

(17,218

)

(48,022

)

Proceeds from sales of property and equipment

156

10

Issuance of notes receivable

(2,942

)

(1,317

)

Net cash used in investing activities

(20,004

)

(49,329

)

Cash flows from financing activities:

Net (decrease) increase in short-term borrowings

(31,039

)

20,334

Repurchases of common stock

(728

)

(3,711

)

Proceeds from issuance of common stock

-

428

Net cash (used in) provided by financing activities

(31,767

)

16,627

Net decrease in cash and cash equivalents

(947

)

(886

)

Cash and cash equivalents, at beginning of period

2,539

1,792

Cash and cash equivalents, at end of period

$

1,592

$

906

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Supplemental Financial Information

(unaudited)

Three Months Ended

Nine Months Ended

September 28,
2024

September 30,
2023

September 28,
2024

September 30,
2023

Percent of sales:

Retail stores

87.8

%

86.6

%

87.9

%

87.1

%

Online, phone, chat and other

12.2

%

13.4

%

12.1

%

12.9

%

Total Company

100.0

%

100.0

%

100.0

%

100.0

%

Sales change rates:

Retail comparable-store sales

(7

%)

(14

%)

(9

%)

(11

%)

Online, phone and chat

(18

%)

(14

%)

(17

%)

(13

%)

Total Retail comparable sales change

(9

%)

(14

%)

(10

%)

(11

%)

Net opened/closed stores and other

(1

%)

1

%

0

%

1

%

Total Company

(10

%)

(13

%)

(10

%)

(10

%)

Stores open:

Beginning of period

646

672

672

670

Opened

1

8

11

27

Closed

(4

)

(2

)

(40

)

(19

)

End of period

643

678

643

678

Other metrics:

Average sales per store ($ in 000's) 1

$

2,670

$

2,952

Average sales per square foot 1

$

863

$

963

Stores > $2 million net sales 2

60

%

67

%

Stores > $3 million net sales 2

20

%

27

%

Average revenue per smart bed unit 3

$

5,771

$

5,640

$

5,778

$

5,822

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

September 28,
2024

September 30,
2023

September 28,
2024

September 30,
2023

Net (loss) income

$

(3,136

)

$

(2,318

)

$

(40,857

)

$

4,471

Income tax (benefit) expense

(489

)

(3,253

)

(7,966

)

1,346

Interest expense

12,057

10,958

49,313

37,641

Depreciation and amortization

15,859

18,200

67,335

72,338

Stock-based compensation

1,432

982

13,523

15,511

Restructuring costs 1

1,963

-

30,110

-

Asset impairments

-

292

198

491

Adjusted EBITDA

$

27,686

$

24,861

$

111,656

$

131,798

1

Represents costs related to business restructuring actions initiated in the fourth quarter of fiscal 2023.

Free Cash Flow

(in thousands)

Nine Months Ended

Trailing Twelve Months Ended

September 28,
2024

September 30,
2023

September 28,
2024

September 30,
2023

Net cash provided by (used in) operating activities

$

50,824

$

31,816

$

9,980

$

(12,168

)

Subtract: Purchases of property and equipment

17,218

48,022

26,252

64,668

Free cash flow

$

33,606

$

(16,206

)

$

(16,272

)

$

(76,836

)

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

September 28,
2024

September 30,
2023

Borrowings under revolving credit facility

$

516,500

$

488,000

Outstanding letters of credit

7,147

7,147

Finance lease obligations

261

338

Consolidated funded indebtedness

$

523,908

$

495,485

Operating lease liabilities 1

401,153

439,722

Total debt including operating lease liabilities (a)

$

925,061

$

935,207

Adjusted EBITDA (see above)

$

111,656

$

131,798

Consolidated rent expense

108,863

113,204

Consolidated EBITDAR (b)

$

220,519

$

245,002

Net Leverage Ratio under revolving credit facility (a divided by b)

4.2 to 1.0

3.8 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

September 28,
2024

September 30,
2023

Adjusted net operating profit after taxes (Adjusted NOPAT)

Operating income

$

490

$

43,458

Add: Operating lease interest 1

27,371

27,497

Less: Income taxes 2

(5,474

)

(1,168

)

Adjusted NOPAT

$

22,387

$

69,787

Average adjusted invested capital

Total deficit

$

(448,784

)

$

(420,687

)

Add: Long-term debt 3

516,761

488,338

Add: Operating lease liabilities 4

401,153

439,722

Total adjusted invested capital at end of period

$

469,130

$

507,373

Average adjusted invested capital 5

$

502,494

$

469,782

Adjusted ROIC 6

4.5

%

14.9

%

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 19.6% and 1.6% for September 28, 2024 and September 30, 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

September 28, 2024

September 30, 2023

As

Reported

Restructuring
Costs 1,2

As

Adjusted

As

Reported

Operating income

$

8,432

$

1,963

$

10,395

$

5,387

Interest expense, net

12,057

-

12,057

10,958

Loss before income taxes

(3,625

)

1,963

(1,662

)

(5,571

)

Income tax (benefit) expense

(489

)

465

(24

)

(3,253

)

Net loss

$

(3,136

)

$

1,498

$

(1,638

)

$

(2,318

)

Net (loss) income per share:

Basic

$

(0.14

)

$

0.07

$

(0.07

)

$

(0.10

)

Diluted

$

(0.14

)

$

0.07

$

(0.07

)

$

(0.10

)

Basic Shares

22,643

22,643

22,643

22,479

Diluted Shares

22,643

22,643

22,643

22,479

Nine Months Ended

September 28, 2024

September 30, 2023

As

Reported

Restructuring Costs 1,2

As

Adjusted

As

Reported

Operating income

$

20,094

$

14,382

$

34,476

$

42,546

Interest expense, net

36,626

-

36,626

30,008

(Loss) income before income taxes

(16,532

)

14,382

(2,150

)

12,538

Income tax (benefit) expense

(863

)

3,409

2,546

2,637

Net (loss) income

$

(15,669

)

$

10,973

$

(4,696

)

$

9,901

Net (loss) income per share:

Basic

$

(0.69

)

$

0.49

$

(0.20

)

$

0.44

Diluted

$

(0.69

)

$

0.49

$

(0.20

)

$

0.44

Basic Shares

22,588

22,588

22,588

22,412

Diluted Shares

22,588

22,588

22,588

22,558

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.

Investor Contact:
Dave Schwantes
[email protected]

Media Contact:
Julie Elepano
[email protected]

Source: Sleep Number Corporation