UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28,September 26, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-25121

snbr-20200926_g1.jpg
SLEEP NUMBER CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota41-1597886
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

1001 Third Avenue South
Minneapolis,,Minnesota55404
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (763) 551-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading
Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per shareSNBRNasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x NO ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  NO x
As of March 28,September 26, 2020, 27,636,00027,757,000 shares of the registrant’s Common Stock were outstanding.


Table of contents
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
INDEX
Page

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Table of contents
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited - in thousands, except per share amounts)

March 28,
2020
December 28,
2019
September 26,
2020
December 28,
2019
AssetsAssetsAssets
Current assets:Current assets:Current assets:
Cash and cash equivalentsCash and cash equivalents$239,213  $1,593  Cash and cash equivalents$1,365 $1,593 
Accounts receivable, net of allowance for doubtful accounts of $1,067 and $898, respectively7,170  19,978  
Accounts receivable, net of allowance for doubtful accounts of $823 and $898, respectivelyAccounts receivable, net of allowance for doubtful accounts of $823 and $898, respectively32,688 19,978 
InventoriesInventories82,021  87,065  Inventories83,258 87,065 
Prepaid expensesPrepaid expenses13,492  15,335  Prepaid expenses10,923 15,335 
Other current assetsOther current assets30,889  36,397  Other current assets36,127 36,397 
Total current assetsTotal current assets372,785  160,368  Total current assets164,361 160,368 
Non-current assets:Non-current assets:Non-current assets:
Property and equipment, netProperty and equipment, net194,707  197,421  Property and equipment, net178,482 197,421 
Operating lease right-of-use assetsOperating lease right-of-use assets323,770  327,017  Operating lease right-of-use assets311,179 327,017 
Goodwill and intangible assets, netGoodwill and intangible assets, net72,681  73,226  Goodwill and intangible assets, net73,508 73,226 
Other non-current assetsOther non-current assets49,871  48,011  Other non-current assets52,587 48,011 
Total assetsTotal assets$1,013,814  $806,043  Total assets$780,117 $806,043 
Liabilities and Shareholders’ DeficitLiabilities and Shareholders’ DeficitLiabilities and Shareholders’ Deficit
Current liabilities:Current liabilities:Current liabilities:
Borrowings under revolving credit facility$446,003  $231,000  
Borrowings under credit facilityBorrowings under credit facility$33,500 $231,000 
Accounts payableAccounts payable132,939  134,594  Accounts payable167,139 134,594 
Customer prepaymentsCustomer prepayments25,816  34,248  Customer prepayments75,043 34,248 
Accrued sales returnsAccrued sales returns22,273  19,809  Accrued sales returns24,085 19,809 
Compensation and benefitsCompensation and benefits27,292  40,321  Compensation and benefits61,751 40,321 
Taxes and withholdingTaxes and withholding27,490  22,171  Taxes and withholding32,030 22,171 
Operating lease liabilitiesOperating lease liabilities60,210  59,561  Operating lease liabilities60,561 59,561 
Other current liabilitiesOther current liabilities53,054  53,070  Other current liabilities58,449 53,070 
Total current liabilitiesTotal current liabilities795,077  594,774  Total current liabilities512,558 594,774 
Non-current liabilities:Non-current liabilities:Non-current liabilities:
Deferred income taxesDeferred income taxes9,142  3,808  Deferred income taxes7,037 3,808 
Operating lease liabilitiesOperating lease liabilities294,548  298,090  Operating lease liabilities281,733 298,090 
Other non-current liabilitiesOther non-current liabilities70,956  68,802  Other non-current liabilities81,616 68,802 
Total liabilitiesTotal liabilities1,169,723  965,474  Total liabilities882,944 965,474 
Shareholders’ deficit:Shareholders’ deficit:Shareholders’ deficit:
Undesignated preferred stock; 5,000 shares authorized, 0 shares issued and outstandingUndesignated preferred stock; 5,000 shares authorized, 0 shares issued and outstanding—  —  Undesignated preferred stock; 5,000 shares authorized, 0 shares issued and outstanding
Common stock, $0.01 par value; 142,500 shares authorized, 27,636 and 27,961 shares issued and outstanding, respectively276  280  
Common stock, $0.01 par value; 142,500 shares authorized, 27,757 and 27,961 shares issued
and outstanding, respectively
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 capitalAdditional paid-in capital—  —  Additional paid-in capital14,390 
Accumulated deficitAccumulated deficit(156,185) (159,711) Accumulated deficit(117,495)(159,711)
Total shareholders’ deficitTotal shareholders’ deficit(155,909) (159,431) Total shareholders’ deficit(102,827)(159,431)
Total liabilities and shareholders’ deficitTotal liabilities and shareholders’ deficit$1,013,814  $806,043  Total liabilities and shareholders’ deficit$780,117 $806,043 
See accompanying notes to condensed consolidated financial statements.
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Table of contents
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited - in thousands, except per share amounts)

Three Months EndedThree Months EndedNine Months Ended
March 28,
2020
March 30,
2019
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
Net salesNet sales$472,566  $426,445  Net sales$531,155 $474,778 $1,288,659 $1,257,186 
Cost of salesCost of sales170,435  164,212  Cost of sales196,195 178,388 488,558 481,377 
Gross profitGross profit302,131  262,233  Gross profit334,960 296,390 800,101 775,809 
Operating expenses:Operating expenses:Operating expenses:
Sales and marketingSales and marketing207,744  186,827  Sales and marketing211,574 213,133 549,483 568,799 
General and administrativeGeneral and administrative31,072  34,323  General and administrative44,127 35,098 111,915 102,466 
Research and developmentResearch and development10,501  8,376  Research and development9,644 9,007 28,399 25,440 
Total operating expensesTotal operating expenses249,317  229,526  Total operating expenses265,345 257,238 689,797 696,705 
Operating incomeOperating income52,814  32,707  Operating income69,615 39,152 110,304 79,104 
Interest expense, netInterest expense, net2,344  2,609  Interest expense, net1,827 3,131 8,111 8,968 
Income before income taxesIncome before income taxes50,470  30,098  Income before income taxes67,788 36,021 102,193 70,136 
Income tax expenseIncome tax expense11,330  4,680  Income tax expense16,468 7,967 24,363 12,384 
Net incomeNet income$39,140  $25,418  Net income$51,320 $28,054 $77,830 $57,752 
Basic net income per share:Basic net income per share:Basic net income per share:
Net income per share – basicNet income per share – basic$1.40  $0.83  Net income per share – basic$1.83 $0.96 $2.79 $1.93 
Weighted-average shares – basicWeighted-average shares – basic27,858  30,620  Weighted-average shares – basic27,973 29,085 27,918 29,859 
Diluted net income per share:Diluted net income per share:Diluted net income per share:
Net income per share – dilutedNet income per share – diluted$1.36  $0.80  Net income per share – diluted$1.79 $0.94 $2.73 $1.88 
Weighted-average shares – dilutedWeighted-average shares – diluted28,772  31,738  Weighted-average shares – diluted28,634 29,796 28,560 30,688 
























See accompanying notes to condensed consolidated financial statements.
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Table of contents
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Deficit
(unaudited - in thousands)

Common Stock
Additional
Paid-in
Capital
Accumulated
Deficit
TotalCommon Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Total
SharesAmountSharesAmount
Additional
Paid-in
Capital
Accumulated
Deficit
Total
Balance at December 28, 2019Balance at December 28, 201927,961  $280  $—  $(159,711) $(159,431) Balance at December 28, 201927,961 $280 $$(159,711)$(159,431)
Net incomeNet income—  —  —  39,140  39,140  Net income— — — 39,140 39,140 
Exercise of common stock optionsExercise of common stock options167   3,282  —  3,283  Exercise of common stock options167 3,282 — 3,283 
Stock-based compensationStock-based compensation396   2,047  —  2,051  Stock-based compensation396 2,047 — 2,051 
Repurchases of common stockRepurchases of common stock(888) (9) (5,329) (35,614) (40,952) Repurchases of common stock(888)(9)(5,329)(35,614)(40,952)
Balance at March 28, 2020Balance at March 28, 202027,636  $276  $—  $(156,185) $(155,909) Balance at March 28, 202027,636 $276 $$(156,185)$(155,909)
Net lossNet loss— — — (12,630)(12,630)
Exercise of common stock optionsExercise of common stock options33 — 817 — 817 
Stock-based compensationStock-based compensation71 5,032 — 5,033 
Repurchases of common stockRepurchases of common stock(15)— (330)(329)
Balance at June 27, 2020Balance at June 27, 202027,725 $277 $5,519 $(168,814)$(163,018)
Net incomeNet income— — — 51,320 51,320 
Exercise of common stock optionsExercise of common stock options20 549 — 550 
Stock-based compensationStock-based compensation14 — 8,470 — 8,470 
Repurchases of common stockRepurchases of common stock(2)— (148)(1)(149)
Balance at September 26, 2020Balance at September 26, 202027,757 $278 $14,390 $(117,495)$(102,827)

Common Stock
Additional
Paid-in
Capital
Accumulated DeficitTotal
SharesAmount
Balance at December 29, 201830,868  $309  $—  $(109,859) $(109,550) 
Net income—  —  —  25,418  25,418  
Exercise of common stock options151   2,834  —  2,836  
Stock-based compensation364   3,635  —  3,638  
Repurchases of common stock(1,170) (12) (6,469) (40,501) (46,982) 
Balance at March 30, 201930,213  $302  $—  $(124,942) $(124,640) 
























Common Stock
Additional
Paid-in
Capital
Accumulated DeficitTotal
SharesAmount
Balance at December 29, 201830,868 $309 $$(109,859)$(109,550)
Net income— — — 25,418 25,418 
Exercise of common stock options151 2,834 — 2,836 
Stock-based compensation364 3,635 — 3,638 
Repurchases of common stock(1,170)(12)(6,469)(40,501)(46,982)
Balance at March 30, 201930,213 $302 $$(124,942)$(124,640)
Net income— — — 4,280 4,280 
Exercise of common stock options115 2,158 — 2,159 
Stock-based compensation99 4,249 — 4,250 
Repurchases of common stock(1,104)(11)(6,407)(36,933)(43,351)
Balance at June 29, 201929,323 $293 $$(157,595)$(157,302)
Net income— — — 28,054 28,054 
Exercise of common stock options33 — 757 — 757 
Stock-based compensation10 — 4,146 — 4,146 
Repurchases of common stock(939)(9)(4,903)(35,230)(40,142)
Balance at September 28, 201928,427 $284 $$(164,771)$(164,487)






See accompanying notes to condensed consolidated financial statements.
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Table of contents
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited - in thousands)

Three Months Ended
March 28,
2020
March 30,
2019
Cash flows from operating activities:
Net income$39,140  $25,418  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization15,371  15,743  
Stock-based compensation2,051  3,638  
Net gain on disposals and impairments of assets(22) (433) 
Deferred income taxes5,334  824  
Changes in operating assets and liabilities:
Accounts receivable12,808  6,182  
Inventories5,044  1,568  
Income taxes5,798  4,208  
Prepaid expenses and other assets7,478  (5,283) 
Accounts payable11,282  5,857  
Customer prepayments(8,432) 3,452  
Accrued compensation and benefits(13,157) 1,750  
Other taxes and withholding(479) 1,254  
Other accruals and liabilities2,725  3,958  
Net cash provided by operating activities84,941  68,136  
Cash flows from investing activities:
Purchases of property and equipment(10,351) (19,743) 
Proceeds from sales of property and equipment25  2,571  
Net cash used in investing activities(10,326) (17,172) 
Cash flows from financing activities:
Repurchases of common stock(41,445) (55,656) 
Net increase in short-term borrowings201,170  2,955  
Proceeds from issuance of common stock3,283  2,836  
Debt issuance costs(3) (1,015) 
Net cash provided by (used in) financing activities163,005  (50,880) 
Net increase in cash and cash equivalents237,620  84  
Cash and cash equivalents, at beginning of period1,593  1,612  
Cash and cash equivalents, at end of period$239,213  $1,696  


Nine Months Ended
September 26,
2020
September 28,
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 amortization46,244 46,267 
Stock-based compensation15,554 12,034 
Net loss (gain) on disposals and impairments of assets208 (409)
Deferred income taxes3,229 (895)
Changes in operating assets and liabilities:
Accounts receivable(12,710)(746)
Inventories3,807 (1,626)
Income taxes5,103 535 
Prepaid expenses and other assets3,666 (8,065)
Accounts payable58,547 45,051 
Customer prepayments40,795 12,758 
Accrued compensation and benefits21,376 11,763 
Other taxes and withholding4,756 5,784 
Other accruals and liabilities18,877 9,629 
Net cash provided by operating activities287,282 189,832 
Cash flows from investing activities:
Purchases of property and equipment(28,074)(46,757)
Proceeds from sales of property and equipment53 2,577 
Purchase of intangible assets(945)
Net cash used in investing activities(28,966)(44,180)
Cash flows from financing activities:
Repurchases of common stock(41,923)(139,178)
Net decrease in short-term borrowings(220,968)(11,270)
Proceeds from issuance of common stock4,650 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 period1,593 1,612 
Cash and cash equivalents, at end of period$1,365 $1,545 








See accompanying notes to condensed consolidated financial statements.
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Table of Contents
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)


1. Business and Summary of Significant Accounting Policies

Business & Basis of Presentation

We prepared the condensed consolidated financial statements as of and for the three and nine months ended March 28,September 26, 2020 of Sleep Number Corporation and our 100%-owned subsidiaries (Sleep Number or the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and they reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position as of March 28,September 26, 2020 and December 28, 2019, and the consolidated results of operations and cash flows for the periods presented. Our historical and quarterly consolidated results of operations may not be indicative of the results that may be achieved for the full year or any future period. Additionally, based on the duration and severity of the current global situation involving the novel coronavirus (COVID-19) pandemic, including but not limited to general economic conditions, consumer confidence, store closings mandated by federal, state or local authorities and possible supply chain disruptions, the extent to which COVID-19 will impact our business and our consolidated financial results will depend on future developments, which are highly uncertain and cannot be predicted.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with our most recent audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019 and other recent filings with the SEC.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of sales, expenses and income taxes during the reporting period. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. In addition, during the current environment involving COVID-19, predicting future events will be especially challenging for management. Changes in these estimates will be reflected in the consolidated financial statements in future periods and could be material. Our critical accounting policies consist of stock-based compensation, goodwill and indefinite-lived intangible assets, warranty liabilities and revenue recognition.

The condensed consolidated financial statements include the accounts of Sleep Number Corporation and our 100%-owned subsidiaries. All significant intra-entity balances and transactions have been eliminated in consolidation.

New Accounting Pronouncements

Recently Adopted Accounting Guidance Not Yet Adopted

In April 2020, the Financial Accounting Standards Board (FASB) issued a Staff Q&A, Topic 842 and 840: Accounting For Lease Concessions Related to the Effects of the COVID-19 Pandemic. To provide clarity in response to the COVID-19 pandemic crisis, the FASB staff believes that it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under Topic 842 as though enforceable rights and obligations for those concessions existed (regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contract).

Consequently, for concessions related to the effects of the COVID-19 pandemic, we willare not haverequired to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the contract and can elect to apply or not apply the lease modification guidance in Topic 842 to those contracts. This election is available for concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or our obligations as the lessee. For example, this election is available for concessions that result in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract. The FASB staff expects that reasonable judgment will be exercised in making those determinations. Some concessions will provide a deferral of payments with no substantive changes to the consideration in the original contract. A deferral affects the timing, but the amount of the consideration is substantially the same as that required by the original contract. The staff expects that there will be multiple ways to account for those deferrals, none of which the staff believes are more preferable than the others. Two of those methods are:
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Table of Contents
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)


a.Account for the concessions as if no changes to the lease contract were made. Under that accounting, a lessor would increase its lease receivable, and a lessee would increase its accounts payable as receivables/payments accrue. In its income statement, a lessor would continue to recognize income, and a lessee would continue to recognize expense during the deferral period.
b.Account for the deferred payments as variable lease payments.

We are evaluatingadopted option a. above and continue to recognize rent expense on a straight-line basis. We have deferred approximately $3.7 million in rent cash payments from the effectsecond and third quarter of the new guidance on our condensed consolidated financial statements and related disclosures, and planfiscal 2020 to select election method b. above. Under this election, deferred payments would be treated as variablefuture periods, including $3.6 million of rent payments resulting in an adjustmentrelated to expenseleases where we have a signed agreement related to the deferrals and the remainder related to leases we are still in the period in which they arise.process of negotiating with the lessors. See Note 6. Leases, for further information.

2. Fair Value Measurements

At March 28,September 26, 2020 and December 28, 2019, we had $9$11 million and $8 million, respectively, of debt and equity securities that fund our deferred compensation plan and are classified in other non-current assets. We also had corresponding deferred compensation plan liabilities of $9$11 million and $8 million at March 28,September 26, 2020 and December 28, 2019, respectively, which are included in other non-current liabilities. The majority of the debt and equity securities are Level 1 as they trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis. Unrealized gains/(losses) on the debt and equity securities offset those associated with the corresponding deferred compensation plan liabilities.

3. Inventories

Inventories consisted of the following (in thousands):
March 28,
2020
December 28,
2019
September 26,
2020
December 28,
2019
Raw materialsRaw materials$4,905  $6,231  Raw materials$8,197 $6,231 
Work in progressWork in progress81  31  Work in progress103 31 
Finished goodsFinished goods77,035  80,803  Finished goods74,958 80,803 
$82,021  $87,065  $83,258 $87,065 

4. Goodwill and Intangible Assets, Net

Goodwill and Indefinite-Lived Intangible Assets

Goodwill was $64 million at March 28,September 26, 2020 and December 28, 2019. Indefinite-lived trade name/trademarks totaled $1.4 million at March 28,September 26, 2020 and December 28, 2019.

Definite-Lived Intangible Assets

Developed Technologies

The gross carrying amount of our developed technologies was $19 million at March 28,September 26, 2020 and December 28, 2019. Accumulated amortization was $12$13 million and $11 million at March 28,September 26, 2020 and December 28, 2019, respectively.

Amortization expense for both the three months ended March 28,September 26, 2020 and March 30,September 28, 2019, was $0.6 million and $0.5 million. Annual amortizationmillion, respectively. Amortization expense for the nine months ended September 26, 2020 and September 28, 2019, was $1.7 million and $1.6 million, respectively.

Other

In June 2020, we purchased certain other definite-lived intangible assets for subsequent years are as follows (in thousands):
March 28,
2020
2020 (excluding the three months ended March 28, 2020)$1,668  
20212,181  
20222,181  
20231,209  
Thereafter—  
Total future amortization for definite-lived intangible assets$7,239  
a total purchase price of $2 million and will amortize them over an average of nine years. Amortization expense for the three and nine months ended September 26, 2020 was $55 thousand.
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Table of Contents
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)

Annual amortization for definite-lived intangible assets for subsequent years are as follows (in thousands):
2020 (excluding the nine months ended September 26, 2020)$638 
20212,403 
20222,403 
20231,431 
2024222 
2025226 
Thereafter743 
Total future amortization for definite-lived intangible assets$8,066 

5. Credit Agreement

Our revolving credit facility as of March 28,September 26, 2020, had a net aggregate availabilitytotal commitment amount of $450 million. The credit facility is for general corporate purposes and to meet our seasonal working capital requirements. The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio (4.5x) and a minimum interest coverage ratio (3.0x). The credit agreement includes an accordion feature which allows us to increase the amount of the credit facility from $450 million to $600 million, subject to lenders' approval. Under the terms of the credit agreement, we pay a variable rate of interest and a commitment fee based on our leverage ratio. The credit agreement matures in February 2024. We were in compliance with all financial covenants as of March 28,September 26, 2020.

On March 17, 2020, we borrowed an additional $262 million under our credit agreement, which represented all remaining amounts then available under the credit agreement. The additional borrowings were undertaken as a precautionary measure to provide increased liquidity and preserve financial flexibility in light of current disruption and uncertainty resulting from the COVID-19 pandemic.
The following table summarizes our borrowings under the credit facility ($ in thousands):
March 28,
2020
December 28,
2019
Outstanding borrowings$446,003  $231,000  
Outstanding letters of credit$3,997  $3,497  
Additional borrowing capacity$—  $215,503  
Weighted-average interest rate2.9 %3.5 %
On April 3, 2020, we amended the credit agreement to add a 364-day term loan facility up to an aggregate commitment of $75 million under our credit agreement for a total commitment amount of $525 million, with anotheran additional $75 million remaining available under our accordion (subject to lenders' approval). We fully drew down the term loan and secured an initial interest rate of approximately 3.27%, which is equal to the one-month LIBOR rate plus the applicable margin based on the then-current total leverage ratio. In addition, the amendment: (a) increases the floor for loans based on LIBOR to at least 0.75% and (b) prohibits the use of proceeds of the revolving loan, term loan or letters of credit under the credit agreement, as amended, to make capital distributions (as defined in the credit agreement, as amended, to include, among other items, dividends and share repurchases). No financial covenants were amended. The additional borrowings were undertaken as a precautionary measure to provide increased liquidity and preserve financial flexibility in light of current disruption and uncertainty resulting from the COVID-19 pandemic. Proceeds may be used inOn September 24, 2020, we repaid the future for working capital and other general corporate purposes permitted by364-day, $75 million term loan. On October 5, 2020, we further amended the credit agreement as amended.to remove the share repurchase restriction and eliminate the floor based on LIBOR of at least 0.75% from our $450 million credit agreement that were added in the April 3, 2020 amendment.

The following table summarizes our borrowings under the credit facility ($ in thousands):
September 26,
2020
December 28,
2019
Outstanding borrowings$33,500 $231,000 
Outstanding letters of credit$3,997 $3,497 
Additional borrowing capacity$412,503 $215,503 
Weighted-average interest rate2.5 %3.5 %
6. Leases

We lease our retail, office and manufacturing space under operating leases which, in addition to the minimum lease payments, may require payment of a proportionate share of the real estate taxes and certain building operating expenses. While our local market development approach generally results in long-term participation in given markets, our retail store leases generally provide for an initial lease term of five to 10 years. Our office and manufacturing leases provide for an initial lease term of up to 15 years. In addition, our mall-based retail store leases may require payment of variable rent based on net sales in excess of certain thresholds. Certain leases may contain options to extend the term of the original lease. The exercise of lease renewal options is at our sole discretion. Lease options are included in the lease term only if exercise is reasonably certain at lease commencement. Our lease agreements do not contain any material residual value guarantees. We also lease vehicles and certain equipment under operating leases with an initial lease term of three to five years.

Our operating lease costs include facility, vehicle and equipment lease costs, but exclude variable lease costs. Operating lease costs are recognized on a straight-line basis over the lease term, after consideration of rent escalations and rent holidays. The lease term for purposes of the calculation begins on the earlier of the lease commencement date or the date we take possession of the property. During lease renewal negotiations that extend beyond the original lease term, we estimate straight-line rent expense based on current market conditions. Variable lease costs are recorded when it is probable the cost has been incurred and the amount can be reasonably
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Notes to Condensed Consolidated Financial Statements
(unaudited)

estimated. Future payments for real estate taxes and certain building operating expenses for which we are obligated are not included in operating lease costs.

At March 28,September 26, 2020, our finance right-of-use assets and lease liabilities were not significant.

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Notes to Condensed Consolidated Financial Statements
(unaudited)

Operating lease costs were as follows (in thousands):
Three Months EndedThree Months EndedNine Months Ended
March 28,
2020
March 30,
2019
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
Operating lease costs(1)
Operating lease costs(1)
$22,949  $21,056  
Operating lease costs(1)
$22,512 $21,583 $67,815 $63,719 
Variable lease costsVariable lease costs$12  $499  Variable lease costs$333 $466 $608 $1,387 
___________________________
(1)Includes short-term lease costs which are not significant.

The maturities of operating lease liabilities as of March 28,September 26, 2020, were as follows(1) (in thousands):
2020 (excluding the three months ended March 28, 2020)(1)
63,309  
2020 (excluding the nine months ended September 26, 2020)2020 (excluding the nine months ended September 26, 2020)21,175 
2021202178,083  202180,946 
2022202269,672  202272,566 
2023202359,702  202362,641 
2024202447,918  202450,846 
2025202539,059  202541,941 
ThereafterThereafter88,488  Thereafter96,068 
Total lease payments(2)
Total lease payments(2)
446,231  
Total lease payments(2)
426,183 
Less: InterestLess: Interest91,473  Less: Interest83,889 
Present value of operating lease liabilities(3)
Present value of operating lease liabilities(3)
$354,758  
Present value of operating lease liabilities(3)
$342,294 
___________________________
(1)Subsequent to March 28, 2020, we renegotiatedWe have deferred certain operating leases to defer approximately $3 million in lease payments frominitially due in the second and third quarters of fiscal 2020 to future periodsperiods. These deferred rent payments of $3.7 million are excluded from this table and are included in response to store closings mandated by federal, state or local authoritiesOther current liabilities and other economic issues related to COVID-19.Other non-current liabilities. See Note 1, Business and Summary of Significant Accounting Policies, New Accounting Pronouncements, Recently Adopted Accounting Guidance.
(2)Total lease payments exclude $62$56 million of legally binding minimum lease payments for leases signed but not yet commenced.
(3)Includes the current portion of $60$61 million for operating lease liabilities.

Other information related to operating leases was as follows:
March 28,
2020
December 28,
2019
September 26,
2020
December 28,
2019
Weighted-average remaining lease term (years)Weighted-average remaining lease term (years)6.56.6Weighted-average remaining lease term (years)6.46.6
Weighted-average discount rateWeighted-average discount rate7.1 %7.2 %Weighted-average discount rate7.0 %7.2 %

Three Months Ended
(in thousands)March 28,
2020
March 30,
2019
Cash paid for amounts included in present value of operating lease liabilities$21,469  $19,757  
Right-of-use assets obtained in exchange for operating lease liabilities$10,954  $16,153  

Nine Months Ended
(in thousands)September 26,
2020
September 28,
2019
Cash paid for amounts included in present value of operating lease liabilities$64,208 $60,512 
Right-of-use assets obtained in exchange for operating lease liabilities$28,772 $53,230 

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AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)

7. Repurchases of Common Stock

Repurchases of our common stock were as follows (in thousands):
Three Months EndedThree Months EndedNine Months Ended
March 28,
2020
March 30,
2019
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
Amount repurchased under Board-approved share repurchase programAmount repurchased under Board-approved share repurchase program$38,111  $40,900  Amount repurchased under Board-approved share repurchase program$$40,000 $38,111 $120,900 
Amount repurchased in connection with the vesting of employee restricted stock grantsAmount repurchased in connection with the vesting of employee restricted stock grants2,841  6,082  Amount repurchased in connection with the vesting of employee restricted stock grants149 142 3,319 9,575 
Total amount repurchased (based on trade dates)Total amount repurchased (based on trade dates)$40,952  $46,982  Total amount repurchased (based on trade dates)$149 $40,142 $41,430 $130,475 

As of March 28,September 26, 2020, the remaining authorization under our Board-approved share repurchase program was $437 million.

In light of the uncertainty surrounding the impact of COVID-19, we havetemporarily suspended all share repurchases under our Board-approved share repurchase program. In October 2020, we resumed our share repurchase program.

8. Revenue Recognition

Deferred contract assets and deferred contract liabilities are included in our condensed consolidated balance sheets as follows (in thousands):
March 28,
2020
December 28,
2019
September 26,
2020
December 28,
2019
Deferred Contract Assets included in:Deferred Contract Assets included in:Deferred Contract Assets included in:
Other current assetsOther current assets$24,408  $23,568  Other current assets$25,454 $23,568 
Other non-current assetsOther non-current assets35,078  33,782  Other non-current assets35,836 33,782 
$59,486  $57,350  $61,290 $57,350 


March 28,
2020
December 28,
2019
September 26,
2020
December 28,
2019
Deferred Contract Liabilities included in:Deferred Contract Liabilities included in:Deferred Contract Liabilities included in:
Other current liabilitiesOther current liabilities$34,515  $34,204  Other current liabilities$34,369 $34,204 
Other non-current liabilitiesOther non-current liabilities46,512  44,970  Other non-current liabilities47,103 44,970 
$81,027  $79,174  $81,472 $79,174 

During both the three months ended March 28,September 26, 2020 and March 30,September 28, 2019, we recognized revenue of $10$9 million, that were included in the deferred contract liability balances at the beginning of the respective periods. During the nine months ended September 26, 2020 and September 28, 2019, we recognized revenue of $27 million and $9$25 million, respectively, that were included in the deferred contract liability balances at the beginning of the respective periods.

Revenue from goods and services transferred to customers at a point in time accounted for approximately 98% of our revenues for both the three and nine months ended March 28,September 26, 2020 and March 30,September 28, 2019.

Net sales from each of our channels was as follows (in thousands):
Three Months Ended
March 28,
2020
March 30,
2019
Retail$435,357  $392,226  
Online and phone35,917  29,763  
Company-Controlled channel471,274  421,989  
Wholesale/Other channel1,292  4,456  
Total$472,566  $426,445  


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AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)

Net sales were as follows (in thousands):
Three Months EndedNine Months Ended
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
Retail$456,756 $437,871 $1,097,872 $1,158,096 
Online and phone72,688 34,520 187,067 89,695 
Total Retail529,444 472,391 1,284,939 1,247,791 
Wholesale/Other1,711 2,387 3,720 9,395 
Total Company$531,155 $474,778 $1,288,659 $1,257,186 

Obligation for Sales Returns

The activity in the sales returns liability account was as follows (in thousands):
Three Months EndedNine Months Ended
March 28,
2020
March 30,
2019
September 26,
2020
September 28,
2019
Balance at beginning of yearBalance at beginning of year$19,809  $19,907  Balance at beginning of year$19,809 $19,907 
Additions that reduce net salesAdditions that reduce net sales22,258  21,726  Additions that reduce net sales55,086 60,962 
Deductions from reservesDeductions from reserves(19,794) (21,676) Deductions from reserves(50,810)(57,036)
Balance at end of periodBalance at end of period$22,273  $19,957  Balance at end of period$24,085 $23,833 

9. Stock-Based Compensation Expense
Total stock-based compensation expense was as follows (in thousands):
Three Months EndedThree Months EndedNine Months Ended
March 28,
2020
March 30,
2019
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
Stock awardsStock awards$1,405  $3,033  Stock awards$7,930 $3,527 13,776 $10,256 
Stock optionsStock options646  605  Stock options540 619 1,778 1,778 
Total stock-based compensation expense (1)
Total stock-based compensation expense (1)
2,051  3,638  
Total stock-based compensation expense (1)
8,470 4,146 15,554 12,034 
Income tax benefitIncome tax benefit496  898  Income tax benefit2,081 984 3,795 2,948 
Total stock-based compensation expense, net of taxTotal stock-based compensation expense, net of tax$1,555  $2,740  Total stock-based compensation expense, net of tax$6,389 $3,162 $11,759 $9,086 
___________________________
(1) DecreaseChanges in 2020 stock-based compensation expense reflectsreflect the cumulative impact of the change in the expected achievements of certain performance targets.

10. Profit Sharing and 401(k) Plan

Under our profit sharing and 401(k) plan, eligible employees may defer up to 50% of their compensation on a pre-tax basis, subject to Internal Revenue Service limitations. Each pay period, we may make a discretionary contribution equal to a percentage of the employee’s contribution. During the three months ended March 28,September 26, 2020 and March 30,September 28, 2019, our contributions, net of forfeitures, were $1.6$2.1 million and $1.5 million, respectively. During the nine months ended September 26, 2020 and September 28, 2019, our contributions, net of forfeitures, were $4.2 million and $4.5 million, respectively.

Effective May 2020, due to the business impact of the COVID-19 pandemic, we temporarily suspended making discretionary 401(k) plan contributions. In September 2020, we reinstated the discretionary 401(k) plan contributions for the remainder of fiscal year 2020.

11. Net Income per Common Share
The components of basic and diluted net income per share were as follows (in thousands, except per share amounts):
Three Months Ended
March 28,
2020
March 30,
2019
Net income$39,140  $25,418  
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding27,858  30,620  
Dilutive effect of stock-based awards914  1,118  
Diluted weighted-average shares outstanding28,772  31,738  
Net income per share – basic$1.40  $0.83  
Net income per share – diluted$1.36  $0.80  
For the three months ended March 28, 2020 and March 30, 2019, anti-dilutive stock-based awards excluded from the diluted net income per share calculations were immaterial.

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AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)

11. Net Income per Common Share

The components of basic and diluted net income per share were as follows (in thousands, except per share amounts):
Three Months EndedNine Months Ended
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
Net income$51,320 $28,054 $77,830 $57,752 
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding27,973 29,085 27,918 29,859 
Dilutive effect of stock-based awards661 711 642 829 
Diluted weighted-average shares outstanding28,634 29,796 28,560 30,688 
Net income per share – basic$1.83 $0.96 $2.79 $1.93 
Net income per share – diluted$1.79 $0.94 $2.73 $1.88 

For the three and nine months ended September 26, 2020 and September 28, 2019, anti-dilutive stock-based awards excluded from the diluted net income per share calculations were immaterial.

12. Commitments and Contingencies

Warranty Liabilities

The activity in the accrued warranty liabilities account was as follows (in thousands):
Three Months EndedNine Months Ended
March 28, 2020March 30, 2019September 26, 2020September 28, 2019
Balance at beginning of yearBalance at beginning of year$11,345  $10,389  Balance at beginning of year$11,345 $10,389 
Additions charged to costs and expenses for current-year salesAdditions charged to costs and expenses for current-year sales2,628  3,192  Additions charged to costs and expenses for current-year sales9,111 8,033 
Deductions from reservesDeductions from reserves(2,779) (3,127) Deductions from reserves(8,034)(8,159)
Changes in liability for pre-existing warranties during the current year, including expirationsChanges in liability for pre-existing warranties during the current year, including expirations297  1,166  Changes in liability for pre-existing warranties during the current year, including expirations(381)1,189 
Balance at end of periodBalance at end of period$11,491  $11,620  Balance at end of period$12,041 $11,452 

Legal Proceedings

We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with U.S. generally accepted accounting principles, we record a liability in our consolidated financial statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. If a material loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. With respect to currently pending legal proceedings, we have not established an estimated range of reasonably possible material losses either because we believe that we have valid defenses to claims asserted against us, the proceeding has not advanced to a stage of discovery that would enable us to establish an estimate, or the potential loss is not material. We currently do not expect the outcome of pending legal proceedings to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against us could adversely impact our consolidated results of operations, financial position or cash flows. We expense legal costs as incurred.

On September 18, 2018, two former Home Delivery team members filed suit, now venued in San Diego County Superior Court, in Fresno County, California, alleging representative claims on a purported class action basis under the California Labor Code Private Attorney General Act. While the two representative plaintiffs were in the Home Delivery workforce, the Complaint does not limit the purported plaintiff class to that group. The plaintiffs allege that Sleep Number failed or refused to adopt adequate practices, policies and procedures relating to wage payments, record keeping, employment disclosures, meal and rest breaks, among other claims, under California law. The Complaint sought damages in the form of civil penalties and plaintiffs’ attorneys’ fees. The parties have executed a settlement agreement, pending Court approval, which includesincluding the settlement and release of certain additional related claims that are contained in a consolidated complaint, currently pending in San Diego County Superior Court.
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Notes to Condensed Consolidated Financial Statements
(unaudited)

which received preliminary Court approval on July 29, 2020 and is proceeding through final administrative processes. We intend to continue vigorously defending this matter in the event the Court doessettlement is not approve the settlement.ultimately finalized.

On March 27, 2018, Level Sleep, LLC (Level Sleep) filed a patent infringement lawsuit against Sleep Number in the Federal District Court for the Eastern District of Texas. In its Complaint, Level Sleep claims that Sleep Number infringed two patents owned by Level Sleep, U.S. Patent Nos. 6,807,698 and 7,036,172 (the Patents), by, among other things, making, using, offering for sale, or selling within the United States, and/or importing into the United States, beds with sleep surfaces having foam with multiple zones in the longitudinal direction. Level Sleep has asserted that five non-360® beds no longer sold and two current non-360 beds infringe the Patents. Level Sleep seeks damages in the form of a reasonable royalty. Sleep Number has asserted that the Patents are invalid and that our products do not infringe the Patents. On January 14, 2020, the Court granted summary judgment in favor of Sleep Number, finding that Sleep Number’s products do not infringe the Patents. Level Sleep has filed a notice ofan appeal of the Court’s summary judgment order.order, which is currently pending with the Federal Circuit Court of Appeals. We intend to continue vigorously defending this matter.


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AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)

13. COVID-19 Pandemic

The COVID-19 pandemic and ensuing government restrictions have resulted in the temporary closure of most of our retail stores sincestarting in mid-March. The pandemic has impacted our revenue growth and will adversely impact our financial performance. The length and severity ofWhile prioritizing the reduction in consumer demand due to the pandemic and the impact on our future financial performance remains uncertain.

In response to the pandemic, we have taken decisive actions to focus on the health and safety of our team, membersserving our customers and customers, strengtheningensuring business continuity, we swiftly took decisive actions to strengthen our liquidity, cash flows and financial position, and mitigatingmitigate the future impact on our operations and financial performance.

For the nine months ended September 26, 2020, net sales increased 3% and net income increased by 35% compared with the same period one year ago, despite a 20% decline in net sales during the three months ended June 27, 2020 when 47% of our stores were closed on average. Approximately 98% of our stores were open on average during the three months ended September 26, 2020.

While we have generated strong financial performance during the first nine months of 2020, the volatility, length and severity of the pandemic's impact on consumer demand and the resulting impact on our future financial performance remains uncertain. See Item 2. Management's Discussion and Analysis of Financial ConditionsCondition and Results of Operations and Part II: Item 1A. Risk Factors for additional discussion on the COVID-19 pandemic and the impact on our business.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of our condensed consolidated financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in eight sections:
Forward-Looking Statements and Risk Factors
Business Overview
COVID-19 Pandemic - Impact on our Business
Results of Operations
Liquidity and Capital Resources
Non-GAAP Data Reconciliations
Off-Balance-Sheet Arrangements and Contractual Obligations
Critical Accounting Policies

Forward-Looking Statements and Risk Factors
The discussion in this Quarterly Report contains certain forward-looking statements that relate to future plans, events, financial results or performance. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “predict,” “intend,” “potential,” “continue” or the negative of these or similar terms. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, among others:

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;
The effectiveness of our marketing messages;
The efficiency of our advertising and promotional efforts;
Our ability to execute our Company-ControlledTotal 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;
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, outbreaks of pandemics or contagious diseases, strikes and the potential for shortages in supply;
Risks of disruption in the operation of any of our main manufacturing facilities or assembly facilities;
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 security;
The costs and potential disruptions to our business related to upgrading 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; 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 under the caption “Risk Factors” below in Part II: Item 1A of this Quarterly Report on Form 10-Q and under the same caption in our Annual Report on Form 10-K.
We have no obligation to publicly update or revise any of the forward-looking statements contained in this Quarterly Report on Form 10-Q.
13

Index
Business Overview

As aIndividuality is core to Sleep Number. Our purpose driven company inis comprised of more than 4,000 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 and wellness, Sleep Number is the leader in sleep innovation. insights, including your daily SleepIQ® score.

Our vertically integrated business model and role as the exclusive designer, manufacturer, marketer, retailer and servicer of Sleep Number® beds allows us to offer consumers high-quality, individualized sleep solutions and services.

We generate revenue by marketing our innovations to new and existing customers, and selling products through Total Retail and Wholesale/Other. Total Retail, which includes Stores, Online, Chat and Phone, sells directly to consumers. Wholesale/Other sells to and through selected wholesale customers in the United States.

We are committed to delivering superior shareholder value by: (1) increasing consumer demand; (2) leveraging our business model; and (3) deploying capital efficiently.

COVID-19 Pandemic - Impact on our Business

The COVID-19 pandemic and ensuing government restrictions have resulted in the temporary closure of most of our retail stores sincestarting in mid-March. The pandemic has impactedWhile prioritizing the safety of our revenue growthteam, serving our customers and will adverselyensuring business continuity, we swiftly took decisive actions to strengthen our liquidity, cash flows and financial position, and mitigate the future impact on our operations and financial performance.

For the nine months ended September 26, 2020, net sales increased 3% and net income increased by 35% compared with the same period one year ago, despite a 20% decline in net sales during the three months ended June 27, 2020 when 47% of our stores were closed on average. Approximately 98% of our stores were open on average during the three months ended September 26, 2020.
The
While we have generated strong financial performance during the first nine months of 2020, the volatility, length and severity of the reduction inpandemic's impact on consumer demand due toand the pandemic and theresulting impact on our future financial performance remains uncertain. See Part II: Item 1A. Risk Factors for furtheradditional discussion of the adverse impacts ofon the COVID-19 pandemic and the impact on our business.

In response to the pandemic, we have taken decisive actions to focus on the health and safety of our team members and customers, strengthening our liquidity, cash flows and financial position, and mitigating the future impact on our operations and financial performance. These measures include, but are not limited to, the following:

Health and Safety of our Team Members and Customers. AsUpon onset of the COVID-19 pandemic, has developed, we have taken numerous steps to supportimplemented precautionary and sanitary guidelines throughout our team members and customers in practicing social distancing. In addition, we have implemented numerous other practices in ouroperations, including stores, manufacturing, facilitieshome delivery and operationsheadquarters based on the Centers for Disease Control and Prevention’s (CDC) recommendations.recommendations, and other best practices.

Expense Management. With the reduction in second-quarter revenue growth,due to the pandemic, we have, and will continue to implement cost cuttingimplemented appropriate expense management actions, including:

WeIn April 2020, we furloughed nearly 40% of our team members with another 30% working reduced hours.
TA significant amounthe majority of our team members’ compensation depends on Company performance against pre-determined goalsmembers returned to work as stores reopened and customer demand increased. In response to changes in shareholder value. Our CEO will not receive any cash compensation for the balancebusiness, we restructured some teams, which resulted in approximately 10% of positions being eliminated from across the year through a 50% deferral and exchanging all remaining salary for restricted stock units. In addition, our board and mostcountry as we reallocated headcount to support the changing needs of our leadership team reduced their cash compensation in exchange for restricted stock units. All team members’ compensation has been meaningfully reduced through variable compensation programs and other actions.business.
We temporarily suspended our 401(k) match and selected other employee benefit programs.
We reduced our sales and marketing expenses, and temporarily suspended virtually all discretionary projects acrossexpenses. During the company.three months ended September 26, 2020, we increased media spending 6% year-over-year, supporting a 12% increase in net sales.
We are negotiatingnegotiated rent deferrals and abatements for stores closed due to COVID-19.

Liquidity, Cash Flows and Financial Position. We have takentook the following actions to preserve cash, increase liquidity and strengthen our financial position:

Drew down the remaining availability under our revolving credit facility on March 17, 2020. Cash and cash equivalents at March 28, 2020 totaled $239 million.
Added $75 million of additional cashliquidity on April 3, 2020 through an incremental 364-day term loan under our credit facility’s $150 million accordion. On September 24, 2020, repaid the $75 million term loan with cash provided by operating activities.
SuspendedIn March 2020, temporarily suspended share repurchases for the remainder of 2020.under our Board-approved share repurchase program. In October 2020, resumed share repurchases.
Reduced 2020 plannedTemporarily reduced capital expenditures to approximately $35$28 million versus $59for the nine months ended September 26, 2020, compared with $47 million during the comparable period one year ago. We remained committed to our long-term innovation initiatives, including investing $28 million in 2019.research and development expenses during the nine months ended September 26, 2020.
14


Net liquidity available under our credit facility was $413 million at September 26, 2020 - $180 million greater than one year ago.
Our leverage ratio as defined in our credit agreement was 1.9x as of September 26, 2020. The maximum leverage ratio under our credit agreement is 4.5x.

CARES Act. On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) into law. The CARES Act includes the following relief, among others:

Amended federal tax laws to permit 100% bonus depreciation for eligible qualified improvement property placed in service by the taxpayer after December 31, 2017 and before January 1, 2023.
Employers are eligible for a 50 percent refundable payroll tax credit on wages paid up to $10,000, per employee, during the crisis. The credit would be available to employers whose businesses were disrupted due to virus shutdowns and those that had a decrease in gross receipts of 50 percent or more when compared to the same quarter last year. The credit can be claimed for employees who are retained but not currently working due to the crisis for firms with more than 100 employees.
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Index
Provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022. This will providehas provided us with additional liquidity during 2020.

Results of Operations

Quarterly and Year-to-Date Results

Quarterly and year-to-date operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in sales, timing, amount and effectiveness of advertising expenditures, changes in sales return rates or warranty experience, timing of investments in growth initiatives and infrastructure, timing of store openings/closings and related expenses, changes in net sales resulting from changes in our store base, timing of new product introductions and related expenses, timing of promotional offerings, competitive factors, changes in commodity costs, disruptions in supplies or third-party service providers, seasonality of retail and bedding industry sales, consumer confidence and general economic conditions. In addition, based on the duration and severity of the current global situation involving the COVID-19 pandemic, the extent to which our business and our condensed consolidated financial results are impacted, will depend on future developments, which are highly uncertain and cannot be predicted. Therefore, our historical results of operations may not be indicative of the results that may be achieved for any future period.

Highlights

Financial highlights for the three months ended March 28,September 26, 2020 were as follows:

The COVID-19 pandemic and ensuing government restrictions have resulted in the temporary closure of most of our retail stores since mid-March. We have taken decisive action to manage liquidity and costs through the challenging economic environment caused by the COVID-19 pandemic. For additional details, see "COVID-19 Pandemic - Impact on our Business" above.
Net sales for the three months ended March 28,September 26, 2020 increased 11%12% to $473$531 million, compared with $426$475 million for the same period one year ago.
The 11%12% net sales increase resulted from a 7%included an 11% comparable sales increase in our Company-Controlled channel and 5Total Retail, in addition to 1 percentage pointspoint (ppt.) of sales growth from 26 net new stores opened in the past 12 months. For additional details, see the components of total net sales change on page 17.
Sales per store (Company-Controlled channel sales(sales for stores open at least one year, Total Retail, including online and phone sales) on a trailing twelve-month basis for the period ended March 28,September 26, 2020 totaled $2.9 million, 7%2% higher than the same period one year ago.last year.
Operating income for the three months ended March 28,September 26, 2020 was $53$70 million, an increase of 61%,$30 million, or $20 million,78%, compared with $33$39 million in the prior-year period. OurThe $30 million increase in operating income rate increased to 11.2% ofresulted from the 12% increase in net sales, compared with 7.7% of net sales for the same period last year.a 0.7 ppt. increase in our gross profit rate and 4.2 ppt. reduction in our operating expenses rate.
Operating incomeThe 0.7 ppt. gross profit rate increase was primarily due to leverage from the 12% net sales increase, including the associated operational and logistics efficiencies.
The 4.2 ppt. reduction in our operating incomeexpense rate forresulted from the leveraging impact of the 12% net sales increase and actions taken to manage expenses as we navigated the uncertainties of the COVID-19 pandemic, while continuing to support our innovation initiatives. During the three months ended March 28, 2020 were positively impacted by the 11% increase in net sales and a 2.4 ppt. improvement in the gross profit rate. The 2.4 ppt. gross profit rate improvement was primarily due to three factors: (i) a favorable sales mix of higher-margin products; (ii) reduced warranty expenses; and (iii) current-period manufacturing efficiency gains. In addition, operating income for the current-year period included a $6.2 million reduction in broad-based incentive compensation, partially offset by $2.6 million of COVID-19 disruption related payroll expenses.
During the three-months ended March 28,September 26, 2020, we continued to prioritize investments in near- and long-term growth drivers, including a 25% increase in our innovation driving$9.6 million of R&D expenses.
Net income for the three months ended March 28,September 26, 2020 increased 54%by 83% to $39$51 million, compared with $25net income of $28 million for the same period one year ago. EarningsNet income per diluted share were $1.36, up 70%was $1.79, a 90% increase compared with $0.80net income per diluted share of $0.94 last year.
We achieved a return on invested capital (ROIC) of 20.8% on a trailing twelve-month basis for the period ended September 26, 2020, compared with 18.4% for the comparable period one year ago.
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Cash provided by operating activities for the threenine months ended March 28,September 26, 2020 increased by $17$97 million, or 25%51%, to $85$287 million, compared with $68$190 million for the same period one year ago.
Cash and cash equivalents at March 28, 2020 totaled $239 million, including drawing down the then remaining availability under our revolving credit facility on March 17, 2020 in response to the COVID-19 pandemic. At March 28,September 26, 2020, we had $446$34 million of borrowings under our revolving credit facility. On April 3, 2020, we entered into a $75 million 364-day term loanNet liquidity available under our credit facility and drew down the full amount.was $413 million at September 26, 2020.

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The following table sets forth our results of operations expressed as dollars and percentages of net sales. Figures are in millions, except percentages and per share amounts. Amounts may not add due to rounding differences.

Three Months EndedThree Months EndedNine Months Ended
March 28,
2020
March 30,
2019
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
Net salesNet sales$472.6  100.0 %$426.4  100.0 %Net sales$531.2 100.0 %$474.8 100.0 %$1,288.7 100.0 %$1,257.2 100.0 %
Cost of salesCost of sales170.4  36.1 %164.2  38.5 %Cost of sales196.2 36.9 %178.4 37.6 %488.6 37.9 %481.4 38.3 %
Gross profitGross profit302.1  63.9 %262.2  61.5 %Gross profit335.0 63.1 %296.4 62.4 %800.1 62.1 %775.8 61.7 %
Operating expenses:Operating expenses:Operating expenses:
Sales and marketingSales and marketing207.7  44.0 %186.8  43.8 %Sales and marketing211.6 39.8 %213.1 44.9 %549.5 42.6 %568.8 45.2 %
General and administrativeGeneral and administrative31.1  6.6 %34.3  8.0 %General and administrative44.1 8.3 %35.1 7.4 %111.9 8.7 %102.5 8.2 %
Research and developmentResearch and development10.5  2.2 %8.4  2.0 %Research and development9.6 1.8 %9.0 1.9 %28.4 2.2 %25.4 2.0 %
Total operating expensesTotal operating expenses249.3  52.8 %229.5  53.8 %Total operating expenses265.3 50.0 %257.2 54.2 %689.8 53.5 %696.7 55.4 %
Operating incomeOperating income52.8  11.2 %32.7  7.7 %Operating income69.6 13.1 %39.2 8.2 %110.3 8.6 %79.1 6.3 %
Interest expense, netInterest expense, net2.3  0.5 %2.6  0.6 %Interest expense, net1.8 0.3 %3.1 0.7 %8.1 0.6 %9.0 0.7 %
Income before income taxesIncome before income taxes50.5  10.7 %30.1  7.1 %Income before income taxes67.8 12.8 %36.0 7.6 %102.2 7.9 %70.1 5.6 %
Income tax expenseIncome tax expense11.3  2.4 %4.7  1.1 %Income tax expense16.5 3.1 %8.0 1.7 %24.4 1.9 %12.4 1.0 %
Net incomeNet income$39.1  8.3 %$25.4  6.0 %Net income$51.3 9.7 %$28.1 5.9 %$77.8 6.0 %$57.8 4.6 %
Net income per share:Net income per share:Net income per share:
BasicBasic$1.40  $0.83  Basic$1.83 $0.96 $2.79 $1.93 
DilutedDiluted$1.36  $0.80  Diluted$1.79 $0.94 $2.73 $1.88 
Weighted-average number of common shares:Weighted-average number of common shares:Weighted-average number of common shares:
BasicBasic27.9  30.6  Basic28.0 29.1 27.9 29.9 
DilutedDiluted28.8  31.7  Diluted28.6 29.8 28.6 30.7 

The percentage of our total net sales, by dollar volume, from each of our channels was as follows:
Three Months Ended
March 28,
2020
March 30,
2019
Company-Controlled channel99.7 %99.0 %
Wholesale/Other channel0.3 %1.0 %
Total100.0 %100.0 %
Three Months EndedNine Months Ended
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
Total Retail99.7 %99.5 %99.7 %99.3 %
Wholesale/Other0.3 %0.5 %0.3 %0.7 %
Total Company100.0 %100.0 %100.0 %100.0 %


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Index
The components of total net sales change, including comparable net sales changes, were as follows:
Three Months EndedThree Months EndedNine Months Ended
March 28,
2020
March 30,
2019
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
Sales change rates:Sales change rates:Sales change rates:
Retail comparable-store sales (1)
Retail comparable-store sales (1)
%%
Retail comparable-store sales (1)
%%(8 %)%
Online and phoneOnline and phone21 %%Online and phone111 %20 %109 %10 %
Company-Controlled comparable sales change (1)
%%
Total Retail comparable sales change (1)
Total Retail comparable sales change (1)
11 %10 %%%
Net opened/closed storesNet opened/closed stores%%Net opened/closed stores%%%%
Total Company-Controlled channel12 %10 %
Wholesale/Other channel(71 %)(3 %)
Total net sales change11 %10 %
Total RetailTotal Retail12 %14 %%13 %
Wholesale/OtherWholesale/Other(28 %)%(60 %)(17 %)
Total Company net sales changeTotal Company net sales change12 %14 %%12 %
___________________________
(1)Stores are included in the comparable-store calculations in the 13th full month of operations. Stores that have been remodeled or repositioned within the same shopping center remain in the comparable-store base.
Other sales metrics were as follows:
Three Months EndedThree Months EndedNine Months Ended
March 28,
2020
March 30,
2019
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
Average sales per store (1) ($ in thousands)
Average sales per store (1) ($ in thousands)
$2,932  $2,744  
Average sales per store (1) ($ in thousands)
$2,920 $2,858 
Average sales per square foot (1)
Average sales per square foot (1)
$1,040  $1,003  
Average sales per square foot (1)
$1,012 $1,029 
Stores > $2 million in net sales (2)
Stores > $2 million in net sales (2)
71 %66 %
Stores > $2 million in net sales (2)
64 %70 %
Stores > $3 million in net sales (2)
Stores > $3 million in net sales (2)
32 %26 %
Stores > $3 million in net sales (2)
26 %28 %
Average revenue per mattress unit – Company-Controlled channel (3)
$4,884  $4,804  
Average revenue per mattress unit (3)
Average revenue per mattress unit (3)
$4,802 $4,788 $4,824 $4,837 
___________________________
(1)Trailing-twelve months Company-ControlledTotal 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 Company-Controlled channel totalTotal Retail net sales divided by Company-Controlled channelTotal Retail mattress units.
The number of retail stores operating was as follows:
Three Months EndedThree Months EndedNine Months Ended
March 28,
2020
March 30,
2019
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
Beginning of periodBeginning of period611  579  Beginning of period598 594 611 579 
OpenedOpened 15  Opened15 20 47 
ClosedClosed(8) (9) Closed(8)(7)(35)(24)
End of periodEnd of period611  585  End of period596 602 596 602 

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Index
Comparison of Three Months Ended March 28,September 26, 2020 with Three Months Ended March 30,September 28, 2019

Net sales

Net sales for the three months ended March 28,September 26, 2020 increased by $46$56 million, or 11%12%, to $473$531 million, compared with $426$475 million for the same period one year ago.

The 12% net sales increase consisted of an 11% comparable sales increase in Total Retail in addition to 1 percentage point (ppt.) of sales growth from net new stores opened in the past 12 months. For additional details, see the components of total net sales change on page 17. Online and phone sales (included in comparable sales noted above) made up 14% of total net sales compared with 7% in the prior year as consumers embrace transacting remotely with Sleep Number as well as in our stores.

The $56 million net sales increase compared with the same period one year ago was comprised of the following: (i) a $48 million increase in our Total Retail comparable net sales; and (ii) a $9 million increase resulting from net store openings; partially offset by (iii) a $1 million decrease in Wholesale/Other sales. Total Retail mattress unit sales increased 12% compared with the prior year. Total Retail average revenue per mattress unit increased to $4,802, compared with $4,788 in the prior-year period.

Gross profit

Gross profit of $335 million increased by $39 million, or 13%, compared with $296 million for the same period one year ago. The gross profit rate improved to 63.1% of net sales for the three months ended September 26, 2020, compared with 62.4% for the prior-year comparable period. The current-year gross profit rate improvement of 0.7 ppt. was mainly due to: (i) leverage from the 12% net sales increase, including associated operational and logistics efficiencies (1.0 ppt.); partially offset by (ii) higher performance-based incentive compensation expense. In addition, our gross profit rate will fluctuate from quarter to quarter due to a variety of other factors, including return and exchange costs.

Sales and marketing expenses

Sales and marketing expenses for the three months ended September 26, 2020 were $212 million, or 39.8% of net sales, compared with $213 million, or 44.9% of net sales, for the same period one year ago. The current-year sales and marketing expenses rate decrease of 5.1 ppt. was primarily due to: (i) actions taken to manage expenses in response to the uncertainty related to the COVID-19 pandemic; and (ii) the leveraging impact of the 12% net sales increase. Expense management actions included leveraging our media spending, which increased by 6% compared with the prior year, while net sales increased by 12%, and lower payroll costs due to reduced store operating hours and improved productivity.

General and administrative expenses

General and administrative (G&A) expenses totaled $44 million, or 8.3% of net sales, for the three months ended September 26, 2020, compared with $35 million, or 7.4% of net sales, in the prior-year period. The $9 million increase in G&A expenses consisted primarily of: (i) a $10 million increase in employee compensation primarily resulting from a year-over-year increase in company-wide performance-based incentive compensation; partially offset by (ii) a $1 million decrease in travel expenses, professional fees and other miscellaneous expenses. The G&A expenses rate increased by 0.9 ppt. in the current-year period, compared with the same period one year ago due to the items discussed above, partially offset by the leveraging impact of the 12% net sales increase.

Research and development expenses

Research and development (R&D) expenses increased to $9.6 million for the three months ended September 26, 2020, compared with $9.0 million for the same period last year as we continued to prioritize our long-term innovation initiatives.

Interest expense, net

Interest expense, net decreased to $1.8 million for the three months ended September 26, 2020, compared with $3.1 million for the same period one year ago. The $1.3 million decrease was mainly driven by a lower level of outstanding borrowings during the three months ended September 26, 2020 and a decrease in the weighted-average interest rate on borrowings, compared with the same period one year ago.


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Income tax expense

Income tax expense totaled $16 million for the three months ended September 26, 2020, compared with $8 million last year. The effective income tax rate for the three months ended September 26, 2020 was 24.3%, compared with 22.1% for the comparable period last year, reflecting higher stock-based compensation excess tax benefits in the prior-year period.

Comparison of Nine Months Ended September 26, 2020 with Nine Months Ended September 28, 2019

Net sales

Net sales for the nine months ended September 26, 2020 increased by $31 million, or 3%, to $1.3 billion. The COVID-19 pandemic and ensuing government restrictions have resulted in the temporary closure of most of our retail stores since mid-March.starting in mid-March, with 47% of our stores closed on average during the three months ended June 27, 2020. Approximately 98% of our stores were open on average during the three months ended September 26, 2020. For additional details, see "COVID-19 Pandemic - Impact on our Business" above.

The 11%3% net sales increase resulted fromconsisted of a 7%1% comparable sales increase in our Company-Controlled channel and 5Total Retail in addition to 2 percentage points (ppt.) of sales growth from 26 net new stores opened in the past 12 months. For additional details, see the components of total net sales change on page 17.

The $46$31 million net sales increase compared with the same period one year ago was comprised of the following: (i) a $30an $8 million increase in our Company-ControlledTotal Retail comparable net sales; and (ii) a $19$29 million increase resulting from net store openings.openings; partially offset by (iii) a $6 million decrease in Wholesale/Other channel sales decreased slightly year-over-year. Company-Controlledsales. Total Retail mattress unit sales increased 10%3%, compared with the prior year. Average revenue per mattress unit in our Company-Controlled channel totaled $4,884, a 2% increaseTotal Retail was $4,824, compared with $4,804$4,837 in the prior-year period.

Gross profit

Gross profit of $302$800 million increased by $40$24 million, or 15%3%, compared with $262$776 million for the same period one year ago. The gross profit rate improved to 63.9%was 62.1% of net sales for the threenine months ended March 28,September 26, 2020, compared with 61.5%61.7% for the prior-year comparable period. The current-year gross profit rate increaseimprovement of 2.40.4 ppt. was primarilymainly due to three factors: (i)the leverage from our first quarter and third quarter net sales growth, including associated operational and logistics efficiencies, partially offset by a favorable sales mixreduction in our gross profit rate during the second quarter of higher-margin products (1.2 ppt.); (ii) reduced warranty expenses (0.5 ppt.); and (iii) current-period manufacturing efficiency gains (0.3 ppt.).2020 due to the pandemic's disruption on our business. In addition, our gross profit rate will fluctuate from quarter to quarter due to a variety of other factors, including return and exchange costs, and performance-based incentive compensation.

Sales and marketing expenses

Sales and marketing expenses for the threenine months ended March 28,September 26, 2020 were $208$549 million, or 44.0%42.6% of net sales, compared with $187$569 million, or 43.8%45.2% of net sales, for the same period one year ago. The0.2ppt. increase $19 million decrease was primarily due to the decisive actions taken in April 2020 to manage expenses in response to the COVID-19 pandemic and the ensuing government restrictions that resulted in the sales and marketing expense rate wastemporary closure of most of our stores during the second quarter. These actions resulted in lower payroll costs mainly due to: (i)to furloughs and reduced team members' hours, and a 16%2% reduction in media expenses compared with the same period last year (6% increase in media expenses that drove additional customer traffic to our sales channels, including stores, online and phone; and (ii) COVID-19 disruption related payroll costs; partially offset by (iii) the expense leverage from the 11% increase in net sales.

General and administrative expenses

General and administrative (G&A) expenses totaled $31 million, or 6.6% of net sales, for the three months ended March 28, 2020, compared with $34 million, or 8.0% of netSeptember 26, 2020). The sales in the prior-year period. The $3.3 million decrease in G&Aand marketing expenses consisted primarily of: (i) a $5.0 million decrease in employee compensation primarily resulting from a year-over-year decrease in performance-based incentive compensation; partially offset by (ii) a $1.7 million increase in professional fees and other expenses. The G&A expense rate decreased by 1.42.6 ppt. in the current-year period, compared with the same period one year ago due to the items discussed above and the leveraging impact of the 3% net sales increase.

General and administrative expenses

General and administrative (G&A) expenses totaled $112 million, or 8.7% of net sales, for the nine months ended September 26, 2020, compared with $102 million, or 8.2% of net sales, in the prior-year period. The $9 million increase in G&A expenses consisted of: (i) a $9 million increase in employee compensation primarily resulting from a year-over-year increase in company-wide performance-based incentive compensation; and (ii) $1 million of severance costs resulting from the permanent elimination of certain roles due to changing business needs based on the COVID-19 pandemic; partially offset by (iii) a $1 million decrease in travel expenses, professional fees and other miscellaneous expenses. The G&A expenses rate increased by 0.5 ppt. in the current-year period, compared with the same period one year ago due to the increased expenses discuss above, partially offset by the leveraging impact of the 11%3% net sales increase.


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Research and development expenses

Research and development (R&D) expenses increased by 25%12% to $11$28 million for the threenine months ended March 28,September 26, 2020, compared with $8$25 million for the same period one year ago. The R&D expense rate for the threenine months ended March 28,September 26, 2020 increased to 2.2% of net sales, compared with 2.0% of net sales for the prior year. The spending level increase supports our ongoing consumer innovation strategy.

Interest expense, net

Interest expense, net decreased to $2.3$8.1 million for the threenine months ended March 28,September 26, 2020, compared with $2.6$9.0 million for the same period one year ago. The $0.3$0.9 million decrease was mainly driven by a reduction in the weighted-average interest rate on borrowings outstanding during the threenine months ended March 28,September 26, 2020, compared with the same period one year ago.
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Index
Income tax expense

Income tax expense totaled $11$24 million for the threenine months ended March 28,September 26, 2020, compared with $5$12 million last year. The effective income tax rate for the threenine months ended March 28,September 26, 2020 was 22.4%23.8%, compared with 15.5%17.7% for the comparable period last year, reflecting higher stock-based compensation excess tax benefits, additional tax credits and the favorable resolution of a tax matter in the prior-year period.

Liquidity and Capital Resources

Managing our liquidity and capital resources is an important part of our commitment to deliver superior shareholder value.value over time. The COVID-19 pandemic and ensuing government restrictions have resulted in the temporary closure of most of our retail stores since mid-March. We havein mid-March, with 47% of our retail stores on average closed during the three months ended June 27, 2020. For the nine months ended September 26, 2020, net sales increased 3% and net income increased by 35% compared with the same period one year ago, and cash generated from operations increased 51%. Approximate 98% of our stores were open on average during the three months ended September 26, 2020. The following actions were taken the following decisive actions to manage liquidity and capital resources throughat the challenging economic environment caused byonset of the COVID-19 pandemic:pandemic. Our strong performance year-to-date has dramatically improved our risk profile and we have taken subsequent liquidity and capital deployment actions as a result:

On March 17,September 24, 2020, we drew down an additional $262 million under our credit agreement, which represented all remaining amounts then available underrepaid the facility.
On April 3, 2020, we added a $75 million, 364-day term loan we added under our credit agreement for a total commitment amount of $525 million, with anotheron April 3, 2020. The $75 million available under our accordion (subject to lenders' approval). We fully drew down the term loan and secured an initial interest rate of approximately 3.27%, which is equal to the one-month LIBOR rate plus the applicable margin based on the then-current total leverage ratio. No financial covenants were amended.
The $262 million and $75 million draws against our credit facility will provideprovided increased liquidity and preservepreserved financial flexibility in consideration of the disruption and uncertainty resulting from the COVID-19 pandemic. Proceeds may be used inOn September 24, 2020, we repaid the future for working capital and other general corporate purposes as permitted by$75 million term loan. On October 5, 2020, we amended the credit agreement to remove the share repurchase restriction and eliminate the floor based on LIBOR of at least 0.75% from our $450 million credit agreement.Net liquidity available under our credit facility was $413 million at September 26, 2020.
On April 8,We resumed share repurchases under our Board-approved share repurchase program in October 2020, we announced additional efforts to preserve cash and manage expensesafter it was temporarily discontinued along with reduced capital expenditures in response to the COVID-19 pandemic including, among other things, discontinuing share repurchases, reducingCOVID-19. We also expect to return to a normalized amount of capital expenditures and negotiatingspending going forward.
We negotiated rent deferrals and abatements for stores closed due to COVID-19. We
We furloughed nearly 40% of our team members with another 30% working reduced hours. Our CEO will not receive any cash compensation for the balance of the year through a 50% deferral and exchanging all remaining salary for restricted stock units. In addition, our Board of Directors and mostThe majority of our leadership team reduced their cash compensationmembers returned to work as stores reopened and customer demand increased. In response to changes in exchange for restricted stock units. the business, we have restructured some teams, which resulted in approximately 10% of positions being eliminated from across the country as we reallocated headcount to support the changing needs of our businessAll team members’ compensation has been meaningfully reduced through variable compensation programs and other actions..
We are temporarily suspendingsuspended the Company's 401(k) match and selected other benefit programs. In September 2020, we reinstated the discretionary 401(k) plan contributions for 2020.
We also temporarily reduced our sales and marketing expenses, and temporarily suspended virtually allmost discretionary projects.projects, while continuing to support our innovation initiatives. As our stores reopened and market conditions warranted, we increased our sales and marketing expenses, and restarted selected discretionary projects to support the future growth of business.

Our primary sources of liquidity are the $239 million of cash and cash equivalents on our balance sheet at March 28, 2020, the $75 million that we drew down on April 3, 2020 under our credit facility and future cash flows provided by operating activities. Our cashactivities and cash equivalents, theavailable under our $450 million revolving credit facility. The cash generated from futureongoing operations and cash available under our revolving credit facility (subject to lenders' approval) are expected to be adequate to maintain operations, and fund anticipated expansion and strategic initiatives for the foreseeable future.

Changes in the cash and cash equivalents during the threenine months ended March 28,September 26, 2020 primarily consisted of $85$287 million of cash provided by operating activities, and a $201 million increase in short-term borrowings, that were partially offset by $10$28 million of cash used to purchase property and equipment, a $221 million decrease in short-term borrowings and $41$42 million of cash used to repurchase our common stock (based on settlement, $38.6$39 million under our Board-approved share repurchase program and $2.8$3 million in connection with the vesting of employee restricted stock grants).
20


The following table summarizes our cash flows ($ in millions). Amounts may not add due to rounding differences:
Three Months EndedNine Months Ended
March 28,
2020
March 30,
2019
September 26,
2020
September 28,
2019
Total cash provided by (used in):Total cash provided by (used in):Total cash provided by (used in):
Operating activitiesOperating activities$84.9  $68.1  Operating activities$287.3 $189.8 
Investing activitiesInvesting activities(10.3) (17.2) Investing activities(29.0)(44.2)
Financing activitiesFinancing activities163.0  (50.9) Financing activities(258.5)(145.7)
Net increase in cash and cash equivalents$237.6  $0.1  
Net decrease in cash and cash equivalentsNet decrease in cash and cash equivalents$(0.2)$(0.1)

Cash provided by operating activities for the threenine months ended March 28,September 26, 2020 was $85$287 million, compared with $68$190 million for the threenine months ended March 30,September 28, 2019. Significant components of the year-over-year change in cash provided by operating activities included: (i) a $14$20 million increase in net income for the threenine months ended March 28,September 26, 2020, compared with the same period one year ago; (ii) a $15$28 million fluctuation in accrued compensation and benefits that primarily resulted from year-over-year changescustomer prepayments due to the strong recovery in company-wide performance-based incentive compensation that was accrued and paid incustomer demand during the two comparable periods (higher incentive
19

Index
compensation paid in 2020 and lower incentive compensation accrued in the first three months ended September 26, 2020 that outperformed forecasts and suppliers' fulfillment, which had been curtailed to navigate the challenges of 2020);the COVID-19 pandemic; (iii) a $13 million fluctuation in accounts payable resulting from the growth of our business and timing of payments; (iv) a $12 million fluctuation in prepaid expenses and other assets withdue to both periods being impacted by the timing of rent payments and the current-year changes in business activities;activities due to the pandemic; and (iv)(v) a $12 million fluctuation in customer prepayments due toaccounts receivable based on strong sales growth during the business disruptions resulting from the COVID-19 pandemic and ensuing government restrictions in the second-half of Marchthree months ended September 26, 2020.

Net cash used in investing activities to purchase property and equipment was $10$28 million for the threenine months ended March 28,September 26, 2020, compared with $20$47 million for the same period one year ago. The year-over-year decrease was primarily due to actions taken to temporarily reduce capital spending based on the timing of cash flowseconomic uncertainties associated with new and remodeled stores’ property and equipment. Based on the expected economic impact of COVID-19, we plan to reduce capital expenditures for 2020 to approximately $35 million versus $59 million in 2019.pandemic.

Net cash provided byused in financing activities was $163$259 million for the threenine months ended March 28,September 26, 2020, compared with $51$146 million net cash used in investing activities for the same period one year ago.last year. During the threenine months ended March 28,September 26, 2020, we repurchased $41$42 million of our stock (based on settlement dates, $38.6$39 million under our Board-approved share repurchase program and $2.8$3 million in connection with the vesting of employee restricted stock awards), compared with $56$139 million during the same period one year ago. Short-term borrowings increaseddecreased by $201$221 million during the current-year period due to a $215$198 million increasedecrease in borrowings under our revolving credit facility to $446$34 million partially offset byand a decrease in book overdrafts which are included in the net change in short-term borrowings. Short-term borrowings increasedwere reduced by $3$11 million during the prior-year period due to a $19decrease in book overdrafts, partially offset by a $14 million increase in borrowings under our revolving credit facility to $219 million, partially offset by a decrease in book overdrafts.$214 million.

Under our Board-approved share repurchase program, we repurchased 0.8 million shares at a cost of $38 million (based on trade dates, an average of $49.42 per share) during the threenine months ended March 28,September 26, 2020. During the threenine months ended March 30,September 28, 2019, we repurchased 1.03.0 million shares at a cost of $41$121 million (an average of $39.36$40.19 per share). The remaining authorization under our Board-approved share repurchase program at March 28,September 26, 2020 was $437 million. There is no expiration date governing the period over which we can repurchase shares. In light of the uncertainty surrounding the impact of COVID-19, in March 2020 we havetemporarily suspended all share repurchases under our Board-approved share repurchase program. We resumed share repurchases in October 2020.

As of March 28,September 26, 2020, we had $446$34 million of borrowings under our revolving credit facility andfacility. We also had $4 million in outstanding letters of credit.Net liquidity available under our credit facility was $413 million at September 26, 2020. The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio (4.5x) and a minimum interest coverage ratio (3.0x). Our leverage ratio as defined in our credit agreement was 1.9x as of September 26, 2020. The credit agreement includes an accordion feature which allows us to increase the amount of the credit facility from $450 million to $600 million, subject to lenders' approval. Under the terms of the credit agreement, we pay a variable rate of interest and a commitment fee based on our leverage ratio. The credit facilityagreement is for general corporate purposes and to meet our seasonal working capital requirements. As of March 28,September 26, 2020, the weighted-average interest rate on borrowings under the credit facility was 2.9%2.5% and we were in compliance with all financial covenants.

We have an agreement with Synchrony Bank to offer qualified customers revolving credit arrangements to finance purchases from us (Synchrony Agreement). The Synchrony Agreement contains financial covenants consistent with our credit facility, including a maximum leverage ratio and a minimum interest coverage ratio consistent with our credit agreement. As of March 28,September 26, 2020, we were in compliance with all financial covenants.


21


Under the terms of the Synchrony Agreement, Synchrony Bank sets the minimum acceptable credit ratings, the interest rates, fees and all other terms and conditions of the customer accounts, including collection policies and procedures, and is the owner of the accounts. As the accounts are owned by Synchrony Bank, at no time are the accounts purchased or acquired from us. We are not liable to Synchrony Bank for our customers’ credit defaults.
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Index

Non-GAAP Data Reconciliations
Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)
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.
Our Adjusted EBITDA calculations are as follows (in thousands):
Three Months Ended
Trailing-Twelve
Months Ended
Three Months Ended
Trailing-Twelve
Months Ended
March 28,
2020
March 30,
2019
March 28,
2020
March 30,
2019
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
Net incomeNet income$39,140  $25,418  $95,567  $74,409  Net income$51,320 $28,054 $101,923 $84,742 
Income tax expenseIncome tax expense11,330  4,680  25,313  15,834  Income tax expense16,468 7,967 30,642 21,421 
Interest expenseInterest expense2,357  2,610  11,338  7,994  Interest expense1,829 3,131 10,829 11,064 
Depreciation and amortizationDepreciation and amortization15,253  15,637  61,026  61,673  Depreciation and amortization15,083 14,963 61,071 61,155 
Stock-based compensationStock-based compensation2,051  3,638  15,070  11,966  Stock-based compensation8,470 4,146 20,177 13,348 
Asset impairmentsAsset impairments 139  49  235  Asset impairments11 29 276 150 
Adjusted EBITDAAdjusted EBITDA$70,134  $52,122  $208,363  $172,111  Adjusted EBITDA$93,181 $58,290 $224,918 $191,880 

Free Cash Flow

Our “free cash flow” data is considered a non-GAAP financial measure and is not in accordance with, or preferable to, “net cash provided by operating activities,” or GAAP financial data. However, we are providing this information as we believe it facilitates analysis for investors and financial analysts.

The following table summarizes our free cash flow calculations (in thousands): 
Three Months Ended
Trailing-Twelve
Months Ended
Nine Months Ended
Trailing-Twelve
Months Ended
March 28,
2020
March 30,
2019
March 28,
2020
March 30,
2019
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
Net cash provided by operating activitiesNet cash provided by operating activities$84,941  $68,136  $205,965  $150,420  Net cash provided by operating activities$287,282 $189,832 $286,610 $186,922 
Subtract: Purchases of property and equipmentSubtract: Purchases of property and equipment10,351  19,743  49,847  56,453  Subtract: Purchases of property and equipment28,074 46,757 40,556 58,260 
Free cash flowFree cash flow$74,590  $48,393  $156,118  $93,967  Free cash flow$259,208 $143,075 $246,054 $128,662 
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Non-GAAP Data Reconciliations (continued)
Return on Invested Capital (ROIC)
(dollars 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
Trailing-Twelve
Months Ended
March 28,
2020
March 30,
2019
September 26,
2020
September 28,
2019
Net operating profit after taxes (NOPAT)Net operating profit after taxes (NOPAT)Net operating profit after taxes (NOPAT)
Operating incomeOperating income$132,203  $98,234  Operating income$143,295 $117,224 
Add: Rent expense (1)
Add: Rent expense (1)
89,237  81,949  
Add: Rent expense (1)
91,142 85,807 
Add: Interest incomeAdd: Interest income15   Add: Interest income97 
Less: Depreciation on capitalized operating leases (2)
Less: Depreciation on capitalized operating leases (2)
(22,883) (20,815) 
Less: Depreciation on capitalized operating leases (2)
(23,700)(21,821)
Less: Income taxes (3)
Less: Income taxes (3)
(47,453) (38,490) 
Less: Income taxes (3)
(50,584)(44,298)
NOPATNOPAT$151,119  $120,882  NOPAT$160,250 $136,916 
Average invested capitalAverage invested capitalAverage invested capital
Total deficitTotal deficit$(155,909) $(124,640) Total deficit$(102,827)$(164,487)
Less: Cash greater than target (4)
(113,397) —  
Add: Long-term debt (5)(4)
Add: Long-term debt (5)(4)
446,733  219,533  
Add: Long-term debt (5)(4)
34,177 214,482 
Add: Capitalized operating lease obligations (6)(5)
Add: Capitalized operating lease obligations (6)(5)
713,896  655,592  
Add: Capitalized operating lease obligations (6)(5)
729,136 686,456 
Total invested capital at end of periodTotal invested capital at end of period$891,323  $750,485  Total invested capital at end of period$660,486 $736,451 
Average invested capital (7)(6)
Average invested capital (7)(6)
$790,420  $732,890  
Average invested capital (7)(6)
$770,197 $743,271 
Return on invested capital (ROIC) (8)(7)
Return on invested capital (ROIC) (8)(7)
19.1 %16.5 %
Return on invested capital (ROIC) (8)(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 6)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 which 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 23.9%24.0% and 24.2%24.4% for 2020 and 2019, respectively.
(4)Cash greater than target is defined as cash, cash equivalents and marketable debt securities less customer prepayments in excess of $100 million.
(5)Long-term debt includes existing finance lease liabilities.
(6)(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.
(7)(6)Average invested capital represents the average of the last five fiscal quarters' ending invested capital balances.
(8)(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.


Off-Balance-Sheet Arrangements and Contractual Obligations
As of March 28,September 26, 2020, we were not involved in any unconsolidated special purpose entity transactions. Other than our $4 million in outstanding letters of credit, we do not have any off-balance-sheet financing.
There have been no material changes in our contractual obligations, other than the amendmentamendments to our credit agreement, since the end of fiscal 2019. See Note 5, Credit Agreement, of the Notes to our Condensed Consolidated Financial Statements for information regarding our credit agreement. See our Annual Report on Form 10-K for the fiscal year ended December 28, 2019 for additional information regarding our other contractual obligations.
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Critical Accounting Policies

We discuss our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019. There were no significant changes in our critical accounting policies since the end of fiscal 2019 other than adding goodwill and indefinite-lived intangible assets as a critical accounting policy.

DescriptionJudgments and UncertaintiesEffect if Actual Results
Differ from Assumptions
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of cost over the fair value of identifiable net assets of businesses acquired. Our indefinite-lived intangible assets include trade names/trademarks.

See Note 1, Business and Summary of Significant Accounting Policies, and Note 5, Goodwill and Intangible Assets, Net, to the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of the 2019 Annual Report on Form 10-K, for a complete discussion of our goodwill and indefinite-lived intangible assets.
The determination of fair value involves uncertainties because it requires management to make assumptions and to apply judgment to estimate industry and economic factors and the profitability of future business strategies. Management’s assumptions also include projected revenues, operating profit levels and discount rates, as well as consideration of any other factors that may indicate potential impairment.In the fourth quarter of fiscal 2019, management completed its annual goodwill and other indefinite-lived intangible asset impairment tests and determined there was no impairment. We believe our assumptions and judgments used in estimating cash flows and determining fair value were reasonable. However, unexpected changes to such assumptions and judgments could affect our impairment analyses and future results of operations, including an impairment charge that could be material. There have been no significant changes for the quarternine months ended March 28,September 26, 2020.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to changes in market-based short-term interest rates that will impact our net interest expense. If overall interest rates were one percentage point higher than current rates, our annual net income would decrease by $3.4$0.3 million based on the $446$34 million of borrowings under our revolving credit facility at March 28,September 26, 2020. We do not manage the interest-rate volatility risk of borrowings under our credit facility through the use of derivative instruments.

ITEM 4. CONTROLS AND PROCEDURES

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in Internal Control

There were no changes in our internal control over financial reporting during the fiscal quarter ended March 28,September 26, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with U.S. generally accepted accounting principles, we record a liability in our consolidated financial statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. If a material loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. With respect to currently pending legal proceedings, we have not established an estimated range of reasonably possible material losses either because we believe that we have valid defenses to claims asserted against us, the proceeding has not advanced to a stage of discovery that would enable us to establish an estimate, or the potential loss is not material. We currently do not expect the outcome of pending legal proceedings to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against us could adversely impact our consolidated results of operations, financial position or cash flows. We expense legal costs as incurred.

On September 18, 2018, two former Home Delivery team members filed suit, now venued in San Diego County Superior Court, California, alleging representative claims on a purported class action basis under the California Labor Code Private Attorney General Act. While the two representative plaintiffs were in the Home Delivery workforce, the Complaint does not limit the purported plaintiff class to that group. The plaintiffs allege that Sleep Number failed or refused to adopt adequate practices, policies and procedures relating to wage payments, record keeping, employment disclosures, meal and rest breaks, among other claims, under California law. The Complaint sought damages in the form of civil penalties and plaintiffs’ attorneys’ fees. The parties have executed a settlement agreement, including the settlement and release of certain additional related claims that are contained in a consolidated complaint, which received preliminary Court approval on July 29, 2020 and is proceeding through final administrative processes. We intend to continue vigorously defending this matter in the event the settlement is not ultimately finalized.

On March 27, 2018, Level Sleep, LLC (Level Sleep) filed a patent infringement lawsuit against Sleep Number in the Federal District Court for the Eastern District of Texas. In its Complaint, Level Sleep claims that Sleep Number infringed two patents owned by Level Sleep, U.S. Patent Nos. 6,807,698 and 7,036,172 (the Patents), by, among other things, making, using, offering for sale, or selling within the United States, and/or importing into the United States, beds with sleep surfaces having foam with multiple zones in the longitudinal direction. Level Sleep has asserted that five non-360® beds no longer sold and two current non-360 beds infringe the Patents. Level Sleep seeks damages in the form of a reasonable royalty. Sleep Number has asserted that the Patents are invalid and that our products do not infringe the Patents. On January 14, 2020, the Court granted summary judgment in favor of Sleep Number, finding that Sleep Number’s products do not infringe the Patents. Level Sleep has filed a notice ofan appeal of the Court’s summary judgment order.order, which is currently pending with the Federal Circuit Court of Appeals. We intend to continue vigorously defending this matter.

ITEM 1A. RISK FACTORS

In addition to the risks discussed below and other information set forth in this Quarterly Report on Form 10-Q, our business, financial condition and operating results are subject to a number of risks and uncertainties, including both those that are specific to our business and others that affect all businesses operating in a global environment. Investors should carefully consider the information in this report under the heading, Management’s Discussion and Analysis of Financial Condition and Results of Operations and also the information under the heading, Risk Factors in our most recent Annual Report on Form 10-K. The risk factors discussed in the Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q do not identify all risks that we face because our business operations could also be affected by additional risk factors that are not presently known to us or that we currently consider to be immaterial to our operations.

The COVID-19 pandemic has had, and is expected tomay continue to have, an adverse effect on our business and our financial results.

The outbreak of the COVID-19 pandemic has created significant volatility, uncertainty and economic disruption, which ishas adversely affectingaffected our business operations and our financial results. As the COVID-19 pandemic continues, consumer fearConsumer concern about becoming ill with the virus and recommendations and/or mandates from federal, state and local authorities to close certain businesses, stay at home, practice social distancing or self-quarantine have increased resultingresulted in the temporary closure of the majority of our stores nationwide since mid-March.for a period of time between mid-March and mid-May. Approximately 98% of our stores were open on average during the three months ended September, but as the COVID-19 pandemic continues, we may need to temporarily close some or all of our stores again. These actions have adversely affected our business, operations, demand for our product, traffic to our stores, and macroeconomic factors that affect us, such as consumer confidence and spending which have, in turn resulted in a loss of sales and profits. Even as certain restrictions have been or are beginning to be eased or lifted, consumers may continue to take additional precautions that could cause a reduction in foot-traffic to certain of our locations or other changes in consumer spending behavior over time, and new restrictions may be implemented. With most oftemporary closures to our retail store locations across the country temporarily closed and our delivery operations adversely impacted, we have shifted to scalescaled our digital capabilities including: remote retail selling, customer service, private appointments, flexible work schedules, solutions for contactless delivery, and remote access for team members across the country. This shift to our team members working remotely has amplified certain risks to our
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Index

business, including increased demand on our information technology resources and systems and increased risk of cybersecurity breaches and IT outages. In addition, as recommendations and/or mandates have been eased or lifted across the country, we have implemented new health and safety policies at headquarters, stores, and our manufacturing and assembly locations as well as for our home delivery teams, which are intended to reduce the risk of contracting or spreading the coronavirus for team members, contractors, and customers who are unable to perform their roles or transact business remotely. The Company has incurred additional costs and has diverted certain internal resources to develop and implement these new policies as well as provide, and in some cases manufacture, the personal protective equipment necessary to follow these new policies. The return to working in-person presents the risk that our new health and safety policies may not adequately protect our team members, contractors, and customers from contracting or spreading the coronavirus. We continue to monitor the effectiveness of our new policies to inform our future plans for welcoming all team members, even those who can work remotely, back to our facilities.

As the COVID-19 pandemic continues, we may further restrict the operations of our stores, delivery operations, and manufacturing and distribution facilities if we deem this necessary or if recommended or mandated by authorities and these measures could have a further material impact on our sales and profits.

In addition, we expect to continue to incur increased costs in our response to the pandemic, including, but not limited to, costs incurred to implement the operational changes described above and certain payments to or other costs relating to team members who are not working during the pandemic.pandemic or whose jobs have been eliminated.

In response to the COVID-19 pandemic, including the significant reduction in customer visits to, and spending at, our stores caused by COVID-19, we have takendid and in some situations continue to take actions to maintain liquidity including:

discontinuingin March, temporarily discontinued share repurchases under our Board-approved share repurchase program, and in October 2020, resumed share repurchases;
reducingtemporarily reduced capital expenditures;
negotiatingnegotiated rent deferrals and abatements for stores closed due to COVID-19;
furloughinginitially furloughed nearly 40% of our team members and reducing the working hours of another 30% of our team members;
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Index

currently,
the majority of our team members returned to work as stores reopened and customer demand increased during the quarter. In response to changes in the business, we have restructured some teams, which resulted in approximately 10% of positions being eliminated from across the country as we reallocated headcount to support the changing needs of our business;
CEO, board members and most of our leadership team deferred all or a portion of their cash compensation for the balance of the year in exchange for restricted stock units;
meaningfully reducing all team members’ compensation through variable compensationtemporarily suspended our discretionary 401(k) contributions and select other employee benefit programs, and other actions;in September 2020, reinstated the discretionary 401(k) plan contributions for 2020;
temporarily suspending our 401(k) match and selected other employee benefit programs;
reducingreduced our sales and marketing expenses;expenses, and during the three months ended-September 26, 2020, we increased media spending 6% year-over-year; and
temporarily suspending virtually allreduced discretionary projects across the company.Company.

It is possible that our cost reduction efforts may be insufficient to maintain adequate liquidity. Also, if we do not respond appropriately to the pandemic, or if customers do not perceive our response to be adequate for a particular region or our company as a whole, we could suffer damage to our reputation and our brand, which could continue to adversely affect our business and financial results in the future.

We are highly dependent on the effectiveness of our marketing messages and the efficiency of our advertising expenditures in generating consumer awareness and sales of our products. In light of our overall reduced marketing expenses and adjustments to our marketing messages due to COVID-19, we may not be as successful in developing effective messages and achieving efficiency in our advertising expenditures.

Our business depends heavily on the uninterrupted operation of our two main manufacturing plants located in Irmo, South Carolina and Salt Lake City, Utah as well as our assembly distribution centers, two of which are co-located at the manufacturing plants and others located in Baltimore, Maryland and the greater Los Angeles, California area. Our business also depends on the successful operation of our bedding collection fulfillment center in Brooklyn Park, Minnesota and headquarters in Minneapolis, Minnesota. The operation of all of our facilities is critically dependent on our team members who staff these locations, and COVID-19 could directly threaten or impact their health and/or ability to work, and, therefore, adversely affect the operations of our facilities. In addition, COVID-19 and governmental mandates or recommendations in these jurisdictions could require closures of our facilities and otherwise limit or adversely impact our ability to continue these operations.

COVID-19 also impacted, and may continue to impact, our retail stores, home delivery operations, logistics, and domestic and foreign supply chain, including raw materials and components we source from third parties as well as our sole source of supply for adjustable
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Index

foundations, particularly as a result of governmental mandates or recommendations. We expect that these impacts will continue through the remainder of 2020, and may continue to impact our results into 2021.

Our temporary suspensionreduction of virtually all discretionary spending across the companyCompany and the inability or limitations of certain suppliers, both domestic and foreign, to operate due to governmental mandates or recommendations has delayed and may continue to delay the introduction of new product lines.

We have seen, and may continue to see, significant deterioration in macroeconomic factors that typically affect us, such as consumer confidence and spending.

The situation surrounding COVID-19 remains fluid and the potential for an adverse effect on our business and our financial results increases the longer the virus impacts activity levels in the United States and globally. For this reason, we cannot reasonably estimate with any degree of certainty the extent of the impact COVID-19 will have on our business. The extent and duration of the impact of COVID-19 on our business, operations, and financial results will also depend on future developments, including the duration and spread of the outbreak, governmental mandates and recommendations, business and workforce disruptions, and the related impact on consumer confidence and spending, all of which are highly uncertain and unpredictable.

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Index

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) – (b) Not applicable.
(c) Issuer Purchases of Equity Securities
Period
Total Number
of Shares
Purchased(1)(2)
Average Price
Paid per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(1)
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs(3)
December 29, 2019 through January 25, 2020240,764  $48.10  238,900  $463,993,000  
January 26, 2020 through February 22, 2020224,831  $54.37  224,400  $451,795,000  
February 23, 2020 through March 28, 2020422,589  $40.58  307,886  $436,889,000  
Total888,184  $46.11  771,186  $436,889,000  
Period
Total Number
of Shares
Purchased(1)(2)
Average Price
Paid per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(1)
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs(3)
June 28, 2020 through July 25, 2020— $— — $436,889,000 
July 26, 2020 through August 22, 2020280 $45.78 — $436,889,000 
August 23, 2020 through September 26, 20202,815 $48.09 — $436,889,000 
Total3,095 $47.88 — $436,889,000 
___________________________
(1)UnderWe did not repurchase any shares under our Board-approved $500 million share repurchase program (effective September 29, 2019), we repurchased 771,186 shares of our common stock at a cost of $38 million (based on trade dates) during the three months ended March 28,September 26, 2020.
(2)In connection with the vesting of employee restricted stock grants, we also repurchased 116,9983,095 shares of our common stock at a cost of $2.8$0.1 million during the three months ended March 28,September 26, 2020.
(3)There is no expiration date governing the period over which we can repurchase shares under our Board-approved share repurchase program. Any repurchased shares are constructively retired and returned to an unissued status. In light of the uncertainty surrounding the impact of COVID-19, we havetemporarily suspended all share repurchases under our Board-approved share repurchase program. We resumed share repurchases in October 2020.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.
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ITEM 6. EXHIBITS

Exhibit
Number
Description
10.1*
10.2*
31.1*
31.2*
32.1*
32.2*
101.INS*XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH*XBRL Taxonomy Extension Schema Document
101.CAL*XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*XBRL Taxonomy Extension Label Linkbase Document
101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document
104*Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
* Filed Herewith
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Index

SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SLEEP NUMBER CORPORATION
(Registrant)
Dated:May 1,October 23, 2020By:/s/ Shelly R. Ibach
Shelly R. Ibach
Chief Executive Officer
(principal executive officer)
By:/s/ Robert J. Poirier
Robert J. Poirier
Chief Accounting Officer
(principal accounting officer)

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