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Sleep Number Announces Record Third Quarter 2020 Results

10/14/2020
  • Third quarter net sales grew 12% to a record $531 million, with demand growth of 16%
  • Third quarter operating income grew 78% and diluted EPS grew 90% to a record $1.79
  • Generated a 51% increase in year-to-date operating cash flows, and a trailing twelve-months ROIC of 20.8%
  • Provides 2020 earnings outlook of approximately $4.00 per diluted share, a 48% increase versus full-year 2019 earnings per diluted share of $2.70, on estimated net sales growth of 7% to 8%

MINNEAPOLIS--(BUSINESS WIRE)-- Sleep Number Corporation (Nasdaq: SNBR) today reported results for the quarter ended September 26, 2020.

"Our exceptional third quarter performance reflects the ongoing relevance of our life-changing 360® smart beds as consumers deepen their understanding of the importance of quality sleep to their overall health and wellness,” said Shelly Ibach, President and CEO. “For the third consecutive year, since transitioning to our smart beds, our Q3 results reflect double-digit demand growth. We again demonstrated the resilience of our vertical business model through our top and bottom-line performance and a trailing twelve months ROIC of nearly 21%. I am thankful for our team's amazing dedication to our mission, their ingenuity and how they keep each other safe, healthy and happy. Driven by our purpose, we are accelerating our strategic initiatives, strengthening our competitive advantages and creating meaningful value for our customers, team, business partners and shareholders.”

Third Quarter Overview

  • Net sales increased 12% to $531 million, including an 11% comparable sales gain; online and phone sales were up 111% versus the prior year and represented 14% of net sales
  • Gross profit rate increased 70 basis points (bp) to 63.1% of net sales compared with 62.4% for the same period last year
  • Operating income increased 78% to $70 million, or 13.1% of net sales, up 490 bp versus the prior year’s third quarter
  • Earnings per diluted share increased 90% to $1.79, compared with $0.94 for the prior year

Cash Flows and Liquidity Review

  • Generated $287 million in net cash from operating activities for the first nine months of 2020, up 51% versus last year, with year-to-date operating free cash flows of $259 million, up 81% versus prior year
  • Invested $28 million in year-to-date capital expenditures compared to $47 million for the prior year period
  • Return on invested capital (ROIC) of 20.8% for the trailing twelve-month period, up 240 bp versus the prior year comparable period
  • Cash and liquidity available under our credit facility, before letters of credit, was $418 million at the end of the third quarter, up $180 million from the same period last year; repaid $75 million, 364-day term loan six months early and removed related LIBOR floor and share repurchase restriction
  • Leverage ratio was 1.9x EBITDAR at the end of the third quarter, compared with 2.6x for the same period last year

Financial Outlook

The company expects to generate full-year 2020 earnings per diluted share of approximately $4.00, which would represent a 48% increase versus full-year 2019 earnings per diluted share of $2.70. The outlook assumes 7% to 8% net sales growth for 2020, including an estimated two percentage points of growth and approximately 25 cents per share from the 53rd week. The company also intends to resume share repurchases in the fourth quarter and to operate, over time, with leverage of 2.5x to 3.0x EBITDAR, with seasonal fluctuations expected.

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 core to Sleep Number. Our purpose driven company is comprised of more than 4,300 passionate team members who are dedicated to our mission of improving lives by individualizing sleep experiences. Our 360® smart beds provide each sleeper with adjustable, personalized comfort for proven quality sleep. We have improved nearly 13 million lives as we strive to improve society’s wellbeing through higher quality sleep.

Sleep science and data are the foundation of our innovations. Our award-winning 360® smart beds benefit from our proprietary SleepIQ® technology - learning from nearly 8 billion hours of highly accurate sleep data - to provide effortless comfort and individualized sleep health insights, including your daily SleepIQ® score.

For life-changing sleep, visit SleepNumber.com or one of our 600 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 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 diseases; 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; 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 third parties and our ability to maintain relationships with key suppliers or third-parties, including several sole-source suppliers or providers of services; rising commodity costs and other inflationary pressures; risks inherent in global sourcing activities, including tariffs, pandemics, strikes, and the potential for shortages in supply; risks of disruption in the operation of our main manufacturing facilities or assembly distribution facilities; increasing government regulation; 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 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 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

September 26,

 

% of

 

September 28,

 

% of

2020

 

Net Sales

 

2019

 

Net Sales

 
Net sales

$

531,155

100.0

%

$

474,778

100.0

%

Cost of sales

 

196,195

36.9

%

 

178,388

37.6

%

Gross profit

 

334,960

63.1

%

 

296,390

62.4

%

Operating expenses:
Sales and marketing

 

211,574

39.8

%

 

213,133

44.9

%

General and administrative

 

44,127

8.3

%

 

35,098

7.4

%

Research and development

 

9,644

1.8

%

 

9,007

1.9

%

Total operating expenses

 

265,345

50.0

%

 

257,238

54.2

%

Operating income

 

69,615

13.1

%

 

39,152

8.2

%

Interest expense, net

 

1,827

0.3

%

 

3,131

0.7

%

Income before income taxes

 

67,788

12.8

%

 

36,021

7.6

%

Income tax expense

 

16,468

3.1

%

 

7,967

1.7

%

Net income

$

51,320

9.7

%

$

28,054

5.9

%

 
Net income per share – basic

$

1.83

$

0.96

 
Net income per share – diluted

$

1.79

$

0.94

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

 

27,973

 

29,085

Dilutive effect of stock-based awards

 

661

 

711

Diluted weighted-average shares outstanding

 

28,634

 

29,796

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

September 26,

 

% of

 

September 28,

 

% of

2020

 

Net Sales

 

2019

 

Net Sales

 
Net sales

$

1,288,659

100.0

%

$

1,257,186

100.0

%

Cost of sales

 

488,558

37.9

%

 

481,377

38.3

%

Gross profit

 

800,101

62.1

%

 

775,809

61.7

%

Operating expenses:
Sales and marketing

 

549,483

42.6

%

 

568,799

45.2

%

General and administrative

 

111,915

8.7

%

 

102,466

8.2

%

Research and development

 

28,399

2.2

%

 

25,440

2.0

%

Total operating expenses

 

689,797

53.5

%

 

696,705

55.4

%

Operating income

 

110,304

8.6

%

 

79,104

6.3

%

Interest expense, net

 

8,111

0.6

%

 

8,968

0.7

%

Income before income taxes

 

102,193

7.9

%

 

70,136

5.6

%

Income tax expense

 

24,363

1.9

%

 

12,384

1.0

%

Net income

$

77,830

6.0

%

$

57,752

4.6

%

 
Net income per share – basic

$

2.79

$

1.93

 
Net income per share – diluted

$

2.73

$

1.88

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

 

27,918

 

29,859

Dilutive effect of stock-based awards

 

642

 

829

Diluted weighted-average shares outstanding

 

28,560

 

30,688

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

September 26,

 

December 28,

2020

 

2019

Assets
Current assets:
Cash and cash equivalents

$

1,365

 

$

1,593

 

Accounts receivable, net of allowance for doubtful accounts of $823 and $898, respectively

 

32,688

 

 

19,978

 

Inventories

 

83,258

 

 

87,065

 

Prepaid expenses

 

10,923

 

 

15,335

 

Other current assets

 

36,127

 

 

36,397

 

Total current assets

 

164,361

 

 

160,368

 

 
Non-current assets:
Property and equipment, net

 

178,482

 

 

197,421

 

Operating lease right-of-use assets

 

311,179

 

 

327,017

 

Goodwill and intangible assets, net

 

73,508

 

 

73,226

 

Other non-current assets

 

52,587

 

 

48,011

 

Total assets

$

780,117

 

$

806,043

 

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

$

33,500

 

$

231,000

 

Accounts payable

 

167,139

 

 

134,594

 

Customer prepayments

 

75,043

 

 

34,248

 

Accrued sales returns

 

24,085

 

 

19,809

 

Compensation and benefits

 

61,751

 

 

40,321

 

Taxes and withholding

 

32,030

 

 

22,171

 

Operating lease liabilities

 

60,561

 

 

59,561

 

Other current liabilities

 

58,449

 

 

53,070

 

Total current liabilities

 

512,558

 

 

594,774

 

 
Non-current liabilities:
Deferred income taxes

 

7,037

 

 

3,808

 

Operating lease liabilities

 

281,733

 

 

298,090

 

Other non-current liabilities

 

81,616

 

 

68,802

 

Total non-current liabilities

 

370,386

 

 

370,700

 

Total liabilities

 

882,944

 

 

965,474

 

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

 

-

 

 

-

 

Common stock, $0.01 par value; 142,500 shares authorized, 27,757 and 27,961 shares issued and outstanding, respectively

 

278

 

 

280

 

Additional paid-in capital

 

14,390

 

 

-

 

Accumulated deficit

 

(117,495

)

 

(159,711

)

Total shareholders’ deficit

 

(102,827

)

 

(159,431

)

Total liabilities and shareholders’ deficit

$

780,117

 

$

806,043

 

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

September 26,

 

September 28,

2020

 

2019

 
Cash flows from operating activities:
Net income

$

77,830

 

$

57,752

 

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

 

46,244

 

 

46,267

 

Stock-based compensation

 

15,554

 

 

12,034

 

Net loss (gain) on disposals and impairments of assets

 

208

 

 

(409

)

Deferred income taxes

 

3,229

 

 

(895

)

Changes in operating assets and liabilities:
Accounts receivable

 

(12,710

)

 

(746

)

Inventories

 

3,807

 

 

(1,626

)

Income taxes

 

5,103

 

 

535

 

Prepaid expenses and other assets

 

3,666

 

 

(8,065

)

Accounts payable

 

58,547

 

 

45,051

 

Customer prepayments

 

40,795

 

 

12,758

 

Accrued compensation and benefits

 

21,376

 

 

11,763

 

Other taxes and withholding

 

4,756

 

 

5,784

 

Other accruals and liabilities

 

18,877

 

 

9,629

 

Net cash provided by operating activities

 

287,282

 

 

189,832

 

 
Cash flows from investing activities:
Purchases of property and equipment

 

(28,074

)

 

(46,757

)

Proceeds from sales of property and equipment

 

53

 

 

2,577

 

Purchase of intangible assets

 

(945

)

 

-

 

Net cash used in investing activities

 

(28,966

)

 

(44,180

)

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

 

(220,968

)

 

(11,270

)

Repurchases of common stock

 

(41,923

)

 

(139,178

)

Proceeds from issuance of common stock

 

4,650

 

 

5,752

 

Debt issuance costs

 

(303

)

 

(1,023

)

Net cash used in financing activities

 

(258,544

)

 

(145,719

)

 
Net decrease in cash and cash equivalents

 

(228

)

 

(67

)

Cash and cash equivalents, at beginning of period

 

1,593

 

 

1,612

 

Cash and cash equivalents, at end of period

$

1,365

 

$

1,545

 

SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)
 
 
Three Months Ended Nine Months Ended

September 26,

 

September 28,

 

September 26,

 

September 28,

2020

 

2019

 

2020

 

2019

 
Percent of sales:
Retail

 

86.0

%

 

92.2

%

 

85.2

%

 

92.1

%

Online and phone

 

13.7

%

 

7.3

%

 

14.5

%

 

7.2

%

Wholesale/other

 

0.3

%

 

0.5

%

 

0.3

%

 

0.7

%

Total Company

 

100.0

%

 

100.0

%

 

100.0

%

 

100.0

%

 
Sales change rates:
Retail comparable-store sales

 

2

%

 

9

%

 

(8

%)

 

7

%

Online and phone

 

111

%

 

20

%

 

109

%

 

10

%

Total Retail comparable sales change

 

11

%

 

10

%

 

1

%

 

8

%

Net opened/closed stores

 

1

%

 

4

%

 

2

%

 

5

%

Total Retail

 

12

%

 

14

%

 

3

%

 

13

%

Wholesale/other

 

(28

%)

 

8

%

 

(60

%)

 

(17

%)

Total Company

 

12

%

 

14

%

 

3

%

 

12

%

 
Stores open:
Beginning of period

 

598

 

 

594

 

 

611

 

 

579

 

Opened

 

6

 

 

15

 

 

20

 

 

47

 

Closed

 

(8

)

 

(7

)

 

(35

)

 

(24

)

End of period

 

596

 

 

602

 

 

596

 

 

602

 

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

$

2,920

 

$

2,858

 

Average sales per square foot 1

$

1,012

 

$

1,029

 

Stores > $2 million net sales 2

 

64

%

 

70

%

Stores > $3 million net sales 2

 

26

%

 

28

%

Average revenue per mattress unit 3

$

4,802

 

$

4,788

 

$

4,824

 

$

4,837

 

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 and phone sales).

3

 

Represents Total Retail net sales divided by Total Retail 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
September 26, September 28, September 26, September 28,

2020

2019

2020

2019

 
Net income

$

51,320

$

28,054

$

101,923

$

84,742

Income tax expense

 

16,468

 

7,967

 

30,642

 

21,421

Interest expense

 

1,829

 

3,131

 

10,829

 

11,064

Depreciation and amortization

 

15,083

 

14,963

 

61,071

 

61,155

Stock-based compensation

 

8,470

 

4,146

 

20,177

 

13,348

Asset impairments

 

11

 

29

 

276

 

150

 
Adjusted EBITDA

$

93,181

$

58,290

$

224,918

$

191,880

 
Free Cash Flow
(in thousands)
 
Three Months Ended Trailing Twelve Months Ended
September 26, September 28, September 26, September 28,

2020

2019

2020

2019

 
Net cash provided by operating activities

$

200,281

$

119,485

$

286,610

$

186,922

Subtract: Purchases of property and equipment

 

6,379

 

12,861

 

40,556

 

58,260

 
Free cash flow

$

193,902

$

106,624

$

246,054

$

128,662

 
Calculation of Net Leverage Ratio under Credit Facility
(in thousands)
 
Trailing Twelve Months Ended
September 26, September 28,

2020

2019

 
Borrowings under credit facility

$

33,500

$

213,700

Outstanding letters of credit

 

3,997

 

3,497

Finance lease obligations

 

677

 

783

Consolidated funded indebtedness

$

38,174

$

217,980

Capitalized operating lease obligations1

 

546,850

 

514,921

Total debt including capitalized operating lease obligations (a)

$

585,024

$

732,901

 
Adjusted EBITDA (see above)

$

224,918

$

191,880

Consolidated rent expense

 

91,142

 

85,807

Consolidated EBITDAR (b)

$

316,060

$

277,687

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

1.9 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 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:
Trailing Twelve Months Ended
September 26,
2020
September 28,
2019
Net operating profit after taxes (NOPAT)
Operating income

$

143,295

 

$

117,224

 

Add: Rent expense 1

 

91,142

 

 

85,807

 

Add: Interest income

 

97

 

 

4

 

Less: Depreciation on capitalized operating leases 2

 

(23,700

)

 

(21,821

)

Less: Income taxes 3

 

(50,584

)

 

(44,298

)

NOPAT

$

160,250

 

$

136,916

 

 
Average invested capital
Total deficit

$

(102,827

)

$

(164,487

)

Add: Long-term debt 4

 

34,177

 

 

214,482

 

Add: Capitalized operating lease obligations 5

 

729,136

 

 

686,456

 

Total invested capital at end of period

$

660,486

 

$

736,451

 

 
Average invested capital 6

$

770,197

 

$

743,271

 

 
Return on invested capital (ROIC) 7

 

20.8

%

 

18.4

%

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 24.0% and 24.4% for 2020 and 2019, 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.

 

Investor Contact: Dave Schwantes; (763) 551-7498; investorrelations@sleepnumber.com
Media Contact: Julie Elepano; (414) 732-9840; julie.elepano@sleepnumber.com

Source: Sleep Number Corporation

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