Sleep Number Announces Third Quarter 2022 Results

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.

 

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The Sleep Number Stock at the time of publication of the news with a raise of +1,60 % to 36,51USD on Nasdaq stock exchange (26. Oktober 2022, 21:48 Uhr).