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 ~~June 27,~~September 26, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-25121

SLEEP NUMBER CORPORATION

(Exact name of registrant as specified in its charter)


Minnesota						41-1597886
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

1001 Third Avenue South

Minneapolis,

Minnesota

55404

(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 class

Trading
Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

SNBR

Nasdaq 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 filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller 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 ~~June 27,~~September 26, 2020, ~~27,725,000~~27,757,000 shares of the registrant’s Common Stock were outstanding.

Table of contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

INDEX

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)


		June 27, 2020		December 28, 2019			September 26, 2020		December 28, 2019
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	1,651	$	1,593	Cash and cash equivalents	$	1,365	$	1,593
Accounts receivable, net of allowance for doubtful accounts of $957 and $898, respectively		15,754		19,978
Accounts receivable, net of allowance for doubtful accounts of $823 and $898, respectively						Accounts receivable, net of allowance for doubtful accounts of $823 and $898, respectively	32,688		19,978
Inventories	Inventories	81,674		87,065		Inventories	83,258		87,065
Prepaid expenses	Prepaid expenses	12,072		15,335		Prepaid expenses	10,923		15,335
Other current assets	Other current assets	30,607		36,397		Other current assets	36,127		36,397
Total current assets	Total current assets	141,758		160,368		Total current assets	164,361		160,368

Non-current assets:	Non-current assets:					Non-current assets:
Property and equipment, net	Property and equipment, net	186,943		197,421		Property and equipment, net	178,482		197,421
Operating lease right-of-use assets	Operating lease right-of-use assets	315,221		327,017		Operating lease right-of-use assets	311,179		327,017
Goodwill and intangible assets, net	Goodwill and intangible assets, net	74,109		73,226		Goodwill and intangible assets, net	73,508		73,226
Other non-current assets	Other non-current assets	50,767		48,011		Other non-current assets	52,587		48,011
Total assets	Total assets	$	768,798	$	806,043	Total assets	$	780,117	$	806,043

Liabilities and Shareholders’ Deficit	Liabilities and Shareholders’ Deficit					Liabilities and Shareholders’ Deficit
Current liabilities:	Current liabilities:					Current liabilities:
Borrowings under credit facility	Borrowings under credit facility	$	227,240	$	231,000	Borrowings under credit facility	$	33,500	$	231,000
Accounts payable	Accounts payable	94,966		134,594		Accounts payable	167,139		134,594
Customer prepayments	Customer prepayments	51,235		34,248		Customer prepayments	75,043		34,248
Accrued sales returns	Accrued sales returns	17,196		19,809		Accrued sales returns	24,085		19,809
Compensation and benefits	Compensation and benefits	33,067		40,321		Compensation and benefits	61,751		40,321
Taxes and withholding	Taxes and withholding	21,085		22,171		Taxes and withholding	32,030		22,171
Operating lease liabilities	Operating lease liabilities	60,180		59,561		Operating lease liabilities	60,561		59,561
Other current liabilities	Other current liabilities	57,547		53,070		Other current liabilities	58,449		53,070
Total current liabilities	Total current liabilities	562,516		594,774		Total current liabilities	512,558		594,774

Non-current liabilities:	Non-current liabilities:					Non-current liabilities:
Deferred income taxes	Deferred income taxes	8,191		3,808		Deferred income taxes	7,037		3,808
Operating lease liabilities	Operating lease liabilities	286,292		298,090		Operating lease liabilities	281,733		298,090
Other non-current liabilities	Other non-current liabilities	74,817		68,802		Other non-current liabilities	81,616		68,802
Total liabilities	Total liabilities	931,816		965,474		Total liabilities	882,944		965,474

Shareholders’ deficit:	Shareholders’ deficit:					Shareholders’ deficit:
Undesignated preferred stock; 5,000 shares authorized, 0 shares issued and outstanding	Undesignated preferred stock; 5,000 shares authorized, 0 shares issued and outstanding	—		—		Undesignated preferred stock; 5,000 shares authorized, 0 shares issued and outstanding	0		0
Common stock, $0.01 par value; 142,500 shares authorized, 27,725 and 27,961 shares issued and outstanding, respectively		277		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 capital	Additional paid-in capital	5,519		—		Additional paid-in capital	14,390		0
Accumulated deficit	Accumulated deficit	(168,814)		(159,711)		Accumulated deficit	(117,495)		(159,711)
Total shareholders’ deficit	Total shareholders’ deficit	(163,018)		(159,431)		Total shareholders’ deficit	(102,827)		(159,431)
Total liabilities and shareholders’ deficit	Total liabilities and shareholders’ deficit	$	768,798	$	806,043	Total liabilities and shareholders’ deficit	$	780,117	$	806,043

See accompanying notes to condensed consolidated financial statements.

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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited - in thousands, except per share amounts)


		Three Months Ended						Six Months Ended							Three Months Ended				Nine Months Ended
		June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019			September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Net sales	Net sales	$	284,938	$	355,963	$	757,504	$	782,408	Net sales	$	531,155	$	474,778	$	1,288,659	$	1,257,186
Cost of sales	Cost of sales	121,928		138,777		292,363		302,989		Cost of sales	196,195		178,388		488,558		481,377
Gross profit	Gross profit	163,010		217,186		465,141		479,419		Gross profit	334,960		296,390		800,101		775,809

Operating expenses:	Operating expenses:									Operating expenses:
Sales and marketing	Sales and marketing	130,165		168,839		337,909		355,666		Sales and marketing	211,574		213,133		549,483		568,799
General and administrative	General and administrative	36,716		33,045		67,788		67,368		General and administrative	44,127		35,098		111,915		102,466
Research and development	Research and development	8,254		8,057		18,755		16,433		Research and development	9,644		9,007		28,399		25,440
Total operating expenses	Total operating expenses	175,135		209,941		424,452		439,467		Total operating expenses	265,345		257,238		689,797		696,705
Operating (loss) income		(12,125)		7,245		40,689		39,952
Operating income										Operating income	69,615		39,152		110,304		79,104
Interest expense, net	Interest expense, net	3,940		3,228		6,284		5,837		Interest expense, net	1,827		3,131		8,111		8,968
(Loss) income before income taxes		(16,065)		4,017		34,405		34,115
Income tax (benefit) expense		(3,435)		(263)		7,895		4,417
Net (loss) income		$	(12,630)	$	4,280	$	26,510	$	29,698
Income before income taxes										Income before income taxes	67,788		36,021		102,193		70,136
Income tax expense										Income tax expense	16,468		7,967		24,363		12,384
Net income										Net income	$	51,320	$	28,054	$	77,830	$	57,752

Basic net (loss) income per share:
Net (loss) income per share – basic		$	(0.45)	$	0.14	$	0.95	$	0.98
Basic net income per share:										Basic net income per share:
Net income per share – basic										Net income per share – basic	$	1.83	$	0.96	$	2.79	$	1.93
Weighted-average shares – basic	Weighted-average shares – basic	27,923		29,873		27,890		30,247		Weighted-average shares – basic	27,973		29,085		27,918		29,859

Diluted net (loss) income per share:
Net (loss) income per share – diluted		$	(0.45)	$	0.14	$	0.93	$	0.95
Diluted net income per share:										Diluted net income per share:
Net income per share – diluted										Net income per share – diluted	$	1.79	$	0.94	$	2.73	$	1.88
Weighted-average shares – diluted	Weighted-average shares – diluted	27,923		30,531		28,523		31,134		Weighted-average shares – diluted	28,634		29,796		28,560		30,688

See accompanying notes to condensed consolidated financial statements.

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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Deficit

(unaudited - in thousands)


		Common Stock					Additional Paid-in Capital		Accumulated Deficit				Total	Common Stock								Additional Paid-in Capital			Accumulated Deficit		Total
		Shares	Amount													Shares			Amount					Additional Paid-in Capital		Accumulated Deficit		Total
Balance at December 28, 2019	Balance at December 28, 2019	27,961	$	280	$	—	$	(159,711)	$	(159,431)	Balance at December 28, 2019	27,961		$	280		$	0		$	(159,711)	$	(159,431)
Net income	Net income	—	—		—		39,140		39,140		Net income	—		—			—			39,140		39,140
Exercise of common stock options	Exercise of common stock options	167	1		3,282		—		3,283		Exercise of common stock options	167		1			3,282			—		3,283
Stock-based compensation	Stock-based compensation	396	4		2,047		—		2,051		Stock-based compensation	396		4			2,047			—		2,051
Repurchases of common stock	Repurchases 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, 2020	Balance at March 28, 2020	27,636	$	276	$	—	$	(156,185)	$	(155,909)	Balance at March 28, 2020	27,636		$	276		$	0		$	(156,185)	$	(155,909)
Net loss	Net loss	—	—		—		(12,630)		(12,630)		Net loss	—		—			—			(12,630)		(12,630)
Exercise of common stock options	Exercise of common stock options	33	—		817		—		817		Exercise of common stock options	33		—			817			—		817
Stock-based compensation	Stock-based compensation	71	1		5,032		—		5,033		Stock-based compensation	71		1			5,032			—		5,033
Repurchases of common stock	Repurchases of common stock	(15)	—		(330)		1		(329)		Repurchases of common stock	(15)		—			(330)			1		(329)

Balance at June 27, 2020	Balance at June 27, 2020	27,725	$	277	$	5,519	$	(168,814)	$	(163,018)	Balance at June 27, 2020	27,725		$	277		$	5,519		$	(168,814)	$	(163,018)
Net income											Net income	—		—			—			51,320		51,320
Exercise of common stock options											Exercise of common stock options	20		1			549			—		550
Stock-based compensation											Stock-based compensation	14		—			8,470			—		8,470
Repurchases of common stock											Repurchases of common stock	(2)		—			(148)			(1)		(149)
Balance at September 26, 2020											Balance at September 26, 2020	27,757		$	278		$	14,390		$	(117,495)	$	(102,827)

Common Stock
Additional
Paid-in
Capital
Accumulated Deficit Total
Shares Amount
Balance at December 29, 2018 30,868 $ 309 $ — $ (109,859) $ (109,550)
Net income — — — 25,418 25,418
Exercise of common stock options 151 2 2,834 — 2,836
Stock-based compensation 364 3 3,635 — 3,638
Repurchases of common stock (1,170) (12) (6,469) (40,501) (46,982)
Balance at March 30, 2019 30,213 $ 302 $ — $ (124,942) $ (124,640)
Net income — — — 4,280 4,280
Exercise of common stock options 115 1 2,158 — 2,159
Stock-based compensation 99 1 4,249 — 4,250
Repurchases of common stock (1,104) (11) (6,407) (36,933) (43,351)
Balance at June 29, 2019 29,323 $ 293 $ — $ (157,595) $ (157,302)


	Common Stock					Additional Paid-in Capital		Accumulated Deficit		Total
	Shares	Amount
Balance at December 29, 2018	30,868	$	309	$	0	$	(109,859)	$	(109,550)
Net income	—	—		—		25,418		25,418
Exercise of common stock options	151	2		2,834		—		2,836
Stock-based compensation	364	3		3,635		—		3,638
Repurchases of common stock	(1,170)	(12)		(6,469)		(40,501)		(46,982)
Balance at March 30, 2019	30,213	$	302	$	0	$	(124,942)	$	(124,640)
Net income	—	—		—		4,280		4,280
Exercise of common stock options	115	1		2,158		—		2,159
Stock-based compensation	99	1		4,249		—		4,250
Repurchases of common stock	(1,104)	(11)		(6,407)		(36,933)		(43,351)
Balance at June 29, 2019	29,323	$	293	$	0	$	(157,595)	$	(157,302)
Net income	—	—		—		28,054		28,054
Exercise of common stock options	33	—		757		—		757
Stock-based compensation	10	—		4,146		—		4,146
Repurchases of common stock	(939)	(9)		(4,903)		(35,230)		(40,142)
Balance at September 28, 2019	28,427	$	284	$	0	$	(164,771)	$	(164,487)

See accompanying notes to condensed consolidated financial statements.

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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited - in thousands)


		Six Months Ended							Nine Months Ended
		June 27, 2020		June 29, 2019			September 26, 2020		September 28, 2019
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	26,510	$	29,698	Net income	$	77,830	$	57,752
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	30,811		31,187		Depreciation and amortization	46,244		46,267
Stock-based compensation	Stock-based compensation	7,084		7,888		Stock-based compensation	15,554		12,034
Net loss (gain) on disposals and impairments of assets	Net loss (gain) on disposals and impairments of assets	224		(431)		Net loss (gain) on disposals and impairments of assets	208		(409)
Deferred income taxes	Deferred income taxes	4,383		721		Deferred income taxes	3,229		(895)
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable	Accounts receivable	4,224		5,214		Accounts receivable	(12,710)		(746)
Inventories	Inventories	5,391		(2,977)		Inventories	3,807		(1,626)
Income taxes	Income taxes	2,508		(9,195)		Income taxes	5,103		535
Prepaid expenses and other assets	Prepaid expenses and other assets	7,018		(8,580)		Prepaid expenses and other assets	3,666		(8,065)
Accounts payable	Accounts payable	(14,804)		12,408		Accounts payable	58,547		45,051
Customer prepayments	Customer prepayments	16,987		3,407		Customer prepayments	40,795		12,758
Accrued compensation and benefits	Accrued compensation and benefits	(7,405)		2,348		Accrued compensation and benefits	21,376		11,763
Other taxes and withholding	Other taxes and withholding	(3,594)		(1,836)		Other taxes and withholding	4,756		5,784
Other accruals and liabilities	Other accruals and liabilities	7,664		495		Other accruals and liabilities	18,877		9,629
Net cash provided by operating activities	Net cash provided by operating activities	87,001		70,347		Net cash provided by operating activities	287,282		189,832

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Purchases of property and equipment	Purchases of property and equipment	(21,695)		(33,896)		Purchases of property and equipment	(28,074)		(46,757)
Proceeds from sales of property and equipment	Proceeds from sales of property and equipment	25		2,571		Proceeds from sales of property and equipment	53		2,577
Purchase of intangible assets	Purchase of intangible assets	(945)		—		Purchase of intangible assets	(945)		0
Net cash used in investing activities	Net cash used in investing activities	(22,615)		(31,325)		Net cash used in investing activities	(28,966)		(44,180)

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Repurchases of common stock	Repurchases of common stock	(41,774)		(99,684)		Repurchases of common stock	(41,923)		(139,178)
Net (decrease) increase in short-term borrowings		(26,364)		56,758
Net decrease in short-term borrowings						Net decrease in short-term borrowings	(220,968)		(11,270)
Proceeds from issuance of common stock	Proceeds from issuance of common stock	4,100		4,995		Proceeds from issuance of common stock	4,650		5,752
Debt issuance costs	Debt issuance costs	(290)		(1,019)		Debt issuance costs	(303)		(1,023)
Net cash used in financing activities	Net cash used in financing activities	(64,328)		(38,950)		Net cash used in financing activities	(258,544)		(145,719)

Net increase in cash and cash equivalents		58		72
Net decrease in cash and cash equivalents						Net decrease in cash and cash equivalents	(228)		(67)
Cash and cash equivalents, at beginning of period	Cash and cash equivalents, at beginning of period	1,593		1,612		Cash and cash equivalents, at beginning of period	1,593		1,612
Cash and cash equivalents, at end of period	Cash and cash equivalents, at end of period	$	1,651	$	1,684	Cash and cash equivalents, at end of period	$	1,365	$	1,545

See accompanying notes to condensed consolidated financial statements.

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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 ~~six~~nine months ended ~~June 27,~~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 ~~June 27,~~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

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 ~~will~~are not ~~have~~required 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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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 adopted option a. above and continue to recognize rent expense on a straight-line basis. We have deferred approximately $5$3.7 million in rent cash payments from the second and third quarter of fiscal 2020 to future periods, including ~~$3.5~~$3.6 million of rent payments related to leases where we have a signed agreement related to the deferrals and the remainder related to leases we are still in the process of negotiating with the lessors. See Note 6. Leases, for further information.

2. Fair Value Measurements

At ~~June 27,~~September 26, 2020 and December 28, 2019, we had ~~$10~~$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 ~~$10~~$11 million and $8 million at ~~June 27,~~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):


		June 27, 2020		December 28, 2019			September 26, 2020		December 28, 2019
Raw materials	Raw materials	$	7,662	$	6,231	Raw materials	$	8,197	$	6,231
Work in progress	Work in progress	86		31		Work in progress	103		31
Finished goods	Finished goods	73,926		80,803		Finished goods	74,958		80,803
		$	81,674	$	87,065		$	83,258	$	87,065

4. Goodwill and Intangible Assets, Net

Goodwill and Indefinite-Lived Intangible Assets

Goodwill was $64 million at ~~June 27,~~September 26, 2020 and December 28, 2019. Indefinite-lived trade name/trademarks totaled $1.4 million at ~~June 27,~~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 ~~June 27,~~September 26, 2020 and December 28, 2019. Accumulated amortization was ~~$12~~$13 million and $11 million at ~~June 27,~~September 26, 2020 and December 28, 2019, respectively.

Amortization expense for ~~both~~ the three months ended ~~June 27,~~September 26, 2020 and ~~June 29,~~September 28, 2019, was $0.6 million and $0.5 ~~million.~~million, respectively. Amortization expense for the ~~six~~nine months ended ~~June 27,~~September 26, 2020 and ~~June 29,~~September 28, 2019, was ~~$1.1 million.~~$1.7 million and $1.6 million, respectively.

Other

In June 2020, we purchased certain other definite-lived intangible assets for a total purchase price of $2 million and will amortize them over an average of nine years. Amortization expense for the three and ~~six~~nine months ended ~~June 27,~~September 26, 2020 was ~~not significant.~~$55 thousand.

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Annual amortization for definite-lived intangible assets for subsequent years are as follows (in thousands):


2020 (excluding the six months ended June 27, 2020)		$	1,238
2020 (excluding the nine months ended September 26, 2020)				2020 (excluding the nine months ended September 26, 2020)	$	638
2021	2021	2,403		2021	2,403
2022	2022	2,403		2022	2,403
2023	2023	1,431		2023	1,431
2024	2024	222		2024	222
2025	2025	226		2025	226
Thereafter	Thereafter	743		Thereafter	743
Total future amortization for definite-lived intangible assets	Total future amortization for definite-lived intangible assets	$	8,666	Total future amortization for definite-lived intangible assets	$	8,066

5. Credit Agreement

Our credit facility as of ~~June 27,~~September 26, 2020, had a total commitment amount of ~~$525~~$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 ~~June 27,~~September 26, 2020.

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 an 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 was 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 disruption and uncertainty resulting from the COVID-19 pandemic. ~~Proceeds may be used in~~On September 24, 2020, we repaid the ~~future for working capital and other general corporate purposes permitted by~~364-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):


		June 27, 2020			December 28, 2019				September 26, 2020			December 28, 2019
Outstanding borrowings ⁽¹⁾	Outstanding borrowings ⁽¹⁾	$	227,240		$	231,000		Outstanding borrowings ⁽¹⁾	$	33,500		$	231,000
Outstanding letters of credit	Outstanding letters of credit	$	3,997		$	3,497		Outstanding letters of credit	$	3,997		$	3,497
Additional borrowing capacity	Additional borrowing capacity	$	293,763		$	215,503		Additional borrowing capacity	$	412,503		$	215,503
Weighted-average interest rate	Weighted-average interest rate	3.0		%	3.5		%	Weighted-average interest rate	2.5		%	3.5		%

⁽¹⁾ ~~Outstanding borrowings at June 27, 2020 include the $75 million term loan due April 2, 2021.~~

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

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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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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 ~~June 27,~~September 26, 2020, our finance right-of-use assets and lease liabilities were not significant.

Operating lease costs were as follows (in thousands):


		Three Months Ended						Six Months Ended							Three Months Ended				Nine Months Ended
		June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019			September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Operating lease costs⁽¹⁾	Operating lease costs⁽¹⁾	$	22,357	$	21,079	$	45,303	$	42,136	Operating lease costs⁽¹⁾	$	22,512	$	21,583	$	67,815	$	63,719
Variable lease costs	Variable lease costs	$	263	$	423	$	275	$	921	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 ~~June 27,~~September 26, 2020, were as follows⁽¹⁾ (in thousands):


2020 (excluding the six months ended June 27, 2020)		42,344
2020 (excluding the nine months ended September 26, 2020)				2020 (excluding the nine months ended September 26, 2020)	21,175
2021	2021	79,043		2021	80,946
2022	2022	70,634		2022	72,566
2023	2023	60,697		2023	62,641
2024	2024	48,887		2024	50,846
2025	2025	40,043		2025	41,941
Thereafter	Thereafter	92,379		Thereafter	96,068
Total lease payments⁽²⁾	Total lease payments⁽²⁾	434,027		Total lease payments⁽²⁾	426,183
Less: Interest	Less: Interest	87,555		Less: Interest	83,889
Present value of operating lease liabilities⁽³⁾	Present value of operating lease liabilities⁽³⁾	$	346,472	Present value of operating lease liabilities⁽³⁾	$	342,294

___________________________

⁽¹⁾We have deferred certain lease payments initially due in the second ~~quarter~~and third quarters of fiscal 2020 to future periods. These deferred rent payments of $5$3.7 million are excluded from this table and are included in Other current liabilities and 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 ~~$53~~$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:


		June 27, 2020		December 28, 2019			September 26, 2020		December 28, 2019
Weighted-average remaining lease term (years)	Weighted-average remaining lease term (years)	6.5		6.6		Weighted-average remaining lease term (years)	6.4		6.6
Weighted-average discount rate	Weighted-average discount rate	7.1	%	7.2	%	Weighted-average discount rate	7.0	%	7.2	%


		Six Months Ended							Nine Months Ended
(in thousands)	(in thousands)	June 27, 2020		June 29, 2019		(in thousands)	September 26, 2020		September 28, 2019
Cash paid for amounts included in present value of operating lease liabilities	Cash paid for amounts included in present value of operating lease liabilities	$	42,773	$	39,941	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	Right-of-use assets obtained in exchange for operating lease liabilities	$	17,670	$	36,543	Right-of-use assets obtained in exchange for operating lease liabilities	$	28,772	$	53,230

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7. Repurchases of Common Stock

Repurchases of our common stock were as follows (in thousands):


		Three Months Ended						Six Months Ended							Three Months Ended				Nine Months Ended
		June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019			September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Amount repurchased under Board-approved share repurchase program	Amount repurchased under Board-approved share repurchase program	$	—	$	40,000	$	38,111	$	80,900	Amount repurchased under Board-approved share repurchase program	$	0	$	40,000	$	38,111	$	120,900
Amount repurchased in connection with the vesting of employee restricted stock grants	Amount repurchased in connection with the vesting of employee restricted stock grants	329		3,351		3,170		9,433		Amount repurchased in connection with the vesting of employee restricted stock grants	149		142		3,319		9,575
Total amount repurchased (based on trade dates)	Total amount repurchased (based on trade dates)	$	329	$	43,351	$	41,281	$	90,333	Total amount repurchased (based on trade dates)	$	149	$	40,142	$	41,430	$	130,475

As of ~~June 27,~~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 ~~have~~temporarily 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):


		June 27, 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 assets	Other current assets	$	23,448	$	23,568	Other current assets	$	25,454	$	23,568
Other non-current assets	Other non-current assets	34,678		33,782		Other non-current assets	35,836		33,782
		$	58,126	$	57,350		$	61,290	$	57,350


		June 27, 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 liabilities	Other current liabilities	$	32,423	$	34,204	Other current liabilities	$	34,369	$	34,204
Other non-current liabilities	Other non-current liabilities	45,732		44,970		Other non-current liabilities	47,103		44,970
		$	78,155	$	79,174		$	81,472	$	79,174

During both the three months ended ~~June 27,~~September 26, 2020 and ~~June 29,~~September 28, 2019, we recognized revenue of ~~$10~~$9 million, ~~and $8 million, respectively,~~ that were included in the deferred contract liability balances at the beginning of the respective periods. During the ~~six~~nine months ended ~~June 27,~~September 26, 2020 and ~~June 29,~~September 28, 2019, we recognized revenue of ~~$18~~$27 million and ~~$17~~$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 ~~97% of our revenues for the three and six months ended June 27, 2020 and approximately~~ 98% of our revenues for the three and ~~six~~nine months ended ~~June 29,~~September 26, 2020 and September 28, 2019.

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Net sales were as follows (in thousands):


		Three Months Ended						Six Months Ended							Three Months Ended				Nine Months Ended
		June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019			September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Retail	Retail	$	205,759	$	327,999	$	641,116	$	720,225	Retail	$	456,756	$	437,871	$	1,097,872	$	1,158,096
Online and phone	Online and phone	78,462		25,412		114,379		55,175		Online and phone	72,688		34,520		187,067		89,695
Total Retail	Total Retail	284,221		353,411		755,495		775,400		Total Retail	529,444		472,391		1,284,939		1,247,791
Wholesale/Other	Wholesale/Other	717		2,552		2,009		7,008		Wholesale/Other	1,711		2,387		3,720		9,395
Total Company	Total Company	$	284,938	$	355,963	$	757,504	$	782,408	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):


		Six Months Ended							Nine Months Ended
		June 27, 2020		June 29, 2019			September 26, 2020		September 28, 2019
Balance at beginning of year	Balance at beginning of year	$	19,809	$	19,907	Balance at beginning of year	$	19,809	$	19,907
Additions that reduce net sales	Additions that reduce net sales	30,901		37,543		Additions that reduce net sales	55,086		60,962
Deductions from reserves	Deductions from reserves	(33,514)		(39,684)		Deductions from reserves	(50,810)		(57,036)
Balance at end of period	Balance at end of period	$	17,196	$	17,766	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 Ended						Six Months Ended							Three Months Ended				Nine Months Ended
		June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019			September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Stock awards	Stock awards	$	4,440	$	3,696	5,846		$	6,729	Stock awards	$	7,930	$	3,527	13,776		$	10,256
Stock options	Stock options	593		554		1,238		1,159		Stock options	540		619		1,778		1,778
Total stock-based compensation expense ⁽¹⁾	Total stock-based compensation expense ⁽¹⁾	5,033		4,250		7,084		7,888		Total stock-based compensation expense ⁽¹⁾	8,470		4,146		15,554		12,034
Income tax benefit	Income tax benefit	1,218		1,066		1,714		1,964		Income tax benefit	2,081		984		3,795		2,948
Total stock-based compensation expense, net of tax	Total stock-based compensation expense, net of tax	$	3,815	$	3,184	$	5,370	$	5,924	Total stock-based compensation expense, net of tax	$	6,389	$	3,162	$	11,759	$	9,086

___________________________

⁽¹⁾Changes in 2020 stock-based compensation expense reflect 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 ~~June 27,~~September 26, 2020 and ~~June 29, 2019, our contributions, net of forfeitures, were $0.5 million and $1.5 million, respectively. During the six months ended June 27, 2020 and June 29,~~September 28, 2019, our contributions, net of forfeitures, were $2.1 million and ~~$3.0~~$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 2020.

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11. Net ~~(Loss)~~ Income per Common Share

The components of basic and diluted net ~~(loss)~~ income per share were as follows (in thousands, except per share amounts):


		Three Months Ended						Six Months Ended							Three Months Ended				Nine Months Ended
		June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019			September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Net (loss) income		$	(12,630)	$	4,280	$	26,510	$	29,698
Net income										Net income	$	51,320	$	28,054	$	77,830	$	57,752
Reconciliation of weighted-average shares outstanding:	Reconciliation of weighted-average shares outstanding:									Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	Basic weighted-average shares outstanding	27,923		29,873		27,890		30,247		Basic weighted-average shares outstanding	27,973		29,085		27,918		29,859
Dilutive effect of stock-based awards	Dilutive effect of stock-based awards	—		658		633		887		Dilutive effect of stock-based awards	661		711		642		829
Diluted weighted-average shares outstanding	Diluted weighted-average shares outstanding	27,923		30,531		28,523		31,134		Diluted weighted-average shares outstanding	28,634		29,796		28,560		30,688
Net (loss) income per share – basic		$	(0.45)	$	0.14	$	0.95	$	0.98
Net (loss) income per share – diluted		$	(0.45)	$	0.14	$	0.93	$	0.95
Net income per share – basic										Net income per share – basic	$	1.83	$	0.96	$	2.79	$	1.93
Net income per share – diluted										Net income per share – diluted	$	1.79	$	0.94	$	2.73	$	1.88

For the three and nine months ended June 27, 2020, potentially dilutive stock-based awards have been excluded from the calculation of diluted weighted-average shares outstanding, as their inclusion would have had an anti-dilutive effect on our net loss per diluted share. For the three months ended June 29, 2019 and the six months ended June 27,September 26, 2020 and ~~June 29,~~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):


		Six Months Ended							Nine Months Ended
		June 27, 2020		June 29, 2019			September 26, 2020		September 28, 2019
Balance at beginning of year	Balance 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 sales	Additions charged to costs and expenses for current-year sales	4,965		5,003		Additions charged to costs and expenses for current-year sales	9,111		8,033
Deductions from reserves	Deductions from reserves	(4,789)		(5,591)		Deductions from reserves	(8,034)		(8,159)
Changes in liability for pre-existing warranties during the current year, including expirations	Changes in liability for pre-existing warranties during the current year, including expirations	(89)		1,418		Changes in liability for pre-existing warranties during the current year, including expirations	(381)		1,189
Balance at end of period	Balance at end of period	$	11,432	$	11,219	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, 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,

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~~The Complaint sought damages in the form of civil penalties and plaintiffs’ attorneys’ fees. The parties have executed a settlement agreement pending~~which received preliminary Court approval ~~which includes the settlement~~on July 29, 2020 and ~~release of certain additional related claims that are contained in a consolidated complaint.~~is proceeding through final administrative processes. We intend to continue vigorously defending this matter in the event the ~~Court does~~settlement 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 an 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.

13. COVID-19 Pandemic

The COVID-19 pandemic and ensuing government restrictions resulted in the temporary closure of ~~47%~~most of our retail stores ~~on average during~~starting in mid-March. While prioritizing the ~~three months ended June 27, 2020. More than 95% of our stores were open as of June 27, 2020.~~ ~~The pandemic has adversely impacted our revenue growth and our financial performance.~~ ~~The length and severity of the reduction in consumer demand due to the pandemic and the impact on our future financial performance remains uncertain.~~

I~~n response to the pandemic, we have taken decisive actions to focus on the health and~~ safety of our team, ~~members~~serving our customers and ~~customers, strengthening~~ensuring business continuity, we swiftly took decisive actions to strengthen our liquidity, cash flows and financial position, and ~~mitigating~~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.

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 Condition 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.

Index

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 Total Retail distribution strategy;

•Our ability to achieve and maintain acceptable levels of product and service quality, and acceptable product return and warranty claims rates;

•Our ability to continue to improve and expand our product line, and consumer acceptance of our products, product quality, innovation and brand image;

•Industry competition, the emergence of additional competitive products and the adequacy of our intellectual property rights to protect our products and brand from competitive or infringing activities;

•Claims that our products, processes, advertising, or trademarks infringe the intellectual property rights of others;

•Availability of attractive and cost-effective consumer credit options;

•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.

~~Index~~

Business Overview

~~As a~~Individuality 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 resulted in the temporary closure of ~~47%~~most of our retail stores starting in mid-March. While prioritizing the safety of our team, serving our customers and ensuring 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.

While we have generated strong financial performance during the first nine months of ~~our stores were open as of June 27, 2020.~~ ~~The pandemic has adversely impacted our revenue and overall financial performance.~~ ~~The~~2020, the volatility, length and severity of the ~~reduction in~~pandemic's impact on consumer demand ~~due to~~and the ~~pandemic and the~~resulting impact on our future financial performance remains uncertain. See Part II: Item 1A. Risk Factors for ~~further~~additional discussion ~~of the adverse impacts of~~on the COVID-19 pandemic and the impact on our business.

In response to the pandemic, we have prioritized the health and safety of our team members, serving our customers and ensuring business continuity. We have taken decisive actions to strengthen our liquidity, cash flows and financial position, and to mitigate 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. Upon onset of the COVID-19 pandemic, we ~~have~~ implemented precautionary and sanitary guidelines throughout our operations, including stores, manufacturing, home delivery and headquarters 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~~implemented appropriate ~~cost cutting~~expense management actions, ~~as needed,~~ including:

•In April 2020, we furloughed nearly 40% of our team members with another 30% working reduced hours. The majority of our team members returned to work as stores reopened and customer demand ~~increased during the quarter.~~increased. In response to changes in the business, we ~~have~~ restructured some teams, which resulted in ~~less than~~approximately 10% of positions being eliminated from across the country as we reallocated headcount to support the changing needs of our business.

•A significant amount of our team members’ compensation depends on Company performance against predetermined goals and changes in shareholder value. 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 and most of our leadership team reduced their cash compensation in exchange for restricted stock units. All team members’ cash compensation has been meaningfully reduced to-date through variable compensation programs and other actions.

•We temporarily ~~suspended our 401(k) match and selected other employee benefit programs.~~

•We reduced our sales and marketing ~~expenses, and halted most discretionary projects across~~expenses. 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 negotiated rent deferrals and abatements for stores closed due to COVID-19.

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

•Added $75 million of additional liquidity 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.

•~~Suspended~~In March 2020, temporarily suspended share repurchases under our Board-approved share repurchase ~~program for the remainder of 2020.~~program. In October 2020, resumed share repurchases.

•~~Reduced~~Temporarily reduced capital expenditures to ~~$22~~$28 million for the ~~six~~nine months ended ~~June 27,~~September 26, 2020, compared with ~~$34~~$47 million during the comparable period one year ago. We remained committed to our long-term innovation initiatives, including investing $28 million in research and development expenses during the nine months ended September 26, 2020.

•Net liquidity available under our credit facility was ~~$294~~$413 million at ~~June 27,~~September 26, 2020 - ~~$129~~$180 million greater than one year ago.

•Our leverage ratio as defined in our credit agreement was ~~2.8x~~1.9x as of ~~June 27, 2020.~~September 26, 2020. The maximum leverage ratio under our credit agreement is 4.5x.

~~Index~~

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.

•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 provide~~has 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 ~~June 27,~~September 26, 2020 were as follows:

•The COVID-19 pandemic and ensuing government restrictions resulted in the temporary closure of 47% of our retail stores on average during the three months ended June 27, 2020. We took 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.

•~~As of June 27, 2020, more than 95% of our stores were open.~~

•Net sales for the three months ended ~~June 27,~~September 26, 2020 ~~decreased 20%~~increased 12% to ~~$285~~$531 million, compared with ~~$356~~$475 million for the same period one year ago.

•The ~~20%~~12% net sales ~~decrease was due to a 21%~~increase included an 11% comparable sales ~~decrease~~increase in Total Retail, ~~partially offset by~~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.

•Sales per store (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 ~~June 27,~~September 26, 2020 totaled ~~$2.8~~$2.9 million, 1%2% higher than the same period last year.

•~~As part~~Operating income for the three months ended September 26, 2020 was $70 million, an increase of $30 million, or 78%, compared with $39 million in the prior-year period. The $30 million increase in operating income resulted from the 12% increase in net sales, a 0.7 ppt. increase in our ~~efforts~~gross profit rate and 4.2 ppt. reduction in our operating expenses rate.

•The 0.7 ppt. gross profit rate increase was primarily due to ~~navigate~~leverage from the 12% net sales increase, including the associated operational and logistics efficiencies.

•The 4.2 ppt. reduction in our operating expense rate resulted 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, ~~we reduced operating expenses 17%, or $35 million, to $175 million, compared with $210 million in the prior-year period~~ while continuing to support our innovation initiatives.

•~~Operating loss for the three months ended June 27, 2020 was $12 million, a decrease of $19 million, compared with operating income of $7 million in the prior-year period.~~

•The operating loss for the three months ended June 27, 2020 resulted from the 20% decrease in net sales and a 3.8 ppt. decrease in the gross profit rate. The 3.8 ppt. gross profit rate decrease was primarily due to two factors: (i) an unfavorable sales mix of lower-margin products driven primarily by an increase to 28% of sales from online, phone and chat compared with 7% in the prior-year period; and (ii) deleverage from the 20% net sales decrease, including the associated operational inefficiencies.

•During the three months ended ~~June 27,~~September 26, 2020, we continued to prioritize investments in near- and long-term growth drivers, including ~~$8.3~~$9.6 million of R&D expenses that support our innovation strategy. In addition, during the three months ended June 27, 2020, we purchased a patent portfolio to further strengthen our competitive position related to the cooling and heating of beds and bedding.expenses.

~~Index~~

•Net ~~loss~~income for the three months ended ~~June 27,~~September 26, 2020 ~~was $13~~increased by 83% to $51 million, compared with net income of $4$28 million for the same period one year ago. Net ~~loss~~income per diluted share was ~~$0.45,~~$1.79, a 90% increase compared with net income per diluted share of ~~$0.14~~$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.

•Cash provided by operating activities for the ~~six~~nine months ended ~~June 27,~~September 26, 2020 increased by ~~$17~~$97 million, or ~~24%~~51%, to ~~$87~~$287 million, compared with ~~$70~~$190 million for the same period one year ago.

•~~Cash and cash equivalents at June 27, 2020 totaled $2 million.~~ At ~~June 27,~~September 26, 2020, we had ~~$227~~$34 million of borrowings under our credit ~~facility, including the $75 million 364-day term loan which we added on April 3, 2020.~~facility. Net liquidity available under our credit facility was ~~$294~~$413 million at ~~June 27, 2020.~~September 26, 2020.

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 Ended														Six Months Ended																Three Months Ended					Nine Months Ended
		June 27, 2020						June 29, 2019						June 27, 2020								June 29, 2019						September 26, 2020						September 28, 2019		September 26, 2020	September 28, 2019
Net sales	Net sales	$	284.9	100.0	%	$	356.0	100.0	%	$	757.5	100.0	%	$	782.4	100.0	%	Net sales	$	531.2	100.0		%	$	474.8	100.0	%	$	1,288.7	100.0	%	$	1,257.2	100.0	%
Cost of sales	Cost of sales	121.9		42.8	%	138.8		39.0	%	292.4		38.6	%	303.0		38.7	%	Cost of sales	196.2		36.9		%	178.4		37.6	%	488.6		37.9	%	481.4		38.3	%
Gross profit	Gross profit	163.0		57.2	%	217.2		61.0	%	465.1		61.4	%	479.4		61.3	%	Gross profit	335.0		63.1		%	296.4		62.4	%	800.1		62.1	%	775.8		61.7	%
Operating expenses:	Operating expenses:																	Operating expenses:
Sales and marketing	Sales and marketing	130.2		45.7	%	168.8		47.4	%	337.9		44.6	%	355.7		45.5	%	Sales and marketing	211.6		39.8		%	213.1		44.9	%	549.5		42.6	%	568.8		45.2	%
General and administrative	General and administrative	36.7		12.9	%	33.0		9.3	%	67.8		8.9	%	67.4		8.6	%	General and administrative	44.1		8.3		%	35.1		7.4	%	111.9		8.7	%	102.5		8.2	%
Research and development	Research and development	8.3		2.9	%	8.1		2.3	%	18.8		2.5	%	16.4		2.1	%	Research and development	9.6		1.8		%	9.0		1.9	%	28.4		2.2	%	25.4		2.0	%
Total operating expenses	Total operating expenses	175.1		61.5	%	209.9		59.0	%	424.5		56.0	%	439.5		56.2	%	Total operating expenses	265.3		50.0		%	257.2		54.2	%	689.8		53.5	%	696.7		55.4	%
Operating (loss) income		(12.1)		(4.3	%)	7.2		2.0	%	40.7		5.4	%	40.0		5.1	%
Operating income																		Operating income	69.6		13.1		%	39.2		8.2	%	110.3		8.6	%	79.1		6.3	%
Interest expense, net	Interest expense, net	3.9		1.4	%	3.2		0.9	%	6.3		0.8	%	5.8		0.7	%	Interest expense, net	1.8		0.3		%	3.1		0.7	%	8.1		0.6	%	9.0		0.7	%
(Loss) income before income taxes		(16.1)		(5.6	%)	4.0		1.1	%	34.4		4.5	%	34.1		4.4	%
Income tax (benefit) expense		(3.4)		(1.2	%)	(0.3)		(0.1	%)	7.9		1.0	%	4.4		0.6	%
Net (loss) income		$	(12.6)	(4.4	%)	$	4.3	1.2	%	$	26.5	3.5	%	$	29.7	3.8	%
Income before income taxes																		Income before income taxes	67.8		12.8		%	36.0		7.6	%	102.2		7.9	%	70.1		5.6	%
Income tax expense																		Income tax expense	16.5		3.1		%	8.0		1.7	%	24.4		1.9	%	12.4		1.0	%
Net income																		Net income	$	51.3	9.7		%	$	28.1	5.9	%	$	77.8	6.0	%	$	57.8	4.6	%

Net (loss) income per share:
Net income per share:																		Net income per share:
Basic	Basic	$	(0.45)			$	0.14			$	0.95			$	0.98			Basic	$	1.83				$	0.96			$	2.79			$	1.93
Diluted	Diluted	$	(0.45)			$	0.14			$	0.93			$	0.95			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:
Basic	Basic	27.9				29.9				27.9				30.2				Basic	28.0					29.1				27.9				29.9
Diluted	Diluted	27.9				30.5				28.5				31.1				Diluted	28.6					29.8				28.6				30.7

The percentage of our total net sales, by dollar volume, was as follows:


		Three Months Ended						Six Months Ended							Three Months Ended				Nine Months Ended
		June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019			September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Total Retail	Total Retail	99.7	%	99.3	%	99.7	%	99.1	%	Total Retail	99.7	%	99.5	%	99.7	%	99.3	%
Wholesale/Other	Wholesale/Other	0.3	%	0.7	%	0.3	%	0.9	%	Wholesale/Other	0.3	%	0.5	%	0.3	%	0.7	%
Total Company	Total Company	100.0	%	100.0	%	100.0	%	100.0	%	Total Company	100.0	%	100.0	%	100.0	%	100.0	%

~~Index~~

The components of total net sales change, including comparable net sales changes, were as follows:


		Three Months Ended						Six Months Ended							Three Months Ended				Nine Months Ended
		June 27, 2020		June 29, 2019		June 27, 2020		June 29, 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⁾	(40	%)	9	%	(14	%)	7	%	Retail comparable-store sales ⁽¹⁾	2	%	9	%	(8	%)	7	%
Online and phone	Online and phone	209	%	2	%	107	%	4	%	Online and phone	111	%	20	%	109	%	10	%
Total Retail comparable sales change ⁽¹⁾	Total Retail comparable sales change ⁽¹⁾	(21	%)	8	%	(5	%)	7	%	Total Retail comparable sales change ⁽¹⁾	11	%	10	%	1	%	8	%
Net opened/closed stores	Net opened/closed stores	1	%	5	%	2	%	4	%	Net opened/closed stores	1	%	4	%	2	%	5	%
Total Retail	Total Retail	(20	%)	13	%	(3	%)	11	%	Total Retail	12	%	14	%	3	%	13	%
Wholesale/Other	Wholesale/Other	(72	%)	(44	%)	(71	%)	(23	%)	Wholesale/Other	(28	%)	8	%	(60	%)	(17	%)
Total Company net sales change	Total Company net sales change	(20	%)	13	%	(3	%)	11	%	Total Company net sales change	12	%	14	%	3	%	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 Ended								Six Months Ended									Three Months Ended				Nine Months Ended
		June 27, 2020			June 29, 2019			June 27, 2020		June 29, 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)	$	2,830		$	2,800						Average sales per store ⁽¹⁾ ($ in thousands)	$	2,920		$	2,858
Average sales per square foot ⁽¹⁾	Average sales per square foot ⁽¹⁾	$	988		$	1,015						Average sales per square foot ⁽¹⁾	$	1,012		$	1,029
Stores > $2 million in net sales ⁽²⁾	Stores > $2 million in net sales ⁽²⁾	63		%	69		%					Stores > $2 million in net sales ⁽²⁾	64		%	70		%
Stores > $3 million in net sales ⁽²⁾	Stores > $3 million in net sales ⁽²⁾	25		%	28		%					Stores > $3 million in net sales ⁽²⁾	26		%	28		%
Average revenue per mattress unit ⁽³⁾	Average revenue per mattress unit ⁽³⁾	$	4,767		$	4,945		$	4,839	$	4,868	Average revenue per mattress unit ⁽³⁾	$	4,802		$	4,788		$	4,824	$	4,837

___________________________

⁽¹⁾Trailing-twelve months Total Retail comparable sales per store open at least one year.

⁽²⁾Trailing-twelve months for stores open at least one year (excludes online and phone sales).

⁽³⁾Represents Total Retail net sales divided by Total Retail mattress units.

The number of retail stores operating was as follows:


		Three Months Ended			Six Months Ended				Three Months Ended		Nine Months Ended
		June 27, 2020	June 29, 2019	June 27, 2020	June 29, 2019		September 26, 2020	September 28, 2019	September 26, 2020	September 28, 2019
Beginning of period	Beginning of period	611	585	611	579	Beginning of period	598	594	611	579
Opened	Opened	6	17	14	32	Opened	6	15	20	47
Closed	Closed	(19)	(8)	(27)	(17)	Closed	(8)	(7)	(35)	(24)
End of period	End of period	598	594	598	594	End of period	596	602	596	602

~~Index~~

Comparison of Three Months Ended ~~June 27,~~September 26, 2020 with Three Months Ended ~~June 29,~~September 28, 2019

Net sales

Net sales for the three months ended ~~June 27,~~September 26, 2020 ~~decreased~~increased by ~~$71~~$56 million, or ~~20%~~12%, to ~~$285~~$531 million, compared with ~~$356~~$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.

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 resulted in the temporary closure of ~~47%~~most of our retail stores starting in mid-March, with 47% of our stores closed on average during the three months ended June 27, 2020. ~~More than 95%~~Approximately 98% of our stores were open ~~as of June 27,~~on average during the three months ended September 26, 2020. For additional details, see "COVID-19 Pandemic - Impact on our Business" above.

The ~~20%~~3% net sales ~~decrease~~increase consisted of a ~~21%~~1% comparable sales ~~decrease~~increase in Total Retail ~~partially offset by 1~~in addition to 2 percentage ~~point~~points (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.

The ~~$71~~$31 million net sales ~~decrease~~increase compared with the same period one year ago was comprised of the following: (i) ~~a $70~~an $8 million ~~decrease~~increase in our Total Retail comparable net sales; ~~and~~ (ii) a ~~$2 million decrease in Wholesale/Other sales; partially offset by (iii) a $1~~$29 million increase resulting from net store ~~openings.~~openings; partially offset by (iii) a $6 million decrease in Wholesale/Other sales. Total Retail mattress unit sales ~~decreased 17%~~increased 3%, compared with the prior year. ~~Total Retail average~~Average revenue per mattress unit in Total Retail was ~~$4,767, a 4% decrease~~$4,824, compared with ~~$4,945~~$4,837 in the prior-year period.

Gross profit

Gross profit of ~~$163~~$800 million ~~decreased~~increased by ~~$54~~$24 million, or ~~25%~~3%, compared with ~~$217~~$776 million for the same period one year ago. The gross profit rate ~~decreased to 57.2%~~was 62.1% of net sales for the ~~three~~nine months ended ~~June 27,~~September 26, 2020, compared with ~~61.0%~~61.7% for the prior-year comparable period. The current-year gross profit rate ~~decrease~~improvement of ~~3.8~~0.4 ppt. was mainly due to ~~two factors that resulted~~the leverage from our first quarter and third quarter net sales growth, including associated operational and logistics efficiencies, partially offset by a reduction in our gross profit rate during the second quarter of 2020 due to the pandemic's disruption on our business: (i) an unfavorable sales mix of lower-margin products (2.6 ppt.) driven primarily by an increase to 28% of net sales generated from online, phone and chat compared with 7% in the prior-year period (for the six months ended June 27, 2020, 15% of net sales were generated from online, phone and chat compared with 7% in the prior-year period); and (ii) deleverage from the 20% net sales decrease, including the associated operational inefficiencies (1.2 ppt.).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 ~~three~~nine months ended ~~June 27,~~September 26, 2020 were ~~$130~~$549 million, or ~~45.7%~~42.6% of net sales, compared with ~~$169~~$569 million, or ~~47.4%~~45.2% of net sales, for the same period one year ago. The ~~$39~~$19 million decrease was primarily due to the decisive actions ~~we took~~taken in April 2020 to manage expenses in response to the COVID-19 pandemic and the ensuing government restrictions that resulted in the temporary closure of most of our ~~stores.~~stores during the second quarter. These actions ~~included reducing~~resulted in lower payroll costs mainly due to furloughs and reduced team members' hours, and a 2% reduction in media expenses ~~by 34%~~ compared with the same period last year ~~and controlling payroll costs via furloughs and reduced team members' hours.~~(6% increase in media expenses for the three months ended September 26, 2020). The sales and marketing ~~expense~~expenses rate decreased by ~~1.7~~2.6 ppt. in the current-year period, compared with the same period one year ago due to the items discussed ~~above; partially offset by~~above and the ~~deleveraging~~leveraging impact of the ~~20%~~3% net sales ~~decrease.~~increase.

General and administrative expenses

General and administrative (G&A) expenses totaled ~~$37~~$112 million, or ~~12.9%~~8.7% of net sales, for the ~~three~~nine months ended ~~June 27,~~September 26, 2020, compared with ~~$33~~$102 million, or ~~9.3%~~8.2% of net sales, in the prior-year period. The ~~$3.7~~$9 million increase in G&A expenses consisted ~~primarily~~ of: (i) a ~~$5.0~~$9 million increase in ~~broad-participation~~employee compensation primarily resulting from a year-over-year increase in company-wide performance-based incentive compensation (in the first quarter of 2020 no performance-based company-wide incentive compensation expense was recorded based on the expected impact the pandemic would have on our 2020 financial performance);compensation; and (ii) ~~) $1.0~~$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 ~~$2.3~~$1 million decrease in travel expenses, professional fees and other miscellaneous expenses. The G&A ~~expense~~expenses rate increased by ~~3.6~~0.5 ppt. in the current-year period, compared with the same period one year ago due to the ~~items discussed~~increased expenses discuss above, ~~and by the deleveraging impact of the 20% net sales decrease.~~

~~Research and development expenses~~

Research and development (R&D) expenses increased to $8.3 million for the three months ended June 27, 2020, compared with $8.1 million for the same period last year as we continued to prioritize our long-term innovation initiatives. The R&D expense rate for the three months ended June 27, 2020 increased to 2.9% of net sales, compared with 2.3% of net sales for the prior year due to the deleveraging impact of the 20% net sales decrease.

~~Index~~

~~Interest expense, net~~

Interest expense, net increased to $3.9 million for the three months ended June 27, 2020, compared with $3.2 million for the same period one year ago. The $0.7 million increase was mainly driven by a higher level of outstanding borrowings during the three months ended June 27, 2020, compared with the same period one year ago.

~~Income tax expense~~

Income tax benefit totaled $3.4 million for the three months ended June 27, 2020, compared with $0.3 million last year. The effective income tax rate for the three months ended June 27, 2020 was 21.4%, compared with -6.5% for the comparable period last year, reflecting higher stock-based compensation excess tax benefits in the prior-year period.

~~Comparison of Six Months Ended June 27, 2020 with Six Months Ended June 29, 2019~~

~~Net sales~~

Net sales for the six months ended June 27, 2020 decreased by $25 million, or 3%, to $758 million, compared with $782 million for the same period one year ago. The COVID-19 pandemic and ensuing government restrictions resulted in the temporary closure of most of our retail stores starting in mid-March, with 47% of our stores closed on average during the three months ended June 27, 2020. More than 95% of our stores were open as of June 27, 2020. For additional details, see "COVID-19 Pandemic - Impact on our Business" above.

The 3% net sales decrease consisted of a 5% comparable sales decrease in Total Retail partially offset by 2 percentage points (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.

The $25 million net sales decrease compared with the same period one year ago was comprised of the following: (i) a $40 million decrease in our Total Retail comparable net sales; and (ii) a $5 million decrease in Wholesale/Other channel sales; partially offset by (iii) a $20 million increase resulting from net store openings. Total Retail mattress unit sales decreased 2%, compared with the prior year. Average revenue per mattress unit in Total Retail was $4,839, a 1% decrease, compared with $4,868 in the prior-year period.

~~Gross profit~~

Gross profit of $465 million decreased by $14 million, or 3%, compared with $479 million for the same period one year ago. The gross profit rate was 61.4% of net sales for the six months ended June 27, 2020, compared with 61.3% for the prior-year comparable period. The current-year gross profit rate was relatively consistent with the prior year as the gross profit rate improvement realized in the first quarter of 2020 was essentially offset by a reduction in the gross profit rate during the second quarter of 2020 due to the pandemic's disruption on our business (see Gross profit discussion above under Comparison of the Three Months ended June 27, 2020). 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 six months ended June 27, 2020 were $338 million, or 44.6% of net sales, compared with $356 million, or 45.5% of net sales, for the same period one year ago. The $18 million decrease was primarily due to the decisive actions we took to manage expenses in response to the COVID-19 pandemic and the ensuing government restrictions that resulted in the temporary closure of most of our stores. These actions resulted in a 7% reduction in media expenses compared with the same period last year (34% reduction in media expenses for the three months ended June 27, 2020) and lower payroll costs due to furloughs and reduced team members' hours. The sales and marketing expense rate decreased 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 ~~deleveraging~~leveraging impact of the 3% net sales ~~decrease.~~increase.

~~General and administrative expenses~~

General and administrative (G&A) expenses totaled $68 million, or 8.9% of net sales, for the six months ended June 27, 2020, compared with $67 million, or 8.6% of net sales, in the prior-year period. The $0.4 million increase in G&A expenses was primarily due to a net increase severance charges recorded in the second quarter arising in response to the COVID-19 pandemic. Team members' compensation expense was consistent on a year-over-year basis. The G&A expense rate increased by 0.3 ppt. in the current-year period, compared with the same period one year ago due to the deleveraging impact of the 3% net sales decrease.

~~Index~~

Research and development expenses

Research and development (R&D) expenses increased by ~~14%~~12% to ~~$19~~$28 million for the ~~six~~nine months ended ~~June 27,~~September 26, 2020, compared with ~~$16~~$25 million for the same period one year ago. The R&D expense rate for the ~~six~~nine months ended ~~June 27,~~September 26, 2020 increased to ~~2.5%~~2.2% of net sales, compared with ~~2.1%~~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 ~~increased~~decreased to ~~$6.3~~$8.1 million for the ~~six~~nine months ended ~~June 27,~~September 26, 2020, compared with ~~$5.8~~$9.0 million for the same period one year ago. The ~~$0.4~~$0.9 million ~~increase~~decrease was ~~mainly~~ driven by ~~an increase~~a reduction in the ~~average~~weighted-average interest rate on borrowings ~~outstanding~~ during the ~~six~~nine months ended ~~June 27,~~September 26, 2020, compared with the same period one year ago.

Income tax expense

Income tax expense totaled ~~$7.9~~$24 million for the ~~six~~nine months ended ~~June 27,~~September 26, 2020, compared with ~~$4.4~~$12 million last year. The effective income tax rate for the ~~six~~nine months ended ~~June 27,~~September 26, 2020 was ~~22.9%~~23.8%, compared with ~~12.9%~~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 over time. The COVID-19 pandemic and ensuing government restrictions ~~have~~ resulted in the temporary closure of most of our retail stores ~~since~~in mid-March, with 47% of our retail stores on average closed during the three months ended June 27, 2020. ~~More than 95%~~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 ~~as of June 27,~~on average during the three months ended September 26, 2020. ~~We took the~~The following ~~decisive~~ actions were taken to manage liquidity and capital resources ~~through~~at the ~~challenging economic environment caused by~~onset 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 ~~April 3,~~September 24, 2020, we ~~added a~~repaid the $75 million, 364-day term loan we added under our credit agreement for a total commitment amount of $525 million, with another $75 million available under our accordion (subject to lenders' approval). We secured an initial interest rate of approximately 3.27%, which was equal to the one-month LIBOR rate plus the applicable margin based on ~~the then-current total leverage ratio. No financial covenants were amended.~~

•April 3, 2020. The $75 million term loan ~~provides~~provided increased liquidity and ~~preserves~~preserved financial flexibility in consideration of the disruption and uncertainty resulting from the COVID-19 pandemic. ~~Proceeds may be used in~~On September 24, 2020, we repaid the ~~future for working capital~~$75 million term loan. On October 5, 2020, we amended the credit agreement to remove the share repurchase restriction and ~~other general corporate purposes as permitted by~~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 ~~$294~~$413 million at ~~June 27, 2020.~~September 26, 2020.

•~~On April 8, 2020, we announced additional efforts to preserve cash and manage expenses in response to the COVID-19 pandemic including, among other things, discontinuing~~We resumed share repurchases under our Board-approved share repurchase program in October 2020, after it was temporarily ~~reducing~~discontinued along with reduced capital expenditures ~~and negotiating~~in response to COVID-19. We also expect to return to a normalized amount of capital spending going forward.

•We negotiated rent deferrals and abatements for stores closed due to COVID-19.

•We furloughed nearly 40% of our team members with another 30% working reduced hours. The majority of our team members returned to work as stores reopened and customer demand ~~increased during the quarter.~~increased. In response to changes in the business, we have restructured some teams, which resulted in ~~less than~~approximately 10% of positions being eliminated from across the country as we reallocated headcount to support the changing needs of our business.

•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 most of our leadership team reduced their cash compensation in exchange for restricted stock units. All team members’ cash compensation has been meaningfully reduced to-date through variable compensation programs and other actions. We ~~are~~ temporarily ~~suspending~~suspended 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 halting~~ most 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 cash flows provided by operating activities and cash available under our $450 million revolving credit ~~facility, supplemented by the $75 million 364-day term loan we added on April 3, 2020.~~facility. The cash generated from ongoing operations and cash available under our revolving credit facility 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 ~~six~~nine months ended ~~June 27,~~September 26, 2020 primarily consisted of ~~$87~~$287 million of cash provided by operating activities, ~~that were partially~~ offset by ~~$22~~$28 million of cash used to purchase property and equipment, a ~~$26~~$221 million decrease in short-term borrowings and $42 million of cash used to repurchase our common stock (based on settlement, $39 million under our Board-approved share repurchase program and $3 million in connection with the vesting of employee restricted stock grants).

~~Index~~

The following table summarizes our cash flows ($ in millions). Amounts may not add due to rounding differences:


		Six Months Ended							Nine Months Ended
		June 27, 2020		June 29, 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 activities	Operating activities	$	87.0	$	70.3	Operating activities	$	287.3	$	189.8
Investing activities	Investing activities	(22.6)		(31.3)		Investing activities	(29.0)		(44.2)
Financing activities	Financing activities	(64.3)		(39.0)		Financing activities	(258.5)		(145.7)
Net increase in cash and cash equivalents		$	0.1	$	0.1
Net decrease in cash and cash equivalents						Net decrease in cash and cash equivalents	$	(0.2)	$	(0.1)

Cash provided by operating activities for the ~~six~~nine months ended ~~June 27,~~September 26, 2020 was ~~$87~~$287 million, compared with ~~$70~~$190 million for the ~~six~~nine months ended ~~June 27,~~September 28, 2019. Significant components of the year-over-year change in cash provided by operating activities included: (i) a $3$20 million ~~decrease~~increase in net income for the ~~six~~nine months ended ~~June 27,~~September 26, 2020, compared with the same period one year ago; (ii) a $27 million fluctuation in accounts payable resulting from a reduction in business activities due to the pandemic; (iii) a $16 million fluctuation in prepaid expenses and other assets with both periods impacted by the timing of rent payments and current-year changes in business activities due to the pandemic; (iv) a $14$28 million fluctuation in customer prepayments due to the strong recovery in customer demand during the ~~last two~~three months ~~of the quarter~~ended September 26, 2020 that outperformed forecasts and suppliers' fulfillment, which had been curtailed to navigate the challenges of 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 due to both periods being impacted by the timing of rent payments and the current-year changes in business activities due to the pandemic; and (v) a $12 million fluctuation in ~~income taxes payable/~~accounts receivable ~~as our final 2019 estimated tax payment was deferred from April 15, 2020 to July 15, 2020~~ based on ~~an Internal Revenue Service postponement action.~~strong sales growth during the three months ended September 26, 2020.

Net cash used in investing activities to purchase property and equipment was ~~$22~~$28 million for the ~~six~~nine months ended ~~June 27,~~September 26, 2020, compared with ~~$34~~$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 economic uncertainties associated with the pandemic.

Net cash used in financing activities was ~~$64~~$259 million for the ~~six~~nine months ended ~~June 27,~~September 26, 2020, compared with ~~$39~~$146 million ~~net cash used in investing activities~~ for the same period ~~one year ago.~~last year. During the ~~six~~nine months ended ~~June 27,~~September 26, 2020, we repurchased $42 million of our stock (based on settlement dates, $39 million under our Board-approved share repurchase program and $3 million in connection with the vesting of employee restricted stock awards), compared with ~~$100~~$139 million during the same period one year ago. Short-term borrowings decreased by ~~$26~~$221 million during the current-year period due to a $4$198 million decrease in borrowings under our revolving credit facility to ~~$227~~$34 million and a decrease in book overdrafts which are included in the net change in short-term borrowings. Short-term borrowings ~~increased~~were reduced by ~~$57~~$11 million during the prior-year period due to ~~an $82~~a decrease in book overdrafts, partially offset by a $14 million increase in borrowings under our credit facility to ~~$282 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 ~~six~~nine months ended ~~June 27,~~September 26, 2020. During the ~~six~~nine months ended ~~June 29,~~September 28, 2019, we repurchased ~~2.1~~3.0 million shares at a cost of ~~$81~~$121 million (an average of ~~$39.02~~$40.19 per share). The remaining authorization under our Board-approved share repurchase program at ~~June 27,~~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 ~~have~~temporarily suspended all share repurchases under our Board-approved share repurchase program. We resumed share repurchases in October 2020.

As of ~~June 27,~~September 26, 2020, we had ~~$227~~$34 million of borrowings under our revolving credit ~~facility, including the $75 million 364-day term loan that we added on April 3, 2020.~~facility. We also had $4 million in outstanding letters of credit. Net liquidity available under our credit facility was ~~$294~~$413 million at ~~June 27, 2020.~~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 ~~2.8x~~1.9x as of ~~June 27, 2020.~~ 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 agreement is for general corporate purposes and to meet our seasonal working capital requirements. As of ~~June 27,~~September 26, 2020, the weighted-average interest rate on borrowings under the credit facility was ~~3.0%~~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 ~~June 27,~~September 26, 2020, we were in compliance with all financial covenants.

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.

~~Index~~

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.

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
		June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019			September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Net (loss) income		$	(12,630)	$	4,280	$	78,657	$	74,945
Income tax (benefit) expense		(3,435)		(263)		22,141		18,682
Net income										Net income	$	51,320	$	28,054	$	101,923	$	84,742
Income tax expense										Income tax expense	16,468		7,967		30,642		21,421
Interest expense	Interest expense	4,022		3,229		12,131		9,769		Interest expense	1,829		3,131		10,829		11,064
Depreciation and amortization	Depreciation and amortization	15,253		15,328		60,951		61,675		Depreciation and amortization	15,083		14,963		61,071		61,155
Stock-based compensation	Stock-based compensation	5,033		4,250		15,853		12,558		Stock-based compensation	8,470		4,146		20,177		13,348
Asset impairments	Asset impairments	246		1		294		151		Asset impairments	11		29		276		150
Adjusted EBITDA	Adjusted EBITDA	$	8,489	$	26,825	$	190,027	$	177,780	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):


		Six Months Ended						Trailing-Twelve Months Ended							Nine Months Ended				Trailing-Twelve Months Ended
		June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019			September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Net cash provided by operating activities	Net cash provided by operating activities	$	87,001	$	70,347	$	205,814	$	172,756	Net cash provided by operating activities	$	287,282	$	189,832	$	286,610	$	186,922
Subtract: Purchases of property and equipment	Subtract: Purchases of property and equipment	21,695		33,896		47,038		58,070		Subtract: Purchases of property and equipment	28,074		46,757		40,556		58,260
Free cash flow	Free cash flow	$	65,306	$	36,451	$	158,776	$	114,686	Free cash flow	$	259,208	$	143,075	$	246,054	$	128,662

Index

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
		June 27, 2020			June 29, 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 income	Operating income	$	112,831		$	103,393		Operating income	$	143,295		$	117,224
Add: Rent expense ⁽¹⁾	Add: Rent expense ⁽¹⁾	90,349			84,210			Add: Rent expense ⁽¹⁾	91,142			85,807
Add: Interest income	Add: Interest income	97			4			Add: Interest income	97			4
Less: Depreciation on capitalized operating leases ⁽²⁾	Less: Depreciation on capitalized operating leases ⁽²⁾	(23,331)			(21,310)			Less: Depreciation on capitalized operating leases ⁽²⁾	(23,700)			(21,821)
Less: Income taxes ⁽³⁾	Less: Income taxes ⁽³⁾	(42,735)			(40,319)			Less: Income taxes ⁽³⁾	(50,584)			(44,298)
NOPAT	NOPAT	$	137,211		$	125,978		NOPAT	$	160,250		$	136,916
Average invested capital	Average invested capital							Average invested capital
Total deficit	Total deficit	$	(163,018)		$	(157,302)		Total deficit	$	(102,827)		$	(164,487)

Add: Long-term debt ⁽⁴⁾	Add: Long-term debt ⁽⁴⁾	227,944			282,308			Add: Long-term debt ⁽⁴⁾	34,177			214,482
Add: Capitalized operating lease obligations ⁽⁵⁾	Add: Capitalized operating lease obligations ⁽⁵⁾	722,792			673,680			Add: Capitalized operating lease obligations ⁽⁵⁾	729,136			686,456
Total invested capital at end of period	Total invested capital at end of period	$	787,718		$	798,686		Total invested capital at end of period	$	660,486		$	736,451
Average invested capital ⁽⁶⁾	Average invested capital ⁽⁶⁾	$	797,862		$	750,375		Average invested capital ⁽⁶⁾	$	770,197		$	743,271
Return on invested capital (ROIC) ⁽⁷⁾	Return on invested capital (ROIC) ⁽⁷⁾	17.2		%	16.8		%	Return on invested capital (ROIC) ⁽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 5) for the respective reporting periods with an assumed thirty-year useful life. This life assumption is based on our long-term participation in given markets though specific retail location lease commitments are generally 5 to 10 years at inception. This is subtracted from operating income to illustrate the impact of owning versus leasing the related assets.

⁽³⁾Reflects annual effective income tax rates, before discrete adjustments, of ~~23.7%~~24.0% and ~~24.2%~~24.4% for 2020 and 2019, respectively.

⁽⁴⁾Long-term debt includes existing finance lease liabilities.

⁽⁵⁾A multiple of eight times annual rent expense is used as an estimate for capitalizing our operating lease obligations. The methodology utilized aligns with the methodology of a nationally recognized credit rating agency.

⁽⁶⁾Average invested capital represents the average of the last five fiscal quarters' ending invested capital balances.

⁽⁷⁾ROIC equals NOPAT divided by average invested capital.

Note - Our ROIC calculation and data are considered non-GAAP financial measures and are not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts.

GAAP - generally accepted accounting principles in the U.S.

Off-Balance-Sheet Arrangements and Contractual Obligations

As of ~~June 27,~~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 ~~amendment~~amendments 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.

Description

Judgments and Uncertainties

Effect 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 ~~six~~nine months ended ~~June 27,~~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 ~~$1.7~~$0.3 million based on the ~~$227~~$34 million of borrowings under our credit facility at ~~June 27,~~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 ~~June 27,~~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

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 to~~may continue to have, an adverse effect on our business and our financial results.

The COVID-19 pandemic has created significant volatility, uncertainty and economic disruption, which ishas adversely ~~affecting~~affected our business operations and our financial results. Consumer 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 resulted in the temporary closure of the majority of our stores nationwide for a period of time between mid-March and mid-May. ~~As of June 27, 2020, more than 95%~~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 ~~begin~~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 temporary closures to our retail store locations across the country and our delivery operations adversely impacted, we ~~shifted to scale~~scaled 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 ~~employees~~team members working remotely has amplified certain risks to our

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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 ~~employees,~~team members, contractors, and customers who are unable to perform their roles or transact business remotely. The ~~company~~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 ~~employees,~~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 ~~employees,~~team members, even those who can work remotely, back to our facilities.

~~Index~~

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 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~~did and in some situations continue to take actions to maintain liquidity including:

•~~discontinuing~~in March, temporarily discontinued share repurchases under our Board-approved share repurchase ~~program;~~program, and in October 2020, resumed share repurchases;

•~~reducing~~temporarily reduced capital expenditures;

•~~negotiating~~negotiated rent deferrals and abatements for stores closed due to COVID-19;

•initially ~~furloughing~~furloughed nearly 40% of our team members and reducing the working hours of another 30% of our team members;

•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 ~~less than~~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 compensation~~temporarily 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;~~

•~~reducing~~reduced 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 ~~reducing~~reduced 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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foundations, particularly as a result of governmental mandates or recommendations. We expect that these impacts will continue through the ~~third quarter~~remainder of 2020, and may continue to impact our results ~~in the remainder of 2020 and beyond.~~into 2021.

Our temporary reduction of discretionary spending across the ~~company~~Company 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 depend on future developments, including the duration and spread of

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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.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) – (b) Not applicable.

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⁾
March 29, 2020 through April 25, 2020 14,468 $ 22.79 — $ 436,889,000
April 26, 2020 through May 23, 2020 — $ — — $ 436,889,000
May 24, 2020 through June 27, 2020 — $ — — $ 436,889,000
Total 14,468 $ 22.79 — $ 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, 2020	280	$	45.78	—	$	436,889,000
August 23, 2020 through September 26, 2020	2,815	$	48.09	—	$	436,889,000
Total	3,095	$	47.88	—	$	436,889,000

___________________________

⁽¹⁾We did not repurchase any shares under our Board-approved $500 million share repurchase program (effective September 29, 2019), during the three months ended ~~June 27,~~September 26, 2020.

⁽²⁾In connection with the vesting of employee restricted stock grants, we repurchased ~~14,468~~3,095 shares of our common stock at a cost of ~~$0.3~~$0.1 million during the three months ended ~~June 27,~~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 ~~have~~temporarily 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.

Index

ITEM 6. EXHIBITS


Exhibit Number						Description
10.1*						~~Form~~Third Amendment to Amended and Restated Credit and Security Agreement, dated as of ~~Non-Statutory~~ ~~Stock Option~~ ~~Award~~ ~~Agreement~~ ~~(Non-Employee Director)underthe~~July 30, 2020 among Sleep Number Corporation, ~~2020 Equity Incentive Plan~~U.S. Bank National Association and the several banks and other financial institutions from time to time party thereto
10.2*						~~Form~~Fourth Amendment to Amended and Restated Credit and Security Agreement, dated as of ~~of Restricted Stock Unit~~October 5, ~~Award Agreement~~ ~~(Non-EmployeeDirector)under the~~2020 among Sleep Number Corporation, ~~2020 Equity Incentive Plan~~
10.3*						~~Form of Non-Statutory~~ ~~Stock Option~~ ~~Award~~ ~~Agreement~~ ~~(Employee)under~~U.S. Bank National Association and the ~~Sleep Number Corporation 2020 Incentive Plan~~
10.4*						~~Form of Performance Adjusted Restricted~~ ~~Stock~~ ~~Unit Award~~ ~~Agreement~~ ~~(ROIC)(Senior Team) under the Sleep Number Corporation 2020 Equity Incentive Plan~~
10.5*						~~Form of Restricted~~ ~~Stock~~ ~~Unit Award~~ ~~Agreement~~ ~~(3-YearRatable Vest) under the Sleep Number Corporation 2020 Equity Incentive Plan~~
10.6*						~~Form of RestrictedStock Unity~~ ~~Award Agreement~~ ~~(3-YearCliffVest)under the Sleep Number Corporation2020Equity Incentive Plan~~
~~10.7~~						~~Sleep Number Corporation 2020 Equity Incentive Plan (incorporated by reference~~several banks and other financial institutions from time to ~~Exhibit 10.1 contained in Sleep Number's Current Report on Form 8-K filed May 13, 2020 (File No. 0-25121))~~time party thereto
31.1*						Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*						Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*						Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
32.2*						Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
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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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:

~~July 24,~~October 23, 2020

By:

/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)


			Page

PART I: FINANCIAL INFORMATION			1

Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Shareholders' Deficit	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24

PART II: OTHER INFORMATION			25

Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Mine Safety Disclosures	27
Item 5.	Other Information	27
Item 6.	Exhibits	28
SIGNATURES			29