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Sleep Number Announces First Quarter 2023 Results

04/26/2023
  • Net sales of $527 million were consistent with the prior year
  • Net operating profit increased to $26 million, up $22 million versus the prior year, including a 160 basis point (bp) gross profit rate improvement year-over-year
  • Diluted EPS of $0.51 versus $0.09 last year
  • Reiterates full-year 2023 earnings outlook of $1.25 to $2.00 per diluted share

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

“First quarter performance was consistent with our expectations, reflecting our team’s strong execution in a challenged macro environment with historically low consumer sentiment pressuring demand. After nearly two years of supply disruption, the consistent flow of microchips has enabled us to return to more efficient operations,” said Shelly Ibach, Chair, President and CEO. “Beginning in the second quarter we are executing a sequence of new integrated demand drivers, including our next generation Sleep Number smart beds, lifestyle furniture, and “Sleep Next Level” brand campaign. These ads inspire consumers to unlock their full potential through our smart bed’s life-changing, individualized sleep benefits.”

First Quarter Overview

  • Net sales of $527 million were consistent with the prior year, including a 2% comparable sales decline, offset by two percentage points of growth from new stores
  • Gross margin increased 160 bp to 58.9% of net sales, including the benefit of pricing actions, improvement in commodity prices and operating efficiencies resulting from a steady flow of microchips
  • Operating income of $26 million represented a $22 million increase versus the prior year, including an $8 million gross profit increase and a $14 million reduction in operating expenses year-over-year
  • Diluted EPS of $0.51 compared with $0.09 last year

Cash Flows Review

  • Generated $19 million in net cash from operating activities in the first quarter, compared with $25 million for the same period last year
  • Leverage ratio of 4.0x EBITDAR at the end of the first quarter versus covenant maximum of 5.0x
  • Adjusted Return on Invested Capital (ROIC) of 20.4% for the trailing twelve months

Financial Outlook

The company reiterates its outlook for 2023 diluted EPS of $1.25 to $2.00. The 2023 outlook assumes net sales are flat to down mid-single digits versus the prior year and gross margin improves by 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 and is planning no share repurchases under our Board-approved share repurchase program during the year.

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. Over 14.5 million people have had their lives improved by our award-winning sleep innovations and are experiencing the physical, mental and emotional benefits of life-changing sleep performance. Our proprietary smart beds combine the physical and digital worlds, integrating exceptional sleep with a highly advanced digital technology platform. This means only Sleep Number can provide a dynamic, adjustable and adaptive sleep experience that effortlessly responds to the needs of each sleeper. Our millions of Smart SleepersSM benefit from their smart bed changing with them, over time; it is unique, like they are.

Our differentiated business model is guided by our purpose to improve the health and wellbeing of society through higher quality sleep. We partner with world-leading sleep and health institutions to bring the power of 19 billion hours of longitudinal sleep data to sleep science and research. Our retail experience meets our consumers whenever and wherever they choose – through online and in-store touchpoints. And our 5,000 mission-driven team members passionately deliver individualized sleep experiences for everyone.

For life-changing sleep, visit one of our 670 stores, 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; 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

 

April 1,
2023

 

% of
Net Sales

 

April 2,
2022

 

% of
Net Sales

Net sales

$

526,527

 

100.0

%

 

$

527,130

 

100.0

%

Cost of sales

 

216,262

 

41.1

%

 

 

224,832

 

42.7

%

Gross profit

 

310,265

 

58.9

%

 

 

302,298

 

57.3

%

Operating expenses:

 

 

 

 

 

 

 

Sales and marketing

 

230,488

 

43.8

%

 

 

240,259

 

45.6

%

General and administrative

 

39,401

 

7.5

%

 

 

41,319

 

7.8

%

Research and development

 

14,443

 

2.7

%

 

 

16,305

 

3.1

%

Total operating expenses

 

284,332

 

54.0

%

 

 

297,883

 

56.5

%

Operating income

 

25,933

 

4.9

%

 

 

4,415

 

0.8

%

Interest expense, net

 

9,102

 

1.7

%

 

 

2,127

 

0.4

%

Income before income taxes

 

16,831

 

3.2

%

 

 

2,288

 

0.4

%

Income tax expense

 

5,366

 

1.0

%

 

 

214

 

0.0

%

Net income

$

11,465

 

2.2

%

 

$

2,074

 

0.4

%

 

 

 

 

 

 

 

 

Net income per share – basic

$

0.51

 

 

 

$

0.09

 

 

 

 

 

 

 

 

 

 

Net income per share – diluted

$

0.51

 

 

 

$

0.09

 

 

 

 

 

 

 

 

 

 

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding

 

22,296

 

 

 

 

22,760

 

 

Dilutive effect of stock-based awards

 

287

 

 

 

 

831

 

 

Diluted weighted-average shares outstanding

 

22,583

 

 

 

 

23,591

 

 

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Consolidated Balance Sheets

(unaudited – in thousands, except per share amounts)

subject to reclassification

 

 

April 1,
2023

 

December 31,
2022

Assets

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$

1,459

 

 

$

1,792

 

Accounts receivable, net of allowances of $1,474 and $1,267, respectively

 

23,288

 

 

 

26,005

 

Inventories

 

116,781

 

 

 

114,034

 

Prepaid expenses

 

26,986

 

 

 

16,006

 

Other current assets

 

39,902

 

 

 

39,921

 

Total current assets

 

208,416

 

 

 

197,758

 

Non-current assets:

 

 

 

Property and equipment, net

 

194,802

 

 

 

200,605

 

Operating lease right-of-use assets

 

398,339

 

 

 

397,755

 

Goodwill and intangible assets, net

 

67,565

 

 

 

68,065

 

Deferred income taxes

 

11,210

 

 

 

7,958

 

Other non-current assets

 

82,477

 

 

 

81,795

 

Total assets

$

962,809

 

 

$

953,936

 

Liabilities and Shareholders’ Deficit

 

 

 

Current liabilities:

 

 

 

Borrowings under revolving credit facility

$

470,600

 

 

$

459,600

 

Accounts payable

 

160,304

 

 

 

176,207

 

Customer prepayments

 

68,542

 

 

 

73,181

 

Accrued sales returns

 

24,071

 

 

 

25,594

 

Compensation and benefits

 

30,706

 

 

 

31,291

 

Taxes and withholding

 

31,647

 

 

 

23,622

 

Operating lease liabilities

 

81,383

 

 

 

79,533

 

Other current liabilities

 

58,441

 

 

 

60,785

 

Total current liabilities

 

925,694

 

 

 

929,813

 

Non-current liabilities:

 

 

 

Operating lease liabilities

 

355,556

 

 

 

356,879

 

Other non-current liabilities

 

106,606

 

 

 

105,421

 

Total non-current liabilities

 

462,162

 

 

 

462,300

 

Total liabilities

 

1,387,856

 

 

 

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, 22,184 and 22,014 shares issued and outstanding, respectively

 

222

 

 

 

220

 

Additional paid-in capital

 

6,845

 

 

 

5,182

 

Accumulated deficit

 

(432,114

)

 

 

(443,579

)

Total shareholders’ deficit

 

(425,047

)

 

 

(438,177

)

Total liabilities and shareholders’ deficit

$

962,809

 

 

$

953,936

 

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited – in thousands)

subject to reclassification

 

 

Three Months Ended

 

April 1,
2023

 

April 2,
2022

Cash flows from operating activities:

 

 

 

Net income

$

11,465

 

 

$

2,074

 

Adjustments to reconcile net income to net cash provided by

operating activities:

 

 

 

Depreciation and amortization

 

18,218

 

 

 

15,870

 

Stock-based compensation

 

4,639

 

 

 

4,133

 

Net loss on disposals and impairments of assets

 

12

 

 

 

93

 

Deferred income taxes

 

(3,252

)

 

 

(376

)

Changes in operating assets and liabilities:

 

 

 

Accounts receivable

 

2,717

 

 

 

1,216

 

Inventories

 

(2,747

)

 

 

2,432

 

Income taxes

 

8,736

 

 

 

1,102

 

Prepaid expenses and other assets

 

(11,056

)

 

 

10,877

 

Accounts payable

 

(574

)

 

 

2,073

 

Customer prepayments

 

(4,639

)

 

 

12,506

 

Accrued compensation and benefits

 

(593

)

 

 

(25,348

)

Other taxes and withholding

 

(711

)

 

 

3,104

 

Other accruals and liabilities

 

(3,634

)

 

 

(5,198

)

Net cash provided by operating activities

 

18,581

 

 

 

24,558

 

 

 

 

 

Cash flows from investing activities:

 

 

 

Purchases of property and equipment

 

(15,556

)

 

 

(19,604

)

Proceeds from sales of property and equipment

 

 

 

 

10

 

Net cash used in investing activities

 

(15,556

)

 

 

(19,594

)

 

 

 

 

Cash flows from financing activities:

 

 

 

Net (decrease) increase in short-term borrowings

 

(384

)

 

 

44,712

 

Repurchases of common stock

 

(3,363

)

 

 

(50,998

)

Proceeds from issuance of common stock

 

389

 

 

 

531

 

Debt issuance costs

 

 

 

 

(42

)

Net cash used in financing activities

 

(3,358

)

 

 

(5,797

)

 

 

 

 

Net decrease in cash and cash equivalents

 

(333

)

 

 

(833

)

Cash and cash equivalents, at beginning of period

 

1,792

 

 

 

2,389

 

Cash and cash equivalents, at end of period

$

1,459

 

 

$

1,556

 

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Supplemental Financial Information

(unaudited)

 

 

Three Months Ended

 

April 1,
2023

 

April 2,
2022

Percent of sales:

 

 

 

Retail stores

 

87.1

%

 

 

84.3

%

Online, phone, chat and other

 

12.9

%

 

 

15.7

%

Total Company

 

100.0

%

 

 

100.0

%

 

 

 

 

Sales change rates:

 

 

 

Retail comparable-store sales

 

1

%

 

 

(14

%)

Online, phone and chat

 

(18

%)

 

 

5

%

Total Retail comparable sales change

 

(2

%)

 

 

(11

%)

Net opened/closed stores and other

 

2

%

 

 

4

%

Total Company

 

0

%

 

 

(7

%)

 

 

 

 

Stores open:

 

 

 

Beginning of period

 

670

 

 

 

648

 

Opened

 

12

 

 

 

13

 

Closed

 

(11

)

 

 

(8

)

End of period

 

671

 

 

 

653

 

 

 

 

 

Other metrics:

 

 

 

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

$

3,239

 

 

$

3,487

 

Average sales per square foot 1

$

1,060

 

 

$

1,167

 

Stores > $2 million net sales 2

 

75

%

 

 

82

%

Stores > $3 million net sales 2

 

36

%

 

 

46

%

Average revenue per smart bed unit 3

$

5,848

 

 

$

4,905

 

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

 

April 1,
2023

 

April 2,
2022

 

April 1,
2023

 

April 2,
2022

Net income

$

11,465

 

$

2,074

 

$

46,001

 

$

89,186

Income tax expense

 

5,366

 

 

214

 

 

17,437

 

 

24,947

Interest expense

 

9,102

 

 

2,127

 

 

25,960

 

 

7,394

Depreciation and amortization

 

17,991

 

 

15,683

 

 

68,934

 

 

60,943

Stock-based compensation

 

4,639

 

 

4,133

 

 

13,729

 

 

20,930

Asset impairments

 

12

 

 

103

 

 

204

 

 

186

Adjusted EBITDA

$

48,575

 

$

24,334

 

$

172,265

 

$

203,586

Free Cash Flow

(in thousands)

 

 

Three Months Ended

 

Trailing Twelve Months Ended

 

April 1,
2023

 

April 2,
2022

 

April 1,
2023

 

April 2,
2022

Net cash provided by operating activities

$

18,581

 

$

24,558

 

$

30,161

 

 

$

212,970

Subtract: Purchases of property and equipment

 

15,556

 

 

19,604

 

 

65,406

 

 

 

74,958

Free cash flow

$

3,025

 

$

4,954

 

$

(35,245

)

 

$

138,012

Calculation of Net Leverage Ratio under Revolving Credit Facility

(in thousands)

 

 

Trailing Twelve Months Ended

 

April 1,
2023

 

April 2,
2022

Borrowings under revolving credit facility

$

470,600

 

$

413,200

Outstanding letters of credit

 

7,147

 

 

5,947

Finance lease obligations

 

392

 

 

509

Consolidated funded indebtedness

$

478,139

 

$

419,656

Capitalized operating lease obligations 1

 

669,559

 

 

629,624

Total debt including capitalized operating lease obligations (a)

$

1,147,698

 

$

1,049,280

 

 

 

 

Adjusted EBITDA (see above)

$

172,265

 

$

203,586

Consolidated rent expense

 

111,593

 

 

104,937

Consolidated EBITDAR (b)

$

283,858

 

$

308,523

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

4.0 to 1.0

 

3.4 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

 

April 1,
2023

 

April 2,
2022

Adjusted net operating profit after taxes (Adjusted NOPAT)

 

 

 

Operating income

$

89,398

 

 

$

121,527

 

Add: Operating lease interest 1

 

26,487

 

 

 

24,907

 

Less: Income taxes 2

 

(29,674

)

 

 

(34,753

)

Adjusted NOPAT

$

86,211

 

 

$

111,681

 

 

 

 

 

Average adjusted invested capital

 

 

 

Total deficit

$

(425,047

)

 

$

(469,213

)

Add: Long-term debt 3

 

470,991

 

 

 

413,709

 

Add: Operating lease obligations 4

 

436,939

 

 

 

412,574

 

Total adjusted invested capital at end of period

$

482,883

 

 

$

357,070

 

 

 

 

 

Average adjusted invested capital 5

$

423,287

 

 

$

348,804

 

 

 

 

 

Adjusted ROIC 6

 

20.4

%

 

 

32.0

%

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 25.6% and 23.7% for April 1, 2023 and April 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.

 

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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