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Sleep Number Announces Record Second Quarter 2019 Results and Raises Midpoint of Earnings Outlook

  • Second quarter net sales grew 13%, with an 8% comp and diluted EPS growth of 40%
  • Year-to-date net sales increased 11%, operating income grew 38% and diluted EPS was up 48%
  • Generated a 141% increase in operating cash flows year-to-date
  • Raises midpoint of 2019 earnings outlook to $2.55 per diluted share

MINNEAPOLIS--(BUSINESS WIRE)--Jul. 25, 2019-- Sleep Number Corporation (Nasdaq: SNBR) today reported results for the second quarter and year-to-date period ended June 29, 2019.

“Consumer response to Sleep Number’s 360® smart beds has driven double-digit demand growth for four consecutive quarters, including performance at the high end of our expectations in the second quarter,” stated Shelly Ibach, President and CEO. “The power of our purpose-driven brand and operational excellence are delivering strong results across our business.”

Second Quarter Overview

  • Net sales increased 13% to $356 million, including an 8% comparable sales gain and 5 percentage points of growth from new stores
  • Gross profit rate increased 130 basis points to 61.0% of net sales compared with 59.7% for the same period last year
  • Operating income increased to $7 million compared with $2 million for the prior year’s second quarter
  • Earnings per diluted share increased 40% to $0.14, compared with $0.10 for the prior year; discrete tax items benefited current year second quarter EPS by four cents and the prior year by eight cents

Cash Flows and Liquidity Review

  • Generated $70 million in net cash from operating activities, invested $34 million in capital expenditures and returned $81 million to shareholders through share repurchases during the first six months of 2019
  • Continue to expect 2019 full-year share repurchases of $125 million to $145 million
  • Ended the second quarter with a leverage ratio of 3.0x EBITDAR; continue to operate with a targeted range of 2.5x to 3.0x EBITDAR with seasonal fluctuations expected
  • Return on invested capital increased 250 basis points year-over-year to 16.8% for the trailing twelve month period

Financial Outlook
The company updated its outlook for 2019 earnings per diluted share to a range of $2.35 to $2.75, compared to the previous range of $2.25 to $2.75. The outlook for the second half of 2019 includes mid- to high-single digitnet sales growth and a 25% effective income tax rate. The company anticipates 2019 full-year capital expenditures to be $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 listen to the call, please dial 800-593-9959 (international participants dial 517-308-9340) and reference the passcode “Sleep.” To access the webcast, please visit the investor relations area of the Sleep Number website at http://www.sleepnumber.com/eng/aboutus/InvestorRelations.cfm. The webcast replay will remain available for approximately 60 days.

About Sleep Number Corporation
The leader in sleep innovation, Sleep Number delivers proven, quality sleep through effortless, adjustable comfort and biometric sleep tracking. Sleep Number’s revolutionary 360® smart bed and proprietary SleepIQ® technology platforms are proving the connection between sleep and well-being. With one of the most comprehensive databases of biometric consumer sleep data and ranked #1 in J.D. Power’s 2018 Mattress Satisfaction Report*, Sleep Number is improving lives by individualizing sleep experiences. And with a commitment to improving the well-being of over one million youth by 2025, Sleep Number is redefining the future of health and wellness – for everyone. To experience better quality sleep, visit SleepNumber.com or one of our over 590 Sleep Number® stores located in all 50 states. For additional information, visit our newsroom and investor relations site.

*Sleep Number received the highest score in the J.D. Power 2015, 2016 and 2018 Mattress Satisfaction Reports of customers’ satisfaction with their mattress. Visit jdpower.com/awards.

Forward-looking Statements
Statements used in this news release relating to future plans, events, financial results or performance 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; the effectiveness of our marketing messages; the efficiency of our advertising and promotional efforts; our ability to execute our company-controlled 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; 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; the potential for claims that our products, processes, advertising, or trademarks infringe the intellectual property rights of others; availability of attractive and cost-effective consumer credit options; pending and unforeseen litigation and the potential for adverse publicity associated with litigation; our manufacturing processes with minimal levels of inventory, which may leave us vulnerable to shortages in supply; our dependence on significant suppliers and our ability to maintain relationships with key suppliers, including several sole-source suppliers; the vulnerability of key suppliers to recessionary pressures, labor negotiations, liquidity concerns or other factors; rising commodity costs and other inflationary pressures; risks inherent in global sourcing activities, including tariffs and the potential for shortages in supply; risks of disruption in the operation of either of our two primary manufacturing facilities; increasing government regulations; 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 security; the costs, distractions and potential disruptions to our business related to upgrading our management 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; and our ability to attract, retain and motivate qualified management, executive and other key employees, 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

June 29,

 

% of

 

June 30,

 

% of

 

2019

 

Net Sales

 

2018

 

Net Sales

 
Net sales

$

355,963

 

100.0%

$

316,338

 

100.0%

Cost of sales

 

138,777

 

39.0%

 

127,450

 

40.3%

Gross profit

 

217,186

 

61.0%

 

188,888

 

59.7%

Operating expenses:
Sales and marketing

 

168,839

 

47.4%

 

151,106

 

47.8%

General and administrative

 

33,045

 

9.3%

 

28,828

 

9.1%

Research and development

 

8,057

 

2.3%

 

6,868

 

2.2%

Total operating expenses

 

209,941

 

59.0%

 

186,802

 

59.1%

Operating income

 

7,245

 

2.0%

 

2,086

 

0.7%

Interest expense, net

 

3,228

 

0.9%

 

1,453

 

0.5%

Income before income taxes

 

4,017

 

1.1%

 

633

 

0.2%

Income tax benefit

 

(263

)

(0.1%)

 

(3,111

)

(1.0%)

Net income

$

4,280

 

1.2%

$

3,744

 

1.2%

 
Net income per share – basic

$

0.14

 

$

0.10

 

 
Net income per share – diluted

$

0.14

 

$

0.10

 

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

 

29,873

 

 

36,138

 

Dilutive effect of stock-based awards

 

658

 

 

706

 

Diluted weighted-average shares outstanding

 

30,531

 

 

36,844

 

SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)

Six Months Ended

 

June 29,

 

% of

 

 

June 30,

 

% of

 

2019

 

Net Sales

 

 

2018

 

Net Sales

 
Net sales

$

782,408

100.0%

$

704,971

100.0%

Cost of sales

 

302,989

38.7%

 

278,606

39.5%

Gross profit

 

479,419

61.3%

 

426,365

60.5%

 
Operating expenses:
Sales and marketing

 

355,666

45.5%

 

323,023

45.8%

General and administrative

 

67,368

8.6%

 

60,562

8.6%

Research and development

 

16,433

2.1%

 

13,793

2.0%

Total operating expenses

 

439,467

56.2%

 

397,378

56.4%

Operating income

 

39,952

5.1%

 

28,987

4.1%

Interest expense, net

 

5,837

0.7%

 

1,978

0.3%

Income before income taxes

 

34,115

4.4%

 

27,009

3.8%

Income tax expense

 

4,417

0.6%

 

2,717

0.4%

Net income

$

29,698

3.8%

$

24,292

3.4%

 
Net income per share – basic

$

0.98

$

0.65

 
Net income per share – diluted

$

0.95

$

0.64

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

 

30,247

 

37,191

Dilutive effect of stock-based awards

 

887

 

905

Diluted weighted-average shares outstanding

 

31,134

 

38,096

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Consolidated Balance Sheets

(unaudited – in thousands, except per share amounts)

subject to reclassification

 

June 29,

December 29,

2019

2018

Assets
Current assets:
Cash and cash equivalents

$

1,684

 

$

1,612

 

Accounts receivable, net of allowance for doubtful accounts of $717 and $699, respectively

 

19,581

 

 

24,795

 

Inventories

 

87,859

 

 

84,882

 

Income taxes receivable

 

3,259

 

 

-

 

Prepaid expenses

 

14,314

 

 

8,009

 

Other current assets

 

31,939

 

 

31,559

 

Total current assets

 

158,636

 

 

150,857

 

 
Non-current assets:
Property and equipment, net

 

202,280

 

 

205,631

 

Operating lease right-of-use assets 1

 

316,958

 

 

-

 

Goodwill and intangible assets, net

 

74,317

 

 

75,407

 

Other non-current assets

 

43,722

 

 

38,243

 

Total assets

$

795,913

 

$

470,138

 

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

$

281,500

 

$

199,600

 

Accounts payable

 

117,343

 

 

144,781

 

Customer prepayments

 

30,473

 

 

27,066

 

Accrued sales returns

 

17,766

 

 

19,907

 

Compensation and benefits

 

29,960

 

 

27,700

 

Taxes and withholding

 

10,608

 

 

18,380

 

Operating lease liabilities 1

 

56,167

 

 

-

 

Other current liabilities

 

48,720

 

 

51,234

 

Total current liabilities

 

592,537

 

 

488,668

 

 
Non-current liabilities:
Deferred income taxes

 

5,543

 

 

4,822

 

Operating lease liabilities 1

 

290,880

 

 

-

 

Other non-current liabilities

 

64,255

 

 

86,198

 

Total non-current liabilities

 

360,678

 

 

91,020

 

Total liabilities

 

953,215

 

 

579,688

 

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

 

-

 

 

-

 

Common stock, $0.01 par value; 142,500 shares authorized, 29,323 and 30,868 shares issued and outstanding, respectively

 

293

 

 

309

 

Additional paid-in capital

 

-

 

 

-

 

Accumulated deficit

 

(157,595

)

 

(109,859

)

Total shareholders’ deficit

 

(157,302

)

 

(109,550

)

Total liabilities and shareholders’ deficit

$

795,913

 

$

470,138

 

 

1 Effective December 30, 2018, we adopted the new lease accounting standard. We adopted the new guidance on a modified-retrospective basis and have not restated prior periods.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited - in thousands)

subject to reclassification

 

Six Months Ended

June 29,

June 30,

2019

2018

 
Cash flows from operating activities:
Net income

$

29,698

 

$

24,292

 

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

 

31,187

 

 

31,089

 

Stock-based compensation

 

7,888

 

 

6,742

 

Net (gain) loss on disposals and impairments of assets

 

(431

)

 

15

 

Deferred income taxes

 

721

 

 

7,212

 

Changes in operating assets and liabilities:
Accounts receivable

 

5,214

 

 

(2,753

)

Inventories

 

(2,977

)

 

(5,943

)

Income taxes

 

(9,195

)

 

(19,075

)

Prepaid expenses and other assets

 

(8,580

)

 

8,242

 

Accounts payable

 

12,408

 

 

(4,859

)

Customer prepayments

 

3,407

 

 

369

 

Accrued compensation and benefits

 

2,348

 

 

(9,944

)

Other taxes and withholding

 

(1,836

)

 

(2,608

)

Other accruals and liabilities

 

495

 

 

(3,648

)

Net cash provided by operating activities

 

70,347

 

 

29,131

 

 
Cash flows from investing activities:
Purchases of property and equipment

 

(33,896

)

 

(21,341

)

Proceeds from sales of property and equipment

 

2,571

 

 

70

 

Net cash used in investing activities

 

(31,325

)

 

(21,271

)

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

 

56,758

 

 

133,253

 

Repurchases of common stock

 

(99,684

)

 

(142,940

)

Proceeds from issuance of common stock

 

4,995

 

 

1,596

 

Debt issuance costs

 

(1,019

)

 

(1,013

)

Net cash used in financing activities

 

(38,950

)

 

(9,104

)

 
Net increase (decrease) in cash and cash equivalents

 

72

 

 

(1,244

)

Cash and cash equivalents, at beginning of period

 

1,612

 

 

3,651

 

Cash and cash equivalents, at end of period

$

1,684

 

$

2,407

 

 
 

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Supplemental Financial Information

(unaudited)
 
 

Three Months Ended

Six Months Ended

June 29,

June 30,

June 29,

June 30,

2019

2018

2019

2018

 
Percent of sales:
Retail

 

92.1

%

 

90.7

%

 

92.1

%

 

91.2

%

Online and phone

 

7.2

%

 

7.9

%

 

7.0

%

 

7.5

%

Wholesale/other

 

0.7

%

 

1.4

%

 

0.9

%

 

1.3

%

Total

 

100.0

%

 

100.0

%

 

100.0

%

 

100.0

%

 
Sales change rates:
Retail comparable-store sales

 

9

%

 

8

%

 

7

%

 

1

%

Online and phone

 

2

%

 

19

%

 

4

%

 

12

%

Company-Controlled comparable sales change

 

8

%

 

9

%

 

7

%

 

2

%

Net opened/closed stores

 

5

%

 

3

%

 

4

%

 

3

%

Total Company-Controlled Channel

 

13

%

 

12

%

 

11

%

 

5

%

Wholesale/other

 

(44

%)

 

(29

%)

 

(23

%)

 

(33

%)

Total

 

13

%

 

11

%

 

11

%

 

4

%

 
Stores open:
Beginning of period

 

585

 

 

558

 

 

579

 

 

556

 

Opened

 

17

 

 

11

 

 

32

 

 

24

 

Closed

 

(8

)

 

(4

)

 

(17

)

 

(15

)

End of period

 

594

 

 

565

 

 

594

 

 

565

 

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

$

2,800

 

$

2,645

 

Average sales per square foot 1

$

1,015

 

$

985

 

Stores > $2 million net sales 2

 

69

%

 

63

%

Stores > $3 million net sales 2

 

28

%

 

23

%

Average revenue per mattress unit 3

$

4,945

 

$

4,508

 

$

4,868

 

$

4,459

 

 
 
1 Trailing twelve months Company-Controlled comparable sales per store open at least one year.
 
2 Trailing twelve months for stores open at least one year (excludes online and phone sales).
 
3 Represents Company-Controlled Channel total net sales divided by Company-Controlled Channel mattress 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

June 29,

June 30,

June 29,

June 30,

2019

2018

2019

2018

 

Net income

$

4,280

 

$

3,744

 

$

74,945

$

65,686

Income tax (benefit) expense

 

(263

)

 

(3,111

)

 

18,682

 

20,014

Interest expense

 

3,229

 

 

1,454

 

 

9,769

 

2,486

Depreciation and amortization

 

15,328

 

 

15,326

 

 

61,675

 

60,945

Stock-based compensation

 

4,250

 

 

3,658

 

 

12,558

 

14,629

Asset impairments

 

1

 

 

85

 

 

151

 

327

Adjusted EBITDA

$

26,825

 

$

21,156

 

$

177,780

$

164,087

 
 

Free Cash Flow

(in thousands)

 

Three Months Ended

Trailing Twelve Months Ended

June 29,

June 30,

June 29,

June 30,

2019

2018

2019

2018

 

Net cash provided by (used in) operating activities

$

2,211

 

$

(20,125

)

$

172,756

$

112,931

Subtract: Purchases of property and equipment

 

14,153

 

 

12,536

 

 

58,070

 

54,038

Free cash flow

$

(11,942

)

$

(32,661

)

$

114,686

$

58,893

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note - Our Adjusted EBITDA calculation and our "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 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:
 

Trailing Twelve Months Ended

June 29,

June 30,

2019

2018

Net operating profit after taxes (NOPAT)
Operating income

$

103,393

 

$

88,135

 

Add: Rent expense 1

 

84,210

 

 

76,215

 

Add: Interest income

 

4

 

 

50

 

Less: Depreciation on capitalized operating leases 2

 

(21,310

)

 

(19,640

)

Less: Income taxes 3

 

(40,319

)

 

(43,934

)

NOPAT

$

125,978

 

$

100,826

 

 
Average invested capital
Total deficit

$

(157,302

)

$

(21,154

)

Add: Long-term debt 4

 

282,308

 

 

183,405

 

Add: Capitalized operating lease obligations 5

 

673,680

 

 

609,720

 

Total invested capital at end of period

$

798,686

 

$

771,971

 

 
Average invested capital 6

$

750,375

 

$

705,575

 

 
Return on invested capital (ROIC) 7

 

16.8

%

 

14.3

%

 

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 6) for the respective reporting periods with an assumed thirty-year useful life. 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 24.2% and 30.3% for 2019 and 2018, 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.

 

Source: Sleep Number Corporation

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

Media Contact: Susan Oguche; (763) 551-7059; susan.oguche@sleepnumber.com


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