- Third quarter net sales declined 13% versus the prior year
to $473 million; third quarter diluted loss per share of
$0.10
- Initiated approximately $50 million of additional operating
expense reduction actions for 2024 on top of an estimated $80
million for 2023
- Updated 2023 EPS outlook to a loss of up to $0.70 per share,
which includes an estimated $10 million or $0.35 per share of
restructuring charges to be recorded in the fourth quarter
- Amended and right-sized bank facility to provide additional
covenant flexibility through 2024
Sleep Number Corporation (Nasdaq: SNBR) today reported results
for the quarter ended September 30, 2023.
“The third quarter was challenging for Sleep Number and the
bedding industry as the consumer demand trajectory changed abruptly
midway through the quarter,” said Shelly Ibach, Chair, President
and CEO, Sleep Number. “In response, we acted quickly to further
reduce costs, recalibrate our sales and marketing approach, and
amend our credit agreement to provide additional covenant
flexibility through the end of 2024. We expect these actions and
broad-based restructuring initiatives to result in a more durable
operating model with improved profitability and cash flows in a
range of economic environments. We remain confident in our
strategic direction and ability to deliver superior value creation
over time.”
Third Quarter Financial Overview
- Net sales decreased 13% to $473 million; demand
decelerated abruptly in August and September, leading to a low
double-digit demand decline for the quarter versus prior year
- Gross margin of 57.4% was up 130 bp versus the prior
year, primarily benefiting from pricing actions and easing
commodity prices
- Operating expenses were reduced by $25 million to $266
million compared with $290 million last year
- Loss per diluted share of $0.10 compared with diluted
earnings per share of $0.22 last year
Cash Flows Overview
- Net cash from operating activities of $32 million for
the first nine months of the year, compared with $80 million for
the same period last year
- Leverage ratio of 4.8x EBITDAR at the end of the third
quarter versus covenant maximum of 5.0x
- Adjusted ROIC of 14.9% for the trailing twelve
months
Business Restructuring Actions
In light of the demand trajectory change in August, the company
initiated additional cost reduction actions which are expected to
reduce 2024 operating expenses by approximately $50 million, and
also accelerated gross margin initiatives. The operating expense
reductions are incremental to the $80 million of operating expense
reductions we expect to realize in 2023.
- The cost restructuring actions are broad-based and include a
reduction in headcount across all areas of the organization,
including in corporate and R&D functions
- We are rationalizing our store portfolio with a planned closure
of 40 to 50 stores by the end of 2024, along with slowing the rate
of new store openings and remodels, and also reducing our 2024
capital expenditures
- Gross margin improvement actions include value engineering and
cost optimization strategies, including driving additional
efficiencies through our manufacturing and home delivery
network
- The business restructuring actions are expected to result in up
to $20 million of one-time restructuring costs, with an estimated
$10 million of the costs being recorded in the fourth quarter of
this year
Amended Credit Agreement
- The company also amended the financial covenants of the
revolving credit facility to provide greater flexibility through
2024, and right-sized the aggregate availability of the credit
facility to $685 million
- Prospectively, the company will be utilizing a new definition
for net leverage as highlighted on page 9 of this news release; our
leverage ratio under the new definition was 3.8x EBITDAR at end of
the third quarter
Financial Outlook
The company updated its full-year 2023 diluted EPS outlook to a
loss of up to $0.70 per share. The updated EPS outlook includes an
estimated $10 million, or $0.35 per share, of restructuring charges
to be recorded in the fourth quarter. The 2023 outlook assumes net
sales are down low double digits versus the prior year, with
approximately 100 basis points of gross margin rate improvement
year-over-year. The company anticipates 2023 capital expenditures
of approximately $60 million.
Conference Call Information
Management will host its regularly scheduled conference call to
discuss the company’s results at 5 p.m. EST (4 p.m. CST; 2 p.m.
PST) today. To access the webcast, 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. We are guided by
our purpose to improve the health and wellbeing of society through
higher quality sleep; to date, our innovations have improved over
15 million lives. Our wellness technology platform helps solve
sleep problems, whether it’s providing individualized temperature
control for each sleeper through our Climate360® smart bed or
applying our 23 billion hours of longitudinal sleep data and
expertise to research with global institutions.
Our smart bed ecosystem drives best-in-class engagement through
dynamic, adjustable, and effortless sleep with personalized digital
sleep and health insights; our millions of Smart Sleepers are loyal
brand advocates. And our almost 4,500 mission-driven team members
passionately innovate to drive value creation through our
vertically integrated business model, including our exclusive
direct-to-consumer selling in over 650 stores and online.
To learn more about life-changing, individualized sleep, visit a
Sleep Number store near you, 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
full-year 2023 diluted EPS and future capital expenditures and
operating expenses, are forward-looking statements subject to
certain risks and uncertainties including, among others, such
factors as current and future economic conditions and consumer
sentiment; ability to realize expected cost savings and other
benefits related to cost restructuring actions and to avoid
unexpected adverse effects on the company; increases in interest
rates, which have increased the cost of servicing the company’s
indebtedness; availability of attractive and cost-effective
consumer credit options; the effectiveness of the company’s
marketing strategy and promotional efforts; the execution of Sleep
Number’s Total Retail distribution strategy; operating with minimal
levels of inventory, which may leave the company vulnerable to
supply shortages; bank failures or other events affecting financial
institutions; 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;
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
September 30,
2023
% of Net Sales
October 1, 2022
% of Net Sales
Net sales
$
472,648
100.0
%
$
540,566
100.0
%
Cost of sales
201,537
42.6
%
237,479
43.9
%
Gross profit
271,111
57.4
%
303,087
56.1
%
Operating expenses:
Sales and marketing
221,143
46.8
%
239,656
44.3
%
General and administrative
31,948
6.8
%
36,003
6.7
%
Research and development
12,633
2.7
%
14,786
2.7
%
Total operating expenses
265,724
56.2
%
290,445
53.7
%
Operating income
5,387
1.1
%
12,642
2.3
%
Interest expense, net
10,958
2.3
%
5,606
1.0
%
(Loss) Income before income taxes
(5,571
)
(1.2
%)
7,036
1.3
%
Income tax (benefit) expense
(3,253
)
(0.7
%)
2,003
0.4
%
Net (loss) income
$
(2,318
)
(0.5
%)
$
5,033
0.9
%
Net (loss) income per share – basic
$
(0.10
)
$
0.23
Net (loss) income per share – diluted
$
(0.10
)
$
0.22
Reconciliation of weighted-average
shares outstanding:
Basic weighted-average shares
outstanding
22,479
22,218
Dilutive effect of stock-based awards
—
355
Diluted weighted-average shares
outstanding
22,479
22,573
For the three months ended September 30, 2023, potentially
dilutive stock-based awards have been excluded from the calculation
of diluted weighted-average shares outstanding, as their inclusion
would have had an anti-dilutive effect on our net loss per diluted
share.
SLEEP NUMBER
CORPORATION
AND SUBSIDIARIES
Consolidated Statements of
Operations
(unaudited – in thousands,
except per share amounts)
Nine Months Ended
September 30,
2023
% of
Net Sales
October 1, 2022
% of
Net Sales
Net sales
$
1,457,964
100.0
%
$
1,616,769
100.0
%
Cost of sales
612,343
42.0
%
686,439
42.5
%
Gross profit
845,621
58.0
%
930,330
57.5
%
Operating expenses:
Sales and marketing
649,410
44.5
%
700,405
43.3
%
General and administrative
111,144
7.6
%
116,049
7.2
%
Research and development
42,521
2.9
%
46,908
2.9
%
Total operating expenses
803,075
55.1
%
863,362
53.4
%
Operating income
42,546
2.9
%
66,968
4.1
%
Interest expense, net
30,008
2.1
%
11,352
0.7
%
Income before income taxes
12,538
0.9
%
55,616
3.4
%
Income tax expense
2,637
0.2
%
13,576
0.8
%
Net income
$
9,901
0.7
%
$
42,040
2.6
%
Net income per share – basic
$
0.44
$
1.87
Net income per share – diluted
$
0.44
$
1.83
Reconciliation of weighted-average
shares outstanding:
Basic weighted-average shares
outstanding
22,412
22,444
Dilutive effect of stock-based awards
146
515
Diluted weighted-average shares
outstanding
22,558
22,959
SLEEP NUMBER
CORPORATION
AND SUBSIDIARIES
Consolidated Balance
Sheets
(unaudited – in thousands,
except per share amounts)
subject to
reclassification
September 30,
2023
December 31,
2022
Assets
Current assets:
Cash and cash equivalents
$
906
$
1,792
Accounts receivable, net of allowances of
$1,408 and $1,267, respectively
18,631
26,005
Inventories
116,224
114,034
Prepaid expenses
21,076
16,006
Other current assets
41,230
39,921
Total current assets
198,067
197,758
Non-current assets:
Property and equipment, net
190,707
200,605
Operating lease right-of-use assets
401,564
397,755
Goodwill and intangible assets, net
66,690
68,065
Deferred income taxes
21,391
7,958
Other non-current assets
82,616
81,795
Total assets
$
961,035
$
953,936
Liabilities and Shareholders’
Deficit
Current liabilities:
Borrowings under revolving credit
facility
$
488,000
$
459,600
Accounts payable
168,883
176,207
Customer prepayments
45,902
73,181
Accrued sales returns
23,012
25,594
Compensation and benefits
24,281
31,291
Taxes and withholding
27,198
23,622
Operating lease liabilities
83,143
79,533
Other current liabilities
58,907
60,785
Total current liabilities
919,326
929,813
Non-current liabilities:
Operating lease liabilities
356,579
356,879
Other non-current liabilities
105,817
105,421
Total non-current liabilities
462,396
462,300
Total liabilities
1,381,722
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, 22,228 and 22,014 shares issued and outstanding,
respectively
222
220
Additional paid-in capital
12,769
5,182
Accumulated deficit
(433,678
)
(443,579
)
Total shareholders’ deficit
(420,687
)
(438,177
)
Total liabilities and shareholders’
deficit
$
961,035
$
953,936
SLEEP NUMBER
CORPORATION
AND SUBSIDIARIES
Consolidated Statements of
Cash Flows
(unaudited – in
thousands)
subject to
reclassification
Nine Months Ended
September 30,
2023
October 1, 2022
Cash flows from operating activities:
Net income
$
9,901
$
42,040
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization
55,196
49,342
Stock-based compensation
10,872
8,585
Net loss on disposals and impairments of
assets
464
274
Deferred income taxes
(13,433
)
(6,955
)
Changes in operating assets and
liabilities:
Accounts receivable
7,374
(1,029
)
Inventories
(2,190
)
(11,080
)
Income taxes
3,571
4,530
Prepaid expenses and other assets
(5,903
)
20,082
Accounts payable
5,199
28,889
Customer prepayments
(27,279
)
(34,225
)
Accrued compensation and benefits
(6,923
)
(23,735
)
Other taxes and withholding
5
4,744
Other accruals and liabilities
(5,038
)
(1,340
)
Net cash provided by operating
activities
31,816
80,122
Cash flows from investing activities:
Purchases of property and equipment
(48,022
)
(52,808
)
Proceeds from sales of property and
equipment
10
49
Issuance of notes receivable
(1,317
)
—
Net cash used in investing activities
(49,329
)
(52,759
)
Cash flows from financing activities:
Net increase in short-term borrowings
20,334
34,781
Repurchases of common stock
(3,711
)
(64,141
)
Proceeds from issuance of common stock
428
998
Debt issuance costs
(424
)
(42
)
Net cash provided by (used in) financing
activities
16,627
(28,404
)
Net decrease in cash and cash
equivalents
(886
)
(1,041
)
Cash and cash equivalents, at beginning of
period
1,792
2,389
Cash and cash equivalents, at end of
period
$
906
$
1,348
SLEEP NUMBER
CORPORATION
AND SUBSIDIARIES
Supplemental Financial
Information
(unaudited)
Three Months Ended
Nine Months Ended
September 30,
2023
October 1, 2022
September 30,
2023
October 1, 2022
Percent of sales:
Retail stores
86.6
%
86.3
%
87.1
%
86.7
%
Online, phone, chat and other
13.4
%
13.7
%
12.9
%
13.3
%
Total Company
100.0
%
100.0
%
100.0
%
100.0
%
Sales change rates:
Retail comparable-store sales
(14
%)
(21
%)
(11
%)
(10
%)
Online, phone and chat
(14
%)
0
%
(13
%)
3
%
Total Retail comparable sales change
(14
%)
(18
%)
(11
%)
(8
%)
Net opened/closed stores and other
1
%
2
%
1
%
3
%
Total Company
(13
%)
(16
%)
(10
%)
(5
%)
Stores open:
Beginning of period
672
659
670
648
Opened
8
12
27
35
Closed
(2
)
(9
)
(19
)
(21
)
End of period
678
662
678
662
Other metrics:
Average sales per store ($ in 000's) 1
$
2,952
$
3,302
Average sales per square foot 1
$
963
$
1,093
Stores > $2 million net sales 2
67
%
77
%
Stores > $3 million net sales 2
27
%
38
%
Average revenue per smart bed unit 3
$
5,640
$
5,083
$
5,822
$
5,416
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
September 30,
2023
October 1, 2022
September 30,
2023
October 1, 2022
Net (loss) income
$
(2,318
)
$
5,033
$
4,471
$
53,181
Income tax (benefit) expense
(3,253
)
2,003
1,346
15,247
Interest expense
10,958
5,606
37,641
13,196
Depreciation and amortization
18,200
17,180
72,338
64,217
Stock-based compensation
982
542
15,511
12,097
Asset impairments
292
95
491
338
Adjusted EBITDA
$
24,861
$
30,459
$
131,798
$
158,276
Free Cash Flow
(in thousands)
Three Months Ended
Trailing Twelve Months
Ended
September 30,
2023
October 1, 2022
September 30,
2023
October 1, 2022
Net cash provided by (used in) by
operating activities
$
13,096
$
51,431
$
(12,168
)
$
87,448
Subtract: Purchases of property and
equipment
18,123
16,249
64,668
70,338
Free cash flow
$
(5,027
)
$
35,182
$
(76,836
)
$
17,110
Note - Our Adjusted EBITDA calculations and 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 Net Leverage Ratio under
Revolving Credit Facility (in thousands)
Our calculation of Net Leverage Ratio under Revolving Credit
Facility was changed effective with the amendment of our credit
facility on November 2, 2023. Prior to the amendment, the
calculation included capitalized operating lease obligations based
on a multiple of six times annual rent expense. The amendment
replaced this line item with operating lease liabilities included
in our financial statements under ASC 842. The calculations in
accordance with the credit facility prior to, and subsequent to,
the November 2, 2023 amendment are presented below:
PRIOR TO AMENDMENT OF OUR CREDIT FACILITY ON NOVEMBER 2,
2023
Trailing Twelve Months
Ended
September 30,
2023
October 1, 2022
Borrowings under revolving credit
facility
$
488,000
$
406,300
Outstanding letters of credit
7,147
5,947
Finance lease obligations
338
450
Consolidated funded indebtedness
$
495,485
$
412,697
Capitalized operating lease obligations
1
679,224
650,742
Total debt including capitalized operating
lease obligations (a)
$
1,174,709
$
1,063,439
Adjusted EBITDA (see above)
$
131,798
$
158,276
Consolidated rent expense
113,204
108,457
Consolidated EBITDAR (b)
$
245,002
$
266,733
Net Leverage Ratio under revolving credit
facility (a divided by b)
4.8 to 1.0
4.0 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.
SUBSEQUENT TO AMENDMENT OF OUR CREDIT FACILITY ON NOVEMBER 2,
2023
Trailing Twelve Months
Ended
September 30,
2023
October 1, 2022
Borrowings under revolving credit
facility
$
488,000
$
406,300
Outstanding letters of credit
7,147
5,947
Finance lease obligations
338
450
Consolidated funded indebtedness
$
495,485
$
412,697
Operating lease liabilities 1
439,722
427,613
Total debt including operating lease
liabilities (a)
$
935,207
$
840,310
Adjusted EBITDA (see above)
$
131,798
$
158,276
Consolidated rent expense
113,204
108,457
Consolidated EBITDAR (b)
$
245,002
$
266,733
Net Leverage Ratio under revolving credit
facility (a divided by b)
3.8 to 1.0
3.2 to 1.0
1 Reflects operating lease liabilities included in our financial
statements under ASC 842.
Note - Our Net Leverage Ratio under Revolving Credit Facility,
EBITDA and EBITDAR calculations 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
September 30,
2023
October 1, 2022
Adjusted net
operating profit after taxes (Adjusted NOPAT)
Operating income
$
43,458
$
81,625
Add: Operating lease interest 1
27,497
25,419
Less: Income taxes 2
(1,168
)
(24,306
)
Adjusted NOPAT
$
69,787
$
82,738
Average adjusted
invested capital
Total deficit
$
(420,687
)
$
(437,471
)
Add: Long-term debt 3
488,338
406,750
Add: Operating lease liabilities 4
439,722
427,613
Total adjusted invested capital at end of
period
$
507,373
$
396,892
Average adjusted invested capital 5
$
469,782
$
371,674
Adjusted ROIC 6
14.9
%
22.3
%
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 1.6% and 22.7% for September
30, 2023 and October 1, 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.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20231107572257/en/
Investor Contact: Dave Schwantes; (763) 551-7498;
investorrelations@sleepnumber.com Media Contact: Julie
Elepano; julie.elepano@sleepnumber.com
Sleep Number (NASDAQ:SNBR)
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