Sleep Number Announces First Quarter 2022 Results

By: Sleep Number Corporation via Business Wire

April 20, 2022 at 16:01 PM EDT

Net sales declined 7% versus the prior year on constrained supply of semiconductor chips
Demand for the quarter declined 3% on acute macro factors in January and March; backlog increased 20% since December
Diluted EPS of $0.09 on lower-than-expected delivered net sales due to worsened external factors
Updated 2022 EPS outlook to a range of $5.00 to $6.00 per share

Sleep Number Corporation (Nasdaq: SNBR) today reported results for the quarter ended April 2, 2022.

“External factors continue to disrupt global supply and weaken consumer confidence, resulting in increased business complexity and volatility,” said Shelly Ibach, President and CEO. “In this dynamic environment, we remain focused on deepening consumer relationships and innovating for broad relevance while taking decisive actions to address near-term pressures. Our team is highly engaged and resilient, and our business model, liquidity and competitive advantages are strong. We remain steadfast in our commitment to fulfilling our purpose and creating superior long-term shareholder value.”

First Quarter Overview

Net sales decreased 7% to $527 million while demand decreased 3% for the quarter, reflecting the impact of Omicron in January and the war in Ukraine in late February; excess backlog increased to over $200 million
Gross margin of 57.3% of net sales was approximately 100 basis points above expectations due to level-loaded delivery efficiencies during the quarter
Diluted EPS of 9 cents for the first quarter was below expectation of 30 to 40 cents on lower-than-expected delivered net sales

Cash Flows and Liquidity Review

Generated $25 million in net cash from operating activities in the first quarter, compared with $112 million for the same period last year on constrained current year deliveries and changes in working capital
Invested $42 million in Sleep Number stock compared to $167 million for the same period last year
Leverage ratio of 3.4x EBITDAR at the end of the first quarter; more than $400 million of liquidity remains against current revolver
Return on invested capital (ROIC) of 20.5% for the trailing twelve-month period reflecting two consecutive quarters constrained by electronics component supply

Financial Outlook

The company updated its full-year 2022 diluted EPS outlook to a range of $5.00 to $6.00 per share. The outlook assumes low double-digit net sales growth for 2022 on flat to low single-digit demand growth the balance of the year, while servicing significant excess backlog. The company expects to generate approximately $200 million of cash from operations and anticipates 2022 capital expenditures of $70 million to $80 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

Individuality is the foundation of Sleep Number. Our purpose driven company is comprised of over 5,500 passionate team members who are dedicated to our mission of improving lives by individualizing sleep experiences. We have improved over 14 million lives and are positively impacting society’s wellbeing through higher quality sleep.

Our award-winning 360^® smart beds are informed by science. They learn from over one billion sleep sessions of highly-accurate, real world sleep data – the cumulation of 14 billion hours’ worth - to automatically adjust to each sleeper and provide effortless comfort and proven quality sleep. Our 360 smart beds deliver individualized sleep health reports and insights, including a daily SleepIQ^® score, and are helping to advance meaningful sleep health solutions by applying sleep science and research.

For life-changing sleep, visit SleepNumber.com or one of our 650 Sleep Number^® stores. More information is available on our newsroom and investor relations sites.

Forward-looking Statements

Statements used in this news release relating to future plans, events, financial results or performance, such as the company’s expectations for full-year 2022 diluted EPS, are forward-looking statements subject to certain risks and uncertainties including, among others, such factors as current and future general and industry economic trends and consumer confidence; risks inherent in outbreaks of pandemics or contagious disease, including the COVID-19 pandemic; risks inherent in global-sourcing activities, including tariffs, outbreaks of pandemics or contagious diseases, such as the COVID-19 pandemic, geo-political turmoil, acts of terrorism, global conflicts or war (such as the current conflict in Ukraine), strikes and the potential for shortages in supply or disruption or delay of production and delivery of materials and products in our supply chain; risks of disruption in the operation of any of our main manufacturing, distribution, logistics, home delivery, product development, or customer service facilities or operations; our manufacturing processes with minimal levels of inventory, which may leave us vulnerable to shortages in supply; our dependence on significant suppliers and third parties and our ability to maintain relationships with key suppliers or third parties, including several sole-source suppliers or service providers; rising commodity costs and other inflationary pressures; the effectiveness of our marketing messages; the efficiency of our advertising and promotional efforts; our ability to execute our Total Retail distribution strategy; our ability to achieve and maintain acceptable levels of product and service quality, and acceptable product return and warranty claims rates; our ability to continue to improve and expand our product line, and consumer acceptance of our products, product quality, innovation and brand image; industry competition, the emergence of additional competitive products and the adequacy of our intellectual-property rights to protect our products and brand from competitive or infringing activities; claims that our products, processes, advertising, or trademarks infringe the intellectual-property rights of others; availability of attractive and cost-effective consumer credit options; increasing government regulation; pending or unforeseen litigation and the potential for adverse publicity associated with litigation; the adequacy of our and third-party information systems to meet the evolving needs of our business and existing and evolving risks and regulatory standards applicable to data privacy and cybersecurity; the costs and potential disruptions to our business related to upgrading or maintaining our information systems; the vulnerability of our and third party information systems to attacks by hackers or other cyber threats that could compromise the security of our systems, result in a data breach or disrupt our business; environmental risks, including increasing environmental regulation and the broader impacts of climate change such as from weather-related events; and our ability, and the ability of our suppliers and vendors, to attract, retain and motivate qualified management, executive and other key team members, including qualified retail sales professionals and managers. 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
	April 2,		% of		April 3,		% of
	2022		Net Sales		2021		Net Sales

Net sales	$	527,130	100.0	%	$	568,256	100.0	%
Cost of sales		224,832	42.7	%		212,338	37.4	%
Gross profit		302,298	57.3	%		355,918	62.6	%
Operating expenses:
Sales and marketing		240,259	45.6	%		223,617	39.4	%
General and administrative		41,319	7.8	%		42,592	7.5	%
Research and development		16,305	3.1	%		13,286	2.3	%
Total operating expenses		297,883	56.5	%		279,495	49.2	%
Operating income		4,415	0.8	%		76,423	13.4	%
Interest expense, net		2,127	0.4	%		977	0.2	%
Income before income taxes		2,288	0.4	%		75,446	13.3	%
Income tax expense		214	0.0	%		8,812	1.6	%
Net income	$	2,074	0.4	%	$	66,634	11.7	%

Net income per share – basic	$	0.09			$	2.63

Net income per share – diluted	$	0.09			$	2.51


Reconciliation of weighted-average
shares outstanding:
Basic weighted-average shares outstanding		22,760				25,377
Dilutive effect of stock-based awards		831				1,167
Diluted weighted-average shares outstanding		23,591				26,544

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

	April 2,			January 1,
	2022			2022
Assets
Current assets:
Cash and cash equivalents	$	1,556		$	2,389
Accounts receivable, net of allowances
of $1,047 and $924, respectively		24,502			25,718
Inventories		103,212			105,644
Prepaid expenses		22,001			18,953
Other current assets		40,624			54,917
Total current assets		191,895			207,621

Non-current assets:
Property and equipment, net		197,644			195,128
Operating lease right-of-use assets		374,650			371,133
Goodwill and intangible assets, net		69,867			70,468
Other non-current assets		78,529			75,190
Total assets	$	912,585		$	919,540

Liabilities and Shareholders’ Deficit
Current liabilities:
Borrowings under revolving credit facility	$	413,200		$	382,500
Accounts payable		177,025			162,547
Customer prepayments		142,005			129,499
Accrued sales returns		20,277			22,368
Compensation and benefits		25,702			51,240
Taxes and withholding		26,293			22,087
Operating lease liabilities		74,046			72,360
Other current liabilities		59,390			64,177
Total current liabilities		937,938			906,778

Non-current liabilities:
Deferred income taxes		312			688
Operating lease liabilities		338,528			336,192
Other non-current liabilities		105,020			100,835
Total non-current liabilities		443,860			437,715
Total liabilities		1,381,798			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,
22,232 and 22,683 shares issued and outstanding, respectively		222			227
Additional paid-in capital		-			3,971
Accumulated deficit		(469,435	)		(429,151	)
Total shareholders’ deficit		(469,213	)		(424,953	)
Total liabilities and shareholders’ deficit	$	912,585		$	919,540

SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
*Consolidated Statements of Cash Flows*
(unaudited - in thousands)
subject to reclassification

	Three Months Ended
	April 2,			April 3,
	2022			2021

Cash flows from operating activities:
Net income	$	2,074		$	66,634
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		15,870			14,638
Stock-based compensation		4,133			6,416
Net loss on disposals and impairments of assets		93			78
Deferred income taxes		(376	)		1,515
Changes in operating assets and liabilities:
Accounts receivable		1,216			5,948
Inventories		2,432			(946	)
Income taxes		1,102			6,847
Prepaid expenses and other assets		10,877			(3,113	)
Accounts payable		2,073			12,390
Customer prepayments		12,506			20,552
Accrued compensation and benefits		(25,348	)		(34,605	)
Other taxes and withholding		3,104			8,912
Other accruals and liabilities		(5,198	)		6,332
Net cash provided by operating activities		24,558			111,598

Cash flows from investing activities:
Purchases of property and equipment		(19,604	)		(11,546	)
Proceeds from sales of property and equipment		10			12
Net cash used in investing activities		(19,594	)		(11,534	)

Cash flows from financing activities:
Net increase in short-term borrowings		44,712			74,087
Repurchases of common stock		(50,998	)		(178,613	)
Proceeds from issuance of common stock		531			2,460
Debt issuance costs		(42	)		(3	)
Net cash used in financing activities		(5,797	)		(102,069	)

Net decrease in cash and cash equivalents		(833	)		(2,005	)
Cash and cash equivalents, at beginning of period		2,389			4,243
Cash and cash equivalents, at end of period	$	1,556		$	2,238

SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)

	Three Months Ended
	April 2,			April 3,
	2022			2021

Percent of sales:
Retail stores		84.3	%		86.1	%
Online, phone, chat and other		15.7	%		13.9	%
Total Company		100.0	%		100.0	%

Sales change rates:
Retail comparable-store sales		(14	%)		12	%
Online, phone and chat		5	%		116	%
Total Retail comparable sales change		(11	%)		20	%
Net opened/closed stores and other		4	%		0	%
Total Company		(7	%)		20	%

Stores open:
Beginning of period		648			602
Opened		13			11
Closed		(8	)		(6	)
End of period		653			607

Other metrics:
Average sales per store ($ in 000's) ¹	$	3,487		$	3,196
Average sales per square foot ¹	$	1,167		$	1,095
Stores > $2 million net sales ²		82	%		71	%
Stores > $3 million net sales ²		46	%		33	%
Average revenue per smart bed unit ³	$	4,905		$	5,030

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				Twelve Months Ended
	April 2,		April 3,		April 2,		April 3,
	2022		2021		2022		2021

Net income	$	2,074	$	66,634	$	89,186	$	166,683
Income tax expense		214		8,812		24,947		34,265
Interest expense		2,127		978		7,394		7,642
Depreciation and amortization		15,683		14,519		60,943		60,049
Stock-based compensation		4,133		6,417		20,930		26,179
Asset impairments		103		89		186		388

Adjusted EBITDA	$	24,334	$	97,449	$	203,586	$	295,206

*Free Cash Flow*
(in thousands)

	Three Months Ended				Twelve Months Ended
	April 2,		April 3,		April 2,		April 3,
	2022		2021		2022		2021

Net cash provided by operating activities	$	24,558	$	111,598	$	212,970	$	306,318
Subtract: Purchases of property and equipment		19,604		11,546		74,958		38,295

Free cash flow	$	4,954	$	100,052	$	138,012	$	268,023

*Calculation of Net Leverage Ratio under Revolving Credit Facility*
(in thousands)

					Twelve Months Ended
					April 2,		April 3,
					2022		2021

Borrowings under revolving credit facility					$	413,200	$	314,900
Outstanding letters of credit						5,947		3,997
Finance lease obligations						509		622
Consolidated funded indebtedness					$	419,656	$	319,519
Capitalized operating lease obligations¹						629,624		555,903
Total debt including capitalized operating lease obligations (a)					$	1,049,280	$	875,422

Adjusted EBITDA (see above)					$	203,586	$	295,206
Consolidated rent expense						104,937		92,650
Consolidated EBITDAR (b)					$	308,523	$	387,856

Net Leverage Ratio under revolving credit facility (a divided by b)					3.4 to 1.0		2.3 to 1.0

¹A 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 (ROIC)*
(in thousands)

ROIC is a financial measure we use to determine how efficiently we deploy our capital. It quantifies the return we earn on our invested capital. Management believes ROIC is also a useful metric for investors and financial analysts. We compute ROIC as outlined below. Our definition and calculation of ROIC may not be comparable to similarly titled definitions and calculations used by other companies. The tables below reconcile net operating profit after taxes (NOPAT) and total invested capital, which are non-GAAP financial measures, to the comparable GAAP financial measures:

	Twelve Months Ended
	April 2, 2022			April 3, 2021
Net operating profit after taxes (NOPAT)
Operating income	$	121,527		$	208,506
Add: Rent expense ¹		104,937			92,650
Add: Interest income		-			84
Less: Depreciation on capitalized operating leases ²		(26,311	)		(24,258	)
Less: Income taxes ³		(47,503	)		(66,118	)
NOPAT	$	152,650		$	210,864

Average invested capital
Total deficit	$	(469,213	)	$	(332,650	)
Add: Long-term debt⁴		413,709			315,522
Add: Capitalized operating lease obligations ⁵		839,496			741,200
Total invested capital at end of period	$	783,992		$	724,072

Average invested capital ⁶	$	746,167		$	763,227

Return on invested capital (ROIC) ⁷		20.5	%		27.6	%

¹ Rent expense is added back to operating income to show the impact of owning versus leasing the related assets.
² Depreciation is based on the average of the last five fiscal quarters' ending capitalized operating lease obligations (see note 5) for the respective reporting periods with an assumed thirty-year useful life. This life assumption is based on our long-term participation in given markets though specific retail location lease commitments are generally 5 to 10 years at inception. This is subtracted from operating income to illustrate the impact of owning versus leasing the related assets.
³ Reflects annual effective income tax rates, before discrete adjustments, of 23.7% and 23.9% for 2022 and 2021, respectively.
⁴ Long-term debt includes existing finance lease liabilities.
⁵ A multiple of eight times annual rent expense is used as an estimate for capitalizing our operating lease obligations. The methodology utilized aligns with the methodology of a nationally recognized credit rating agency.
⁶ Average invested capital represents the average of the last five fiscal quarters' ending invested capital balances.
⁷ ROIC equals NOPAT divided by average invested capital.
Note - Our 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.
GAAP - generally accepted accounting principles in the U.S.

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Contacts

Investor Contact: Dave Schwantes; (763) 551-7498; investorrelations@sleepnumber.com

Media Contact: Julie Elepano; (414) 732-9840; julie.elepano@sleepnumber.com