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Sleep Number Announces Third Quarter 2022 Results

10/26/2022
  • Third-quarter net sales declined 16% versus the prior year as expected on semiconductor chip supply constraints
  • Third-quarter diluted EPS of $0.22 ahead of expectation for breakeven profits
  • Revised 2022 EPS outlook to a range of $1.50 to $2.00 per diluted share due to constrained, uneven flow of chip supply and softer demand

MINNEAPOLIS--(BUSINESS WIRE)-- Sleep Number Corporation (Nasdaq: SNBR) today reported results for the quarter ended October 1, 2022.

“We continue to navigate a very difficult environment, including persistent electronic chip inventory constraints and softer-than-expected consumer demand. We are aggressively pursuing actions to improve supply, margin, and demand,” said Shelly Ibach, Chair, President and CEO. “While the consumer is understandably cautious, our brand health remains very strong, and our customer loyalty is stellar. Guided by our purpose, we continue to develop life-changing sleep innovations, including this month’s introduction of our revolutionary Climate360™ smart bed, that position us to generate renewed demand growth. This new smart bed solves one of our consumer’s greatest sleep issues – temperature, while also capitalizing on future profitable growth opportunities in health and wellbeing.”

Third Quarter Overview

  • Net sales decreased 16% to $541 million, with demand decreasing 16% for the quarter, as consumer sentiment remains at historically low levels
  • Gross margin of 56.1% of net sales, reflecting expediting costs and operating inefficiencies resulting from the uneven flow of electronics supply
  • Diluted EPS of 22 cents, reflecting ongoing chip supply constraints and challenging macroenvironment

Cash Flows and Liquidity Review

  • Year-to-date net cash from operating activities of $80 million despite macroeconomic pressures
  • Invested $53 million in capital expenditures; suspended share repurchases (in the second quarter) until macroeconomic conditions improve
  • Leverage ratio of 3.99x EBITDAR at the end of the third quarter; $413 million of liquidity remains against current debt facility
  • Return on invested capital (ROIC) was 15.8% for the trailing twelve-month period

Financial Outlook
The company updated its full-year 2022 diluted EPS outlook to a range of $1.50 to $2.00 per share driven by insufficient and uneven flow of chip supply and softer demand. The outlook assumes flat net sales versus the prior year for the fourth quarter. The company anticipates 2022 capital expenditures of approximately $70 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 leader in sleep and wellness technology. Our 360® smart bed platform connects the physical and digital worlds, creating an immersive, adaptive, and individualized sleep health experience. Quality sleep is vital for physical, mental, and emotional wellbeing; our smart beds deliver exceptional sleep by automatically sensing and effortlessly adjusting to the needs of each sleeper. Through partnerships with the world’s leading health and research institutions, we are advancing sleep science with our 17 billion hours of highly accurate, longitudinal sleep data from millions of sleepers in our Smart Sleeper community.

Sleep Number is a company with purpose, with over 5,300 mission-driven team members who are dedicated to improving the health and wellbeing of society through higher quality sleep. We have improved more than 14 million lives and are committed to lifelong relationships with our smart sleepers.

For life-changing sleep, visit SleepNumber.com or one of our more than 660 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 war in Ukraine), strikes, labor shortages, government-mandated work closures, 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 operate 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

October 1,

 

% of

 

October 2,

 

% of

2022

 

Net Sales

 

2021

 

Net Sales

 
Net sales

$

540,566

100.0

%

$

640,393

100.0

%

Cost of sales

 

237,479

43.9

%

 

250,039

39.0

%

Gross profit

 

303,087

56.1

%

 

390,354

61.0

%

Operating expenses:
Sales and marketing

 

239,656

44.3

%

 

255,512

39.9

%

General and administrative

 

36,003

6.7

%

 

47,676

7.4

%

Research and development

 

14,786

2.7

%

 

14,431

2.3

%

Total operating expenses

 

290,445

53.7

%

 

317,619

49.6

%

Operating income

 

12,642

2.3

%

 

72,735

11.4

%

Interest expense, net

 

5,606

1.0

%

 

1,816

0.3

%

Income before income taxes

 

7,036

1.3

%

 

70,919

11.1

%

Income tax expense

 

2,003

0.4

%

 

17,198

2.7

%

Net income

$

5,033

0.9

%

$

53,721

8.4

%

 
Net income per share – basic

$

0.23

$

2.29

 
Net income per share – diluted

$

0.22

$

2.22

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

 

22,218

 

23,464

Dilutive effect of stock-based awards

 

355

 

769

Diluted weighted-average shares outstanding

 

22,573

 

24,233

 

SLEEP NUMBER CORPORATION

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

Nine Months Ended

October 1,

 

% of

 

October 2,

 

% of

2022

 

Net Sales

 

2021

 

Net Sales

 
Net sales

$

1,616,769

100.0

%

$

1,692,965

100.0

%

Cost of sales

 

686,439

42.5

%

 

653,842

38.6

%

Gross profit

 

930,330

57.5

%

 

1,039,123

61.4

%

Operating expenses:
Sales and marketing

 

700,405

43.3

%

 

685,123

40.5

%

General and administrative

 

116,049

7.2

%

 

131,488

7.8

%

Research and development

 

46,908

2.9

%

 

43,633

2.6

%

Total operating expenses

 

863,362

53.4

%

 

860,244

50.8

%

Operating income

 

66,968

4.1

%

 

178,879

10.6

%

Interest expense, net

 

11,352

0.7

%

 

4,400

0.3

%

Income before income taxes

 

55,616

3.4

%

 

174,479

10.3

%

Income tax expense

 

13,576

0.8

%

 

31,874

1.9

%

Net income

$

42,040

2.6

%

$

142,605

8.4

%

 
Net income per share – basic

$

1.87

$

5.84

 
Net income per share – diluted

$

1.83

$

5.63

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

 

22,444

 

24,404

Dilutive effect of stock-based awards

 

515

 

920

Diluted weighted-average shares outstanding

 

22,959

 

25,324

 

SLEEP NUMBER CORPORATION

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

October 1,

 

January 1,

2022

 

2022

Assets
Current assets:
Cash and cash equivalents

$

1,348

 

$

2,389

 

Accounts receivable, net of allowances
of $1,508 and $924, respectively

 

26,747

 

 

25,718

 

Inventories

 

113,554

 

 

105,644

 

Prepaid expenses

 

21,214

 

 

18,953

 

Other current assets

 

34,803

 

 

54,917

 

Total current assets

 

197,666

 

 

207,621

 

 
Non-current assets:
Property and equipment, net

 

199,917

 

 

195,128

 

Operating lease right-of-use assets

 

389,524

 

 

371,133

 

Goodwill and intangible assets, net

 

68,666

 

 

70,468

 

Deferred income taxes

 

6,267

 

 

-

 

Other non-current assets

 

78,741

 

 

75,190

 

Total assets

$

940,781

 

$

919,540

 

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

$

406,300

 

$

382,500

 

Accounts payable

 

199,154

 

 

162,547

 

Customer prepayments

 

95,274

 

 

129,499

 

Accrued sales returns

 

25,651

 

 

22,368

 

Compensation and benefits

 

27,339

 

 

51,240

 

Taxes and withholding

 

31,361

 

 

22,087

 

Operating lease liabilities

 

77,243

 

 

72,360

 

Other current liabilities

 

60,949

 

 

64,177

 

Total current liabilities

 

923,271

 

 

906,778

 

 
Non-current liabilities:
Deferred income taxes

 

-

 

 

688

 

Operating lease liabilities

 

350,370

 

 

336,192

 

Other non-current liabilities

 

104,611

 

 

100,835

 

Total non-current liabilities

 

454,981

 

 

437,715

 

Total liabilities

 

1,378,252

 

 

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,
22,001 and 22,683 shares issued and outstanding, respectively

 

220

 

 

227

 

Additional paid-in capital

 

458

 

 

3,971

 

Accumulated deficit

 

(438,149

)

 

(429,151

)

Total shareholders’ deficit

 

(437,471

)

 

(424,953

)

Total liabilities and shareholders’ deficit

$

940,781

 

$

919,540

 

 

SLEEP NUMBER CORPORATION

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

Nine Months Ended

October 1,

 

October 2,

2022

 

2021

 
Cash flows from operating activities:
Net income

$

42,040

 

$

142,605

 

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

 

49,342

 

 

44,786

 

Stock-based compensation

 

8,585

 

 

19,701

 

Net loss (gain) on disposals and impairments of assets

 

274

 

 

(20

)

Deferred income taxes

 

(6,955

)

 

291

 

Changes in operating assets and liabilities:
Accounts receivable

 

(1,029

)

 

(1,517

)

Inventories

 

(11,080

)

 

(4,767

)

Income taxes

 

4,530

 

 

5,615

 

Prepaid expenses and other assets

 

20,082

 

 

(13,879

)

Accounts payable

 

28,889

 

 

51,543

 

Customer prepayments

 

(34,225

)

 

35,785

 

Accrued compensation and benefits

 

(23,735

)

 

(12,725

)

Other taxes and withholding

 

4,744

 

 

7,636

 

Other accruals and liabilities

 

(1,340

)

 

17,630

 

Net cash provided by operating activities

 

80,122

 

 

292,684

 

 
Cash flows from investing activities:
Purchases of property and equipment

 

(52,808

)

 

(49,370

)

Proceeds from sales of property and equipment

 

49

 

 

257

 

Net cash used in investing activities

 

(52,759

)

 

(49,113

)

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

 

34,781

 

 

132,222

 

Repurchases of common stock

 

(64,141

)

 

(381,496

)

Proceeds from issuance of common stock

 

998

 

 

3,847

 

Debt issuance costs

 

(42

)

 

(557

)

Net cash used in financing activities

 

(28,404

)

 

(245,984

)

 
Net decrease in cash and cash equivalents

 

(1,041

)

 

(2,413

)

Cash and cash equivalents, at beginning of period

 

2,389

 

 

4,243

 

Cash and cash equivalents, at end of period

$

1,348

 

$

1,830

 

 

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

October 1,

 

October 2,

 

October 1,

 

October 2,

 

2022

 

2021

 

2022

 

2021

 

Percent of sales:

 

Retail stores

 

 

86.3

%

 

88.4

%

 

86.7

%

 

87.5

%

Online, phone, chat and other

 

 

13.7

%

 

11.6

%

 

13.3

%

 

12.5

%

Total Company

 

 

100.0

%

 

100.0

%

 

100.0

%

 

100.0

%

 

Sales change rates:

 

Retail comparable-store sales

 

 

(21

%)

 

19

%

 

(10

%)

 

32

%

Online, phone and chat

 

 

0

%

 

0

%

 

3

%

 

11

%

Total Retail comparable sales change

 

 

(18

%)

 

16

%

 

(8

%)

 

28

%

Net opened/closed stores and other

 

 

2

%

 

5

%

 

3

%

 

3

%

Total Company

 

 

(16

%)

 

21

%

 

(5

%)

 

31

%

 

Stores open:

 

Beginning of period

 

 

659

 

 

621

 

 

648

 

 

602

 

Opened

 

 

12

 

 

18

 

 

35

 

 

55

 

Closed

 

 

(9

)

 

(7

)

 

(21

)

 

(25

)

End of period

 

 

662

 

 

632

 

 

662

 

 

632

 

 

Other metrics:

 

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

 

$

3,302

 

$

3,689

 

Average sales per square foot 1

 

$

1,093

 

$

1,249

 

Stores > $2 million net sales 2

 

 

77

%

 

85

%

Stores > $3 million net sales 2

 

 

38

%

 

50

%

Average revenue per smart bed unit 3

 

$

5,083

 

$

5,021

 

$

5,416

 

$

5,045

 

 

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

October 1,

 

October 2,

 

October 1,

 

October 2,

2022

 

2021

 

2022

 

2021

 
Net income

$

5,033

$

53,721

$

53,181

$

203,964

Income tax expense

 

2,003

 

17,198

 

15,247

 

44,294

Interest expense

 

5,606

 

1,816

 

13,196

 

5,214

Depreciation and amortization

 

17,180

 

14,820

 

64,217

 

59,539

Stock-based compensation

 

542

 

7,317

 

12,097

 

25,961

Asset impairments

 

95

 

23

 

338

 

154

 
Adjusted EBITDA

$

30,459

$

94,895

$

158,276

$

339,126

 

Free Cash Flow

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Trailing Twelve Months Ended

 

 

October 1,

 

October 2,

 

October 1,

 

October 2,

 

 

2022

 

2021

 

2022

 

2021

 
Net cash provided by operating activities

$

51,431

$

131,264

$

87,448

$

285,063

Subtract: Purchases of property and equipment

 

16,249

 

17,358

 

70,338

 

58,396

 
Free cash flow

$

35,182

$

113,906

$

17,110

$

226,667

 

Calculation of Net Leverage Ratio under Revolving Credit Facility

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trailing Twelve Months Ended

 

 

 

 

 

 

October 1,

 

October 2,

 

 

 

 

 

 

2022

 

2021

 
Borrowings under revolving credit facility

$

406,300

$

359,100

Outstanding letters of credit

 

5,947

 

3,997

Finance lease obligations

 

450

 

566

Consolidated funded indebtedness

$

412,697

$

363,663

Capitalized operating lease obligations1

 

650,742

 

593,034

Total debt including capitalized operating lease obligations (a)

$

1,063,439

$

956,697

 
Adjusted EBITDA (see above)

$

158,276

$

339,126

Consolidated rent expense

 

108,457

 

98,839

Consolidated EBITDAR (b)

$

266,733

$

437,965

 
Net Leverage Ratio under revolving credit facility (a divided by b) 4.0 to 1.0 2.2 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 (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
October 1,
2022
October 2,
2021
Net operating profit after taxes (NOPAT)
Operating income

$

81,625

 

$

253,472

 

Add: Rent expense 1

 

108,457

 

 

98,839

 

Less: Depreciation on capitalized operating leases 2

 

(27,784

)

 

(25,030

)

Less: Income taxes 3

 

(36,853

)

 

(78,975

)

NOPAT

$

125,445

 

$

248,306

 

 
Average invested capital
Total deficit

$

(437,471

)

$

(440,066

)

Add: Long-term debt 4

 

406,750

 

 

359,666

 

Add: Capitalized operating lease obligations 5

 

867,656

 

 

790,712

 

Total invested capital at end of period

$

836,935

 

$

710,312

 

 
Average invested capital 6

$

791,970

 

$

717,670

 

 
Return on invested capital (ROIC) 7

 

15.8

%

 

34.6

%

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 22.7% and 24.1% for October 1, 2022 and October 2, 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.

 

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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