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Sleep Number Announces Second Quarter 2023 Results

  • Second quarter net sales were $459 million; demand down mid-single digits versus the prior year
  • Reports second quarter diluted EPS of $0.03
  • 2023 EPS outlook updated to a range of $1.25 to $1.75 per share
  • Announces the appointment of Francis Lee to Executive Vice President and Chief Financial Officer

Sleep Number Corporation (Nasdaq: SNBR) today reported results for the quarter ended July 1, 2023.

“As we continue to navigate a challenging macro environment, our business is well positioned for growth. Demand has steadily improved year-to-date, and we expect this trend to continue in the back-half of the year as we benefit from the launch of our entire next generation smart bed portfolio, the Climate360 smart bed, and the advancement of our ‘Sleep Next Level’ advertising campaign with the start of the NFL season,” said Shelly Ibach, Chair, President and CEO, Sleep Number. “We have taken actions across the business to drive efficiencies and remain on track to expand margins and generate more than $100 million in cash from operations in 2023.”

Today, Sleep Number also announced the appointment of Francis Lee to Executive Vice President and Chief Financial Officer. Details can be found on the Sleep Number newsroom.

Second Quarter Overview

  • Net sales decreased 16% to $459 million, with demand down mid-single digits; demand improved throughout the second quarter, although slightly below our expectations
  • Gross margin was 57.6% and in line with our expectations; as a reminder prior year second quarter results benefitted from the delivery of more than $100 million in margin-rich backlog
  • Operating expenses were reduced by $22 million to $253 million compared with $275 million last year
  • Earnings per diluted share of $0.03 compared with $1.54 for the same period last year

Year-to-Date Overview

  • Net sales decreased 8% to $985 million, with demand down high-single digits versus prior year
  • Gross profit decreased to $575 million compared with $627 million for the prior year; gross margin rate of 58.3% was consistent with the same period last year and up 290 bp versus the back half of last year
  • Operating income of $37 million compared with $54 million last year, with an 8% decline in gross margin dollars, partially offset by a $36 million reduction in operating expenses
  • Earnings per diluted share of $0.54 compared with $1.60 for the same period last year

Cash Flows Overview

  • Net cash from operating activities of $19 million for the first six months of the year, compared with $29 million for the same period last year
  • Leverage ratio of 4.7x EBITDAR at the end of the second quarter versus covenant maximum of 5.0x
  • Adjusted ROIC of 12.3% for the trailing twelve months

Financial Outlook

The company updated its full-year 2023 diluted EPS outlook to a range of $1.25 to $1.75. The 2023 outlook assumes net sales are down low to mid-single digits versus the prior year and gross margin improvement of more than 150 basis points versus 2022. The company expects to generate more than $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.

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 14.5 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 21 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 nearly 5,000 mission-driven team members passionately innovate to drive value creation through our vertically integrated business model, including our exclusive direct-to-consumer selling in 670 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 company’s financial outlook for full-year 2023, including 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; bank failures or other events affecting financial institutions; 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

 

July 1,

2023

 

% of

Net Sales

 

July 2,

2022

 

% of

Net Sales

Net sales

$

458,789

 

100.0%

 

$

549,073

 

100.0%

Cost of sales

 

194,544

 

42.4%

 

 

224,128

 

40.8%

Gross profit

 

264,245

 

57.6%

 

 

324,945

 

59.2%

Operating expenses:

 

 

 

 

 

 

 

Sales and marketing

 

197,779

 

43.1%

 

 

220,490

 

40.2%

General and administrative

 

39,795

 

8.7%

 

 

38,727

 

7.1%

Research and development

 

15,445

 

3.4%

 

 

15,817

 

2.9%

Total operating expenses

 

253,019

 

55.1%

 

 

275,034

 

50.1%

Operating income

 

11,226

 

2.4%

 

 

49,911

 

9.1%

Interest expense, net

 

9,948

 

2.2%

 

 

3,619

 

0.7%

Income before income taxes

 

1,278

 

0.3%

 

 

46,292

 

8.4%

Income tax expense

 

524

 

0.1%

 

 

11,359

 

2.1%

Net income

$

754

 

0.2%

 

$

34,933

 

6.4%

 

 

 

 

 

 

 

 

Net income per share – basic

$

0.03

 

 

 

$

1.56

 

 

 

 

 

 

 

 

 

 

Net income per share – diluted

$

0.03

 

 

 

$

1.54

 

 

 

 

 

 

 

 

 

 

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding

 

22,460

 

 

 

 

22,355

 

 

Dilutive effect of stock-based awards

 

42

 

 

 

 

358

 

 

Diluted weighted-average shares outstanding

 

22,502

 

 

 

 

22,713

 

 

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited – in thousands, except per share amounts)

 

 

Six Months Ended

 

July 1,

2023

 

% of

Net Sales

 

July 2,

2022

 

% of

Net Sales

Net sales

$

985,316

 

100.0%

 

$

1,076,203

 

100.0%

Cost of sales

 

410,806

 

41.7%

 

 

448,960

 

41.7%

Gross profit

 

574,510

 

58.3%

 

 

627,243

 

58.3%

Operating expenses:

 

 

 

 

 

 

 

Sales and marketing

 

428,267

 

43.5%

 

 

460,749

 

42.8%

General and administrative

 

79,196

 

8.0%

 

 

80,046

 

7.4%

Research and development

 

29,888

 

3.0%

 

 

32,122

 

3.0%

Total operating expenses

 

537,351

 

54.5%

 

 

572,917

 

53.2%

Operating income

 

37,159

 

3.8%

 

 

54,326

 

5.0%

Interest expense, net

 

19,050

 

1.9%

 

 

5,746

 

0.5%

Income before income taxes

 

18,109

 

1.8%

 

 

48,580

 

4.5%

Income tax expense

 

5,890

 

0.6%

 

 

11,573

 

1.1%

Net income

$

12,219

 

1.2%

 

$

37,007

 

3.4%

 

 

 

 

 

 

 

 

Net income per share – basic

$

0.55

 

 

 

$

1.64

 

 

 

 

 

 

 

 

 

 

Net income per share – diluted

$

0.54

 

 

 

$

1.60

 

 

 

 

 

 

 

 

 

 

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding

 

22,378

 

 

 

 

22,558

 

 

Dilutive effect of stock-based awards

 

165

 

 

 

 

594

 

 

Diluted weighted-average shares outstanding

 

22,543

 

 

 

 

23,152

 

 

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Consolidated Balance Sheets

(unaudited – in thousands, except per share amounts)

subject to reclassification

 

 

July 1,

2023

 

December 31,

2022

Assets

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$

1,798

 

 

$

1,792

 

Accounts receivable, net of allowances of $1,475 and $1,267, respectively

 

24,102

 

 

 

26,005

 

Inventories

 

121,446

 

 

 

114,034

 

Prepaid expenses

 

21,029

 

 

 

16,006

 

Other current assets

 

40,142

 

 

 

39,921

 

Total current assets

 

208,517

 

 

 

197,758

 

Non-current assets:

 

 

 

Property and equipment, net

 

191,067

 

 

 

200,605

 

Operating lease right-of-use assets

 

399,989

 

 

 

397,755

 

Goodwill and intangible assets, net

 

67,086

 

 

 

68,065

 

Deferred income taxes

 

16,230

 

 

 

7,958

 

Other non-current assets

 

82,266

 

 

 

81,795

 

Total assets

$

965,155

 

 

$

953,936

 

Liabilities and Shareholders’ Deficit

 

 

 

Current liabilities:

 

 

 

Borrowings under revolving credit facility

$

483,800

 

 

$

459,600

 

Accounts payable

 

152,205

 

 

 

176,207

 

Customer prepayments

 

58,498

 

 

 

73,181

 

Accrued sales returns

 

25,476

 

 

 

25,594

 

Compensation and benefits

 

38,934

 

 

 

31,291

 

Taxes and withholding

 

23,356

 

 

 

23,622

 

Operating lease liabilities

 

82,439

 

 

 

79,533

 

Other current liabilities

 

57,054

 

 

 

60,785

 

Total current liabilities

 

921,762

 

 

 

929,813

 

Non-current liabilities:

 

 

 

Operating lease liabilities

 

356,044

 

 

 

356,879

 

Other non-current liabilities

 

106,490

 

 

 

105,421

 

Total non-current liabilities

 

462,534

 

 

 

462,300

 

Total liabilities

 

1,384,296

 

 

 

1,392,113

 

Shareholders’ deficit:

 

 

 

Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding

 

 

 

Common stock, $0.01 par value; 142,500 shares authorized, 22,214 and 22,014 shares issued and outstanding, respectively

 

222

 

 

 

220

 

Additional paid-in capital

 

11,997

 

 

 

5,182

 

Accumulated deficit

 

(431,360

)

 

 

(443,579

)

Total shareholders’ deficit

 

(419,141

)

 

 

(438,177

)

Total liabilities and shareholders’ deficit

$

965,155

 

 

$

953,936

 

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited – in thousands)

subject to reclassification

 

 

Six Months Ended

 

July 1,

2023

 

July 2,

2022

Cash flows from operating activities:

 

 

 

Net income

$

12,219

 

 

$

37,007

 

Adjustments to reconcile net income to net cash provided by

operating activities:

 

 

 

Depreciation and amortization

 

36,749

 

 

 

31,975

 

Stock-based compensation

 

9,890

 

 

 

8,043

 

Net loss on disposals and impairments of assets

 

181

 

 

 

179

 

Deferred income taxes

 

(8,272

)

 

 

(3,794

)

Changes in operating assets and liabilities:

 

 

 

Accounts receivable

 

1,903

 

 

 

(2,898

)

Inventories

 

(7,412

)

 

 

(15,674

)

Income taxes

 

1,808

 

 

 

4,368

 

Prepaid expenses and other assets

 

(5,824

)

 

 

6,266

 

Accounts payable

 

(10,244

)

 

 

(1,713

)

Customer prepayments

 

(14,683

)

 

 

(14,754

)

Accrued compensation and benefits

 

7,594

 

 

 

(17,789

)

Other taxes and withholding

 

(2,074

)

 

 

971

 

Other accruals and liabilities

 

(3,115

)

 

 

(3,496

)

Net cash provided by operating activities

 

18,720

 

 

 

28,691

 

 

 

 

 

Cash flows from investing activities:

 

 

 

Purchases of property and equipment

 

(29,899

)

 

 

(36,559

)

Proceeds from sales of property and equipment

 

 

 

 

23

 

Issuance of note receivable

 

(435

)

 

 

 

Net cash used in investing activities

 

(30,334

)

 

 

(36,536

)

 

 

 

 

Cash flows from financing activities:

 

 

 

Net increase in short-term borrowings

 

14,693

 

 

 

70,836

 

Repurchases of common stock

 

(3,501

)

 

 

(63,644

)

Proceeds from issuance of common stock

 

428

 

 

 

585

 

Debt issuance costs

 

 

 

 

(42

)

Net cash provided by financing activities

 

11,620

 

 

 

7,735

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

6

 

 

 

(110

)

Cash and cash equivalents, at beginning of period

 

1,792

 

 

 

2,389

 

Cash and cash equivalents, at end of period

$

1,798

 

 

$

2,279

 

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Supplemental Financial Information

(unaudited)

 

 

Three Months Ended

 

Six Months Ended

 

July 1,

2023

 

July 2,

2022

 

July 1,

2023

 

July 2,

2022

Percent of sales:

 

 

 

 

 

 

 

Retail stores

 

87.7

%

 

 

89.4

%

 

 

87.4

%

 

 

86.9

%

Online, phone, chat and other

 

12.3

%

 

 

10.6

%

 

 

12.6

%

 

 

13.1

%

Total Company

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

 

 

Sales change rates:

 

 

 

 

 

 

 

Retail comparable-store sales

 

(20

%)

 

 

10

%

 

 

(10

%)

 

 

(3

%)

Online, phone and chat

 

(3

%)

 

 

2

%

 

 

(12

%)

 

 

4

%

Total Retail comparable sales change

 

(18

%)

 

 

9

%

 

 

(10

%)

 

 

(2

%)

Net opened/closed stores and other

 

2

%

 

 

4

%

 

 

2

%

 

 

4

%

Total Company

 

(16

%)

 

 

13

%

 

 

(8

%)

 

 

2

%

 

 

 

 

 

 

 

 

Stores open:

 

 

 

 

 

 

 

Beginning of period

 

671

 

 

 

653

 

 

 

670

 

 

 

648

 

Opened

 

7

 

 

 

10

 

 

 

19

 

 

 

23

 

Closed

 

(6

)

 

 

(4

)

 

 

(17

)

 

 

(12

)

End of period

 

672

 

 

 

659

 

 

 

672

 

 

 

659

 

 

 

 

 

 

 

 

 

Other metrics:

 

 

 

 

 

 

 

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

$

3,089

 

 

$

3,526

 

 

 

 

 

Average sales per square foot 1

$

1,007

 

 

$

1,172

 

 

 

 

 

Stores > $2 million net sales 2

 

71

%

 

 

82

%

 

 

 

 

Stores > $3 million net sales 2

 

31

%

 

 

45

%

 

 

 

 

Average revenue per smart bed unit 3

$

5,990

 

 

$

6,485

 

 

$

5,913

 

 

$

5,601

 

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

 

July 1,

2023

 

July 2,

2022

 

July 1,

2023

 

July 2,

2022

Net income

$

754

 

$

34,933

 

$

11,822

 

$

101,869

Income tax expense

 

524

 

 

11,359

 

 

6,602

 

 

30,442

Interest expense

 

9,948

 

 

3,619

 

 

32,289

 

 

9,406

Depreciation and amortization

 

18,304

 

 

15,920

 

 

71,318

 

 

61,857

Stock-based compensation

 

5,252

 

 

3,910

 

 

15,071

 

 

18,872

Asset impairments

 

170

 

 

80

 

 

294

 

 

266

Adjusted EBITDA

$

34,952

 

$

69,821

 

$

137,396

 

$

222,712

Free Cash Flow

(in thousands)

 

 

Three Months Ended

 

Trailing Twelve Months Ended

 

July 1,

2023

 

July 2,

2022

 

July 1,

2023

 

July 2,

2022

Net cash provided by operating activities

$

139

 

 

$

4,133

 

 

$

26,167

 

 

$

167,281

Subtract: Purchases of property and equipment

 

14,343

 

 

 

16,955

 

 

 

62,794

 

 

 

71,447

Free cash flow

$

(14,204

)

 

$

(12,822

)

 

$

(36,627

)

 

$

95,834

Calculation of Net Leverage Ratio under Revolving Credit Facility

(in thousands)

 

 

Trailing Twelve Months Ended

 

July 1,

2023

 

July 2,

2022

Borrowings under revolving credit facility

$

483,800

 

$

443,300

Outstanding letters of credit

 

7,147

 

 

5,947

Finance lease obligations

 

361

 

 

479

Consolidated funded indebtedness

$

491,308

 

$

449,726

Capitalized operating lease obligations 1

 

675,108

 

 

642,213

Total debt including capitalized operating lease obligations (a)

$

1,166,416

 

$

1,091,939

 

 

 

 

Adjusted EBITDA (see above)

$

137,396

 

$

222,712

Consolidated rent expense

 

112,518

 

 

107,035

Consolidated EBITDAR (b)

$

249,914

 

$

329,747

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

4.7 to 1.0

 

3.3 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

 

July 1,

2023

 

July 2,

2022

Adjusted net operating profit after taxes (Adjusted NOPAT)

 

 

 

Operating income

$

50,713

 

 

$

141,718

 

Add: Operating lease interest 1

 

27,040

 

 

 

25,079

 

Less: Income taxes 2

 

(21,993

)

 

 

(39,798

)

Adjusted NOPAT

$

55,760

 

 

$

126,999

 

 

 

 

 

Average adjusted invested capital

 

 

 

Total deficit

$

(419,141

)

 

$

(442,962

)

Add: Long-term debt 3

 

484,161

 

 

 

443,779

 

Add: Operating lease obligations 4

 

438,483

 

 

 

420,516

 

Total adjusted invested capital at end of period

$

503,503

 

 

$

421,333

 

 

 

 

 

Average adjusted invested capital 5

$

452,573

 

 

$

363,986

 

 

 

 

 

Adjusted ROIC 6

 

12.3

%

 

 

34.9

%

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 28.3% and 23.9% for July 1, 2023 and July 2, 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 - 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. The prior period has been updated to reflect this calculation.

 

 

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

 

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