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Sleep Number Announces Fourth Quarter and Full Year 2022 Results

  • Fourth quarter net sales increased 1% versus the prior year
  • Full year net sales decreased 3% to $2.11 billion, with full year diluted earnings per share (EPS) of $1.60
  • Generated $36 million of operating cash flows for the year and an Adjusted ROIC of 17.6%
  • Provides 2023 earnings outlook of $1.25 to $2.00 per diluted share

Sleep Number Corporation (Nasdaq: SNBR) today reported results for the year ended December 31, 2022.

“As we navigated a series of significant macro challenges in 2022, we achieved important strategic advancements that strengthen our sleep technology leadership. These advancements will position Sleep Number to capitalize on profitable growth opportunities when the consumer environment improves,” said Shelly Ibach, Chair, President and CEO. “Consumer response to our best innovation to date – the new Climate360 smart bed – has been strong, and we are excited to introduce our next-generation smart beds beginning in the second quarter. We are seeing improved demand trends early in the year, with the consistent flow of microchips supporting normalized delivery times for our smart beds and adjustable bases. I am grateful to our Sleep Number team for their resilience and commitment to our purpose of improving the health and wellbeing of society through higher quality sleep.”

Fourth Quarter Overview

  • Net sales were $498 million, up 1% compared with $492 million last year
  • Gross profit decreased 3% to $272 million, or 54.7% of net sales, compared with $280 million or 56.9% of net sales for the prior year
  • Net loss per diluted share of $0.24, compared to net income per diluted share of $0.47 last year

Full Year Overview

  • Net sales decreased 3% to $2.11 billion in 2022; full year demand declined 13% versus the prior year, partially offset by the delivery of excess backlog
  • Gross profit decreased 9% to $1.2 billion, or 56.9% of net sales, including the impact of year-over-year input cost increases and inefficiencies from semiconductor chip constraints, partially offset by pricing actions
  • Diluted EPS of $1.60, compared to $6.16 last year

Cash Flows and Liquidity Review

  • Generated $36 million in net cash from operating activities
  • Invested $69 million in capital expenditures; suspended share repurchases in the second quarter of 2022
  • Leverage ratio of 4.4x EBITDAR at the end of the fourth quarter versus covenant maximum of 5.0x; $359 million of liquidity remains against current credit facility
  • Adjusted return on invested capital (Adjusted ROIC) was 17.6% for the trailing twelve-month period

Financial Outlook

The company expects 2023 diluted EPS of $1.25 to $2.00. The 2023 outlook assumes net sales are flat to down mid-single digits versus the prior year. The outlook assumes gross margin rate improves by more than 150 basis points versus 2022. The company expects to generate over $100 million of operating cash flow for the year and positive free cash flows. The company anticipates 2023 capital expenditures of $50 million to $60 million and is planning no share repurchases during the year.

Conference Call Information

Management will host its regularly scheduled conference call to discuss the company’s results at 5 p.m. EST (4 p.m. CST; 2 p.m. PST) 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. Over 14 million people have had their lives improved by our award-winning sleep innovations and are experiencing the physical, mental and emotional benefits of life-changing sleep performance. Our proprietary smart beds combine the physical and digital worlds, integrating exceptional sleep with a highly advanced digital technology platform. This means only Sleep Number can provide a dynamic, adjustable and adaptive sleep experience that effortlessly responds to the needs of each sleeper. Our millions of Smart Sleepers benefit from their smart bed changing with them, over time; it is unique, like they are.

Our differentiated business model is guided by our purpose to improve the health and wellbeing of society through higher quality sleep. We partner with world-leading sleep and health institutions to bring the power of 18 billion hours of longitudinal sleep data to sleep science and research. Our retail experience meets our consumers whenever and wherever they choose – through online and in-store touchpoints. And our 5,000 mission-driven team members passionately deliver individualized sleep experiences for everyone.

For life-changing sleep, visit one of our 670 stores, 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 company’s outlook for full-year 2023 diluted EPS, are forward-looking statements subject to certain risks and uncertainties including, among others, such factors as current and future economic conditions and consumer sentiment; increases in interest rates, which have increased the cost of servicing the company’s indebtedness; availability of attractive and cost-effective consumer credit options; operating with minimal levels of inventory, which may leave the company vulnerable to supply shortages; Sleep Number’s dependence on, and ability to maintain strong working relationships with key suppliers and third parties; rising commodity costs or third-party logistics costs and other inflationary pressures; risks inherent in global-sourcing activities, including tariffs, geo-political turmoil, war, strikes, labor challenges, government-mandated work closures, outbreaks of pandemics or contagious diseases, and resulting supply shortages and production and delivery delays and disruptions; risks of disruption due to health epidemics or pandemics, such as the COVID-19 pandemic; regional risks related to having global operations and suppliers, including climate and other disasters; the effectiveness of the company’s marketing strategy and promotional efforts; the execution of Sleep Number’s Total Retail distribution strategy; ability to achieve and maintain high levels of product quality; ability to improve and expand Sleep Number’s product line and execute successful new product introductions; ability to prevent third parties from using the company’s technology or trademarks, and the adequacy of its intellectual property rights to protect its products and brand; ability to compete; risks of disruption in the operation of any of the company’s main manufacturing, distribution, logistics, home delivery, product development or customer service operations; the company’s ability to comply with existing and changing government regulation; 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 withstand cyber threats that could compromise the security of its systems, result in a data breach or business disruption; Sleep Number’s ability, and the ability of its suppliers and vendors, to attract, retain and motivate qualified personnel; the volatility of Sleep Number stock; environmental, social and governance (ESG) 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 in the company’s filings with the Securities and Exchange Commission (SEC), including the Annual Report on Form 10-K, and other periodic reports filed with the SEC. The company has no obligation to publicly update or revise any of the forward-looking statements in this news release.

 
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)
 
Three Months Ended
December 31, % of January 1, % of

2022

 

Net Sales

 

2022

 

Net Sales

 
Net sales

$

497,528

 

100.0

%

$

491,984

100.0

%

Cost of sales

 

225,562

 

45.3

%

 

212,260

43.1

%

Gross profit

 

271,966

 

54.7

%

 

279,724

56.9

%

Operating expenses:
Sales and marketing

 

219,224

 

44.1

%

 

220,236

44.8

%

General and administrative

 

37,217

 

7.5

%

 

29,924

6.1

%

Research and development

 

14,613

 

2.9

%

 

14,907

3.0

%

Total operating expenses

 

271,054

 

54.5

%

 

265,067

53.9

%

Operating income

 

912

 

0.2

%

 

14,657

3.0

%

Interest expense, net

 

7,633

 

1.5

%

 

1,845

0.4

%

(Loss) income before income taxes

 

(6,721

)

(1.4

%)

 

12,812

2.6

%

Income tax (benefit) expense

 

(1,291

)

(0.3

%)

 

1,671

0.3

%

Net (loss) income

$

(5,430

)

(1.1

%)

$

11,141

2.3

%

 
Net (loss) income per share – basic

$

(0.24

)

$

0.49

 
Net (loss) income per share – diluted

$

(0.24

)

$

0.47

 
 
Reconciliation of weighted-average
shares outstanding:
Basic weighted-average shares outstanding

 

22,249

 

 

22,939

Dilutive effect of stock-based awards 1

 

-

 

 

877

Diluted weighted-average shares outstanding 1

 

22,249

 

 

23,816

 

1 For the three months ended December 31, 2022, 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)
 
Twelve Months Ended
December 31, % of January 1, % of

2022

 

Net Sales

 

2022

 

Net Sales

 
Net sales

$

2,114,297

100.0

%

$

2,184,949

100.0

%

Cost of sales

 

912,001

43.1

%

 

866,102

39.6

%

Gross profit

 

1,202,296

56.9

%

 

1,318,847

60.4

%

Operating expenses:
Sales and marketing

 

919,629

43.5

%

 

905,359

41.4

%

General and administrative

 

153,266

7.2

%

 

161,412

7.4

%

Research and development

 

61,521

2.9

%

 

58,540

2.7

%

Total operating expenses

 

1,134,416

53.7

%

 

1,125,311

51.5

%

Operating income

 

67,880

3.2

%

 

193,536

8.9

%

Interest expense, net

 

18,985

0.9

%

 

6,245

0.3

%

Income before income taxes

 

48,895

2.3

%

 

187,291

8.6

%

Income tax expense

 

12,285

0.6

%

 

33,545

1.5

%

Net income

$

36,610

1.7

%

$

153,746

7.0

%

 
Net income per share – basic

$

1.63

$

6.40

 
Net income per share – diluted

$

1.60

$

6.16

 
 
Reconciliation of weighted-average
shares outstanding:
Basic weighted-average shares outstanding

 

22,396

 

24,038

Dilutive effect of stock-based awards

 

456

 

909

Diluted weighted-average shares outstanding

 

22,852

 

24,947

 
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited – in thousands, except per share amounts)
subject to reclassification
 
December 31, January 1,

2022

2022

Assets
Current assets:
Cash and cash equivalents

$

1,792

 

$

2,389

 

Accounts receivable, net of allowances
of $1,267 and $924, respectively

 

26,005

 

 

25,718

 

Inventories

 

114,034

 

 

105,644

 

Prepaid expenses

 

16,006

 

 

18,953

 

Other current assets

 

39,921

 

 

54,917

 

Total current assets

 

197,758

 

 

207,621

 

 
Non-current assets:
Property and equipment, net

 

200,605

 

 

195,128

 

Operating lease right-of-use assets

 

397,755

 

 

371,133

 

Goodwill and intangible assets, net

 

68,065

 

 

70,468

 

Deferred income taxes

 

7,958

 

 

-

 

Other non-current assets

 

81,795

 

 

75,190

 

Total assets

$

953,936

 

$

919,540

 

 
Liabilities and Shareholders’ Deficit
Current liabilities:
Borrowings under revolving credit facility

$

459,600

 

$

382,500

 

Accounts payable

 

176,207

 

 

162,547

 

Customer prepayments

 

73,181

 

 

129,499

 

Accrued sales returns

 

25,594

 

 

22,368

 

Compensation and benefits

 

31,291

 

 

51,240

 

Taxes and withholding

 

23,622

 

 

22,087

 

Operating lease liabilities

 

79,533

 

 

72,360

 

Other current liabilities

 

60,785

 

 

64,177

 

Total current liabilities

 

929,813

 

 

906,778

 

 
Non-current liabilities:
Deferred income taxes

 

-

 

 

688

 

Operating lease liabilities

 

356,879

 

 

336,192

 

Other non-current liabilities

 

105,421

 

 

100,835

 

Total non-current liabilities

 

462,300

 

 

437,715

 

Total liabilities

 

1,392,113

 

 

1,344,493

 

 
Shareholders’ deficit:
Undesignated preferred stock; 5,000 shares authorized,
no shares issued and outstanding

 

-

 

 

-

 

Common stock, $0.01 par value; 142,500 shares authorized,
22,014 and 22,683 shares issued and outstanding, respectively

 

220

 

 

227

 

Additional paid-in capital

 

5,182

 

 

3,971

 

Accumulated deficit

 

(443,579

)

 

(429,151

)

Total shareholders’ deficit

 

(438,177

)

 

(424,953

)

Total liabilities and shareholders’ deficit

$

953,936

 

$

919,540

 

 
 
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited - in thousands)
subject to reclassification
 
Twelve Months Ended
December 31, January 1,

2022

2022

 
Cash flows from operating activities:
Net income

$

36,610

 

$

153,746

 

Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization

 

67,401

 

 

60,394

 

Stock-based compensation

 

13,223

 

 

23,214

 

Net loss on disposals and impairments of assets

 

291

 

 

37

 

Deferred income taxes

 

(8,646

)

 

446

 

Changes in operating assets and liabilities:
Accounts receivable

 

(287

)

 

6,153

 

Inventories

 

(11,560

)

 

(24,282

)

Income taxes

 

1,356

 

 

(3,066

)

Prepaid expenses and other assets

 

19,379

 

 

(13,836

)

Accounts payable

 

(4,743

)

 

54,405

 

Customer prepayments

 

(56,318

)

 

57,482

 

Accrued compensation and benefits

 

(19,821

)

 

(24,790

)

Other taxes and withholding

 

179

 

 

1,814

 

Other accruals and liabilities

 

(926

)

 

8,293

 

Net cash provided by operating activities

 

36,138

 

 

300,010

 

 
Cash flows from investing activities:
Purchases of property and equipment

 

(69,454

)

 

(66,900

)

Proceeds from sales of property and equipment

 

49

 

 

257

 

Investment in non-marketable equity securities

 

(1,202

)

 

-

 

Net cash used in investing activities

 

(70,607

)

 

(66,643

)

 
Cash flows from financing activities:
Net increase in short-term borrowings

 

97,647

 

 

145,473

 

Repurchases of common stock

 

(64,188

)

 

(382,376

)

Proceeds from issuance of common stock

 

1,131

 

 

4,441

 

Debt issuance costs

 

(718

)

 

(2,759

)

Net cash provided by (used in) financing activities

 

33,872

 

 

(235,221

)

 
Net decrease in cash and cash equivalents

 

(597

)

 

(1,854

)

Cash and cash equivalents, at beginning of period

 

2,389

 

 

4,243

 

Cash and cash equivalents, at end of period

$

1,792

 

$

2,389

 

 
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)
 
 
Three Months Ended Twelve Months Ended
December 31, January 1, December 31, January 1,

2022

 

2022

 

2022

 

2022

 
Percent of sales:
Retail stores

 

84.8

%

 

85.8

%

 

86.3

%

 

87.1

%

Online, phone, chat and other

 

15.2

%

 

14.2

%

 

13.7

%

 

12.9

%

Total Company

 

100.0

%

 

100.0

%

 

100.0

%

 

100.0

%

 
Sales change rates:
Retail comparable-store sales

 

(3

%)

 

(11

%)

 

(8

%)

 

19

%

Online, phone and chat

 

10

%

 

(11

%)

 

4

%

 

4

%

Total Retail comparable sales change

 

(1

%)

 

(11

%)

 

(6

%)

 

17

%

Net opened/closed stores and other

 

2

%

 

(2

%)

 

3

%

 

1

%

Total Company

 

1

%

 

(13

%)

 

(3

%)

 

18

%

 
Stores open:
Beginning of period

 

662

 

 

632

 

 

648

 

 

602

 

Opened

 

14

 

 

22

 

 

49

 

 

77

 

Closed

 

(6

)

 

(6

)

 

(27

)

 

(31

)

End of period

 

670

 

 

648

 

 

670

 

 

648

 

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

$

3,281

 

$

3,600

 

Average sales per square foot 1

$

1,081

 

$

1,212

 

Stores > $2 million net sales 2

 

76

%

 

84

%

Stores > $3 million net sales 2

 

36

%

 

48

%

Average revenue per smart bed unit 3

$

5,361

 

$

5,309

 

$

5,403

 

$

5,102

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 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
December 31, January 1, December 31, January 1,

2022

 

2022

 

 

2022

 

2022

 
Net (loss) income

$

(5,430

)

$

11,141

 

$

36,610

 

$

153,746

Income tax (benefit) expense

 

(1,291

)

 

1,671

 

 

12,285

 

 

33,545

Interest expense

 

7,633

 

 

1,844

 

 

18,985

 

 

6,245

Depreciation and amortization

 

17,843

 

 

15,434

 

 

66,626

 

 

59,779

Stock-based compensation

 

4,638

 

 

3,512

 

 

13,223

 

 

23,214

Asset impairments

 

17

 

 

60

 

 

295

 

 

172

 
Adjusted EBITDA

$

23,410

 

$

33,662

 

$

148,024

 

$

276,701

 
Free Cash Flow
(in thousands)
 
 
Three Months Ended Trailing Twelve Months Ended
December 31, January 1, December 31, January 1,

2022

 

2022

 

 

2022

 

2022

 
Net cash (used in) provided by operating activities

$

(43,984

)

$

7,326

 

$

36,138

 

$

300,010

Subtract: Purchases of property and equipment

 

16,646

 

 

17,530

 

 

69,454

 

 

66,900

 
Free cash flow

$

(60,630

)

$

(10,204

)

$

(33,316

)

$

233,110

 
Calculation of Net Leverage Ratio under Revolving Credit Facility
(in thousands)
 
 
Trailing Twelve Months Ended
December 31, January 1,

2022

2022

 
Borrowings under revolving credit facility

$

459,600

 

$

382,500

Outstanding letters of credit

 

5,947

 

 

3,997

Finance lease obligations

 

420

 

 

537

Consolidated funded indebtedness

$

465,967

 

$

387,034

Capitalized operating lease obligations1

 

663,939

 

 

610,072

Total debt including capitalized operating lease obligations (a)

$

1,129,906

 

$

997,106

 
Adjusted EBITDA (see above)

$

148,024

 

$

276,701

Consolidated rent expense

 

110,657

 

 

101,679

Consolidated EBITDAR (b)

$

258,681

 

$

378,380

 
Net Leverage Ratio under revolving credit facility (a divided by b) 4.4 to 1.0 2.6 to 1.0

1 A multiple of six times annual rent expense is used as an estimate for capitalizing our operating lease obligations in accordance with our credit facility.

Note - Our Adjusted EBITDA and EBITDAR calculations, Free Cash Flow data and Calculation of Net Leverage Ratio under Revolving Credit Facility 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
December 31,

2022
January 1,

2022
Adjusted net operating profit after taxes (Adjusted NOPAT)
Operating income

$

67,880

 

$

193,536

 

Add: Operating lease interest 1

 

25,912

 

 

24,763

 

Less: Income taxes 2

 

(23,542

)

 

(52,807

)

Adjusted NOPAT

$

70,250

 

$

165,492

 

 
Average adjusted invested capital
Total deficit

$

(438,177

)

$

(424,953

)

Add: Long-term debt 3

 

460,020

 

 

383,037

 

Add: Operating lease obligations 4

 

436,412

 

 

408,552

 

Total adjusted invested capital at end of period

$

458,255

 

$

366,636

 

 
Average adjusted invested capital 5

$

400,038

 

$

350,597

 

 
Adjusted ROIC 6

 

17.6

%

 

47.2

%

1 Represents the interest expense component of lease expense included in our financial statements under ASC 842.
2 Reflects annual effective income tax rates, before discrete adjustments, of 25.1% and 24.2% for December 31, 2022 and January 1, 2022, 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 - Our 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. We updated our Adjusted ROIC calculation for the reporting period ended December 31, 2022, to reflect adjustments consistent with ASC 842, Leases. The prior period has been updated to reflect this calculation."

GAAP - generally accepted accounting principles in the U.S.

 

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