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 ~~April~~July 2, 2022


☐			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 ☒ 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 ☒ 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 ☒

As of ~~April~~July 2, 2022, ~~22,232,000~~21,964,000 shares of the registrant’s Common Stock were outstanding.

Table of contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

INDEX


i \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

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)

April 2,
2022 January 1,
2022
Assets
Current assets:
Cash and cash equivalents $ 1,556 $ 2,389
Accounts receivable, net of allowances of $1,047 and $924, respectively 24,502 25,718
Inventories 103,212 105,644
Prepaid expenses 22,001 18,953
Other current assets 40,624 54,917
Total current assets 191,895 207,621
Non-current assets:
Property and equipment, net 197,644 195,128
Operating lease right-of-use assets 374,650 371,133
Goodwill and intangible assets, net 69,867 70,468
Other non-current assets 78,529 75,190
Total assets $ 912,585 $ 919,540
Liabilities and Shareholders’ Deficit
Current liabilities:
Borrowings under revolving credit facility $ 413,200 $ 382,500
Accounts payable 177,025 162,547
Customer prepayments 142,005 129,499
Accrued sales returns 20,277 22,368
Compensation and benefits 25,702 51,240
Taxes and withholding 26,293 22,087
Operating lease liabilities 74,046 72,360
Other current liabilities 59,390 64,177
Total current liabilities 937,938 906,778
Non-current liabilities:
Deferred income taxes 312 688
Operating lease liabilities 338,528 336,192
Other non-current liabilities 105,020 100,835
Total liabilities 1,381,798 1,344,493
Shareholders’ deficit:
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding — —
Common stock, $0.01 par value; 142,500 shares authorized, 22,232 and 22,683 shares issued and outstanding, respectively 222 227
Additional paid-in capital — 3,971
Accumulated deficit (469,435) (429,151)
Total shareholders’ deficit (469,213) (424,953)
Total liabilities and shareholders’ deficit $ 912,585 $ 919,540


	July 2, 2022		January 1, 2022
Assets
Current assets:
Cash and cash equivalents	$	2,279	$	2,389
Accounts receivable, net of allowances of $1,326 and $924, respectively	28,616		25,718
Inventories	121,318		105,644

Prepaid expenses	24,575		18,953
Other current assets	45,077		54,917
Total current assets	221,865		207,621

Non-current assets:
Property and equipment, net	196,888		195,128
Operating lease right-of-use assets	382,324		371,133
Goodwill and intangible assets, net	69,267		70,468
Deferred income taxes	3,106		—
Other non-current assets	76,637		75,190
Total assets	$	950,087	$	919,540

Liabilities and Shareholders’ Deficit
Current liabilities:
Borrowings under revolving credit facility	$	443,300	$	382,500
Accounts payable	167,213		162,547
Customer prepayments	114,745		129,499
Accrued sales returns	24,656		22,368
Compensation and benefits	33,274		51,240
Taxes and withholding	27,426		22,087
Operating lease liabilities	76,041		72,360
Other current liabilities	58,605		64,177
Total current liabilities	945,260		906,778

Non-current liabilities:
Deferred income taxes	—		688
Operating lease liabilities	344,475		336,192
Other non-current liabilities	103,314		100,835
Total liabilities	1,393,049		1,344,493

Shareholders’ deficit:
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding	—		—
Common stock, $0.01 par value; 142,500 shares authorized, 21,964 and 22,683 shares issued and outstanding, respectively	220		227
Additional paid-in capital	—		3,971
Accumulated deficit	(443,182)		(429,151)
Total shareholders’ deficit	(442,962)		(424,953)
Total liabilities and shareholders’ deficit	$	950,087	$	919,540

See accompanying notes to condensed consolidated financial statements.


1 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited - in thousands, except per share amounts)


		Three Months Ended				Three Months Ended				Six Months Ended
		April 2, 2022		April 3, 2021				July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Net sales	Net sales	$	527,130	$	568,256		Net sales	$	549,073	$	484,316	$	1,076,203	$	1,052,572
Cost of sales	Cost of sales	224,832		212,338			Cost of sales	224,128		191,465		448,960		403,803
Gross profit	Gross profit	302,298		355,918			Gross profit	324,945		292,851		627,243		648,769

Operating expenses:	Operating expenses:						Operating expenses:
Sales and marketing	Sales and marketing	240,259		223,617			Sales and marketing	220,490		205,994		460,749		429,611
General and administrative	General and administrative	41,319		42,592			General and administrative	38,727		41,220		80,046		83,812
Research and development	Research and development	16,305		13,286			Research and development	15,817		15,916		32,122		29,202
Total operating expenses	Total operating expenses	297,883		279,495			Total operating expenses	275,034		263,130		572,917		542,625
Operating income	Operating income	4,415		76,423			Operating income	49,911		29,721		54,326		106,144
Interest expense, net	Interest expense, net	2,127		977			Interest expense, net	3,619		1,607		5,746		2,584
Income before income taxes	Income before income taxes	2,288		75,446			Income before income taxes	46,292		28,114		48,580		103,560
Income tax expense	Income tax expense	214		8,812			Income tax expense	11,359		5,864		11,573		14,676
Net income	Net income	$	2,074	$	66,634		Net income	$	34,933	$	22,250	$	37,007	$	88,884

Basic net income per share:	Basic net income per share:						Basic net income per share:
Net income per share – basic	Net income per share – basic	$	0.09	$	2.63		Net income per share – basic	$	1.56	$	0.91	$	1.64	$	3.57
Weighted-average shares – basic	Weighted-average shares – basic	22,760		25,377			Weighted-average shares – basic	22,355		24,371		22,558		24,874

Diluted net income per share:	Diluted net income per share:						Diluted net income per share:
Net income per share – diluted	Net income per share – diluted	$	0.09	$	2.51		Net income per share – diluted	$	1.54	$	0.88	$	1.60	$	3.44
Weighted-average shares – diluted	Weighted-average shares – diluted	23,591		26,544			Weighted-average shares – diluted	22,713		25,194		23,152		25,869

See accompanying notes to condensed consolidated financial statements.


2 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Deficit

(unaudited - in thousands)


		Common Stock			Additional Paid-in Capital				Accumulated Deficit					Total			Common Stock							Additional Paid-in Capital		Accumulated Deficit		Total
		Shares	Amount										Shares					Amount
Balance at January 1, 2022	Balance at January 1, 2022	22,683	$	227			$	3,971			$	(429,151)					$	(424,953)	Balance at January 1, 2022	22,683			$		227	$	3,971	$	(429,151)	$	(424,953)
Net income																Net income	—				—			—		2,074		2,074
Exercise of common stock options																Exercise of common stock options	21				—			531		—		531
Stock-based compensation																Stock-based compensation	341				3			4,130		—		4,133
Repurchases of common stock																Repurchases of common stock	(813)				(8)			(8,632)		(42,358)		(50,998)
Balance at April 2, 2022																Balance at April 2, 2022	22,232				$	222		$	—	$	(469,435)	$	(469,213)
Net income	Net income	—	—		—				2,074					2,074		Net income	—				—			—		34,933		34,933
Exercise of common stock options	Exercise of common stock options	21	—		531				—					531		Exercise of common stock options	2				—			54		—		54
Stock-based compensation	Stock-based compensation	341	3		4,130				—					4,133		Stock-based compensation	26				1			3,909		—		3,910
Repurchases of common stock	Repurchases of common stock	(813)	(8)		(8,632)				(42,358)					(50,998)		Repurchases of common stock	(296)				(3)			(3,963)		(8,680)		(12,646)

Balance at April 2, 2022		22,232	$	222	$	—			$	(469,435)				$	(469,213)
Balance at July 2, 2022																Balance at July 2, 2022	21,964				$	220		$	—	$	(443,182)	$	(442,962)

Common Stock Additional
Paid-in
Capital Accumulated Deficit Total
Shares Amount
Balance at January 2, 2021 25,390 $ 254 $ — $ (224,232) $ (223,978)
Net income — — — 66,634 66,634
Exercise of common stock options 106 1 2,459 — 2,460
Stock-based compensation 314 3 6,413 — 6,416
Repurchases of common stock (1,346) (13) (8,872) (175,297) (184,182)
Balance at April 3, 2021 24,464 $ 245 $ — $ (332,895) $ (332,650)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total
	Shares	Amount
Balance at January 2, 2021	25,390	$	254	$	—	$	(224,232)	$	(223,978)
Net income	—	—		—		66,634		66,634
Exercise of common stock options	106	1		2,459		—		2,460
Stock-based compensation	314	3		6,413		—		6,416
Repurchases of common stock	(1,346)	(13)		(8,872)		(175,297)		(184,182)
Balance at April 3, 2021	24,464	$	245	$	—	$	(332,895)	$	(332,650)
Net income	—	—		—		22,250		22,250
Exercise of common stock options	35	—		1,075		—		1,075
Stock-based compensation	22	—		5,969		—		5,969
Repurchases of common stock	(899)	(9)		(7,044)		(93,249)		(100,302)





Balance at July 3, 2021	23,622	$	236	$	—	$	(403,894)	$	(403,658)

See accompanying notes to condensed consolidated financial statements.


3 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited - in thousands)


		Three Months Ended					Six Months Ended
		April 2, 2022		April 3, 2021			July 2, 2022		July 3, 2021
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	2,074	$	66,634	Net income	$	37,007	$	88,884
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	15,870		14,638		Depreciation and amortization	31,975		29,800
Stock-based compensation	Stock-based compensation	4,133		6,416		Stock-based compensation	8,043		12,385
Net loss on disposals and impairments of assets	Net loss on disposals and impairments of assets	93		78		Net loss on disposals and impairments of assets	179		78
Deferred income taxes	Deferred income taxes	(376)		1,515		Deferred income taxes	(3,794)		421
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable	Accounts receivable	1,216		5,948		Accounts receivable	(2,898)		8,666
Inventories	Inventories	2,432		(946)		Inventories	(15,674)		(7,215)
Income taxes	Income taxes	1,102		6,847		Income taxes	4,368		(11,625)
Prepaid expenses and other assets	Prepaid expenses and other assets	10,877		(3,113)		Prepaid expenses and other assets	6,266		(13,407)
Accounts payable	Accounts payable	2,073		12,390		Accounts payable	(1,713)		23,232
Customer prepayments	Customer prepayments	12,506		20,552		Customer prepayments	(14,754)		47,418
Accrued compensation and benefits	Accrued compensation and benefits	(25,348)		(34,605)		Accrued compensation and benefits	(17,789)		(22,387)
Other taxes and withholding	Other taxes and withholding	3,104		8,912		Other taxes and withholding	971		487
Other accruals and liabilities	Other accruals and liabilities	(5,198)		6,332		Other accruals and liabilities	(3,496)		4,683
Net cash provided by operating activities	Net cash provided by operating activities	24,558		111,598		Net cash provided by operating activities	28,691		161,420

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	(19,604)		(11,546)		Purchases of property and equipment	(36,559)		(32,012)
Proceeds from sales of property and equipment	Proceeds from sales of property and equipment	10		12		Proceeds from sales of property and equipment	23		12

Net cash used in investing activities	Net cash used in investing activities	(19,594)		(11,534)		Net cash used in investing activities	(36,536)		(32,000)

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Repurchases of common stock	Repurchases of common stock	(50,998)		(178,613)		Repurchases of common stock	(63,644)		(280,915)
Net increase in short-term borrowings	Net increase in short-term borrowings	44,712		74,087		Net increase in short-term borrowings	70,836		146,447
Proceeds from issuance of common stock	Proceeds from issuance of common stock	531		2,460		Proceeds from issuance of common stock	585		3,535
Debt issuance costs	Debt issuance costs	(42)		(3)		Debt issuance costs	(42)		(557)
Net cash used in financing activities		(5,797)		(102,069)
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	7,735		(131,490)

Net decrease in cash and cash equivalents	Net decrease in cash and cash equivalents	(833)		(2,005)		Net decrease in cash and cash equivalents	(110)		(2,070)
Cash and cash equivalents, at beginning of period	Cash and cash equivalents, at beginning of period	2,389		4,243		Cash and cash equivalents, at beginning of period	2,389		4,243
Cash and cash equivalents, at end of period	Cash and cash equivalents, at end of period	$	1,556	$	2,238	Cash and cash equivalents, at end of period	$	2,279	$	2,173

See accompanying notes to condensed consolidated financial statements.


4 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of Contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Business and Summary of Significant Accounting Policies

Business & Basis of Presentation

We prepared the condensed consolidated financial statements as of and for the three and six months ended ~~April~~July 2, 2022 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 ~~April~~July 2, 2022 and January 1, 2022, 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. In addition, based on the duration and severity of the current global situation involving the COVID-19 pandemic, the war in Ukraine, historic low consumer sentiment and other external factors, including but not limited to general economic conditions, inflation, consumer ~~confidence,~~sentiment, store restrictions mandated by federal, state or local authorities and global supply chain disruptions (especially disruptive supply and flow of semiconductor chips and other electronic components), the extent to which these external factors 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 January 1, 2022 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 external factors such as COVID-19, historic low consumer sentiment and the war in Ukraine, 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, 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.

2. Fair Value Measurements

At ~~April~~July 2, 2022 and January 1, 2022, we had ~~$18~~$17 million and $19 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 ~~$18~~$17 million and $19 million at ~~April~~July 2, 2022 and January 1, 2022, 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.


5 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of Contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

3. Inventories

Inventories consisted of the following (in thousands):


		April 2, 2022		January 1, 2022			July 2, 2022		January 1, 2022
Raw materials	Raw materials	$	11,257	$	11,752	Raw materials	$	7,501	$	11,752
Work in progress	Work in progress	68		83		Work in progress	76		83
Finished goods	Finished goods	91,887		93,809		Finished goods	113,741		93,809
		$	103,212	$	105,644		$	121,318	$	105,644

4. Goodwill and Intangible Assets, Net

Goodwill and Indefinite-lived Intangible Assets

Goodwill was $64 million at ~~April~~July 2, 2022 and January 1, 2022. Indefinite-lived trade name/trademarks totaled $1.4 million at ~~April~~July 2, 2022 and January 1, 2022.

Definite-lived Intangible Assets

The gross carrying amount of our developed technologies was $19 million at ~~April~~July 2, 2022 and January 1, 2022. Accumulated amortization was $17 million and $16 million at ~~April~~July 2, 2022 and January 1, 2022. Amortization expense for both the three months ended ~~April~~July 2, 2022 and ~~April~~July 3, 2021, was $0.5 million. Amortization expense for both the six months ended July 2, 2022 and July 3, 2021, was $1.1 million.

The gross carrying amount of our patents was $2 million at ~~April~~July 2, 2022 and January 1, 2022. Accumulated amortization was ~~$0.4~~$0.5 million and $0.3 million at ~~April~~July 2, 2022 and January 1, 2022, respectively. Amortization expense for both the three months ended ~~April~~July 2, 2022 and ~~April~~July 3, 2021, was $55 thousand. Amortization expense for both the six months ended July 2, 2022 and July 3, 2021, was $0.1 million.

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


2022 (excluding the three months ended April 2, 2022)		$	1,802
2022 (excluding the six months ended July 2, 2022)				2022 (excluding the six months ended July 2, 2022)	$	1,201
2023	2023	1,431		2023	1,431
2024	2024	222		2024	222
2025	2025	226		2025	226
2026	2026	222		2026	222
2027	2027	222		2027	222
Thereafter	Thereafter	300		Thereafter	300
Total future amortization for definite-lived intangible assets	Total future amortization for definite-lived intangible assets	$	4,425	Total future amortization for definite-lived intangible assets	$	3,824

5. Credit Agreement

As of ~~April~~July 2, 2022, our credit facility had a total commitment amount of $825 million. The credit facility is for general corporate purposes, to meet our seasonal working capital requirements and to repurchase our stock. The credit agreement includes an accordion feature which allows us to increase the amount of the credit facility from $825 million to $1.2 billion, subject to lenders’ approval. 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). 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 December 2026. We were in compliance with all financial covenants as of ~~April~~July 2, 2022.


6 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of Contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following table summarizes our borrowings under the credit facility ($ in thousands):


		April 2, 2022			January 1, 2022				July 2, 2022			January 1, 2022
Outstanding borrowings	Outstanding borrowings	$	413,200		$	382,500		Outstanding borrowings	$	443,300		$	382,500
Outstanding letters of credit	Outstanding letters of credit	$	5,947		$	3,997		Outstanding letters of credit	$	5,947		$	3,997
Additional borrowing capacity	Additional borrowing capacity	$	405,853		$	438,503		Additional borrowing capacity	$	375,753		$	438,503
Weighted-average interest rate	Weighted-average interest rate	2.2		%	1.6		%	Weighted-average interest rate	3.7		%	1.6		%

6. Leases

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

Our operating lease costs include facility, vehicle and equipment lease costs, but exclude variable lease costs. Operating lease costs are recognized on a straight-line basis over the lease term, after consideration of rent escalations and rent holidays. The lease term for purposes of the calculation begins on the earlier of the lease commencement date or the date we take possession of the property. During lease renewal negotiations that extend beyond the original lease term, we estimate straight-line rent expense based on current market conditions. Variable lease costs are recorded when it is probable the cost has been incurred and the amount can be reasonably 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 ~~April~~July 2, 2022, our finance right-of-use assets and lease liabilities were not significant.

Lease costs were as follows (in thousands):


		Three Months Ended				Three Months Ended				Six Months Ended
		April 2, 2022		April 3, 2021				July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Operating lease costs(1)	Operating lease costs(1)	$	27,078	$	23,638		Operating lease costs(1)	$	27,025	$	24,352	$	54,103	$	47,991
Variable lease costs	Variable lease costs	$	330	$	515		Variable lease costs	$	262	$	840	$	593	$	1,355

___________________________

(1)Includes short-term lease costs which are not significant.


7 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of Contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

The maturities of operating lease liabilities as of ~~April~~July 2, 2022, were as follows(1) (in thousands):


2022 (excluding the three months ended April 2, 2022)		$	72,962
2022 (excluding the six months ended July 2, 2022)				2022 (excluding the six months ended July 2, 2022)	$	49,989
2023	2023	89,790		2023	95,063
2024	2024	77,978		2024	82,667
2025	2025	68,001		2025	72,361
2026	2026	56,694		2026	60,823
2027	2027	41,517		2027	45,401
Thereafter	Thereafter	86,958		Thereafter	96,838
Total operating lease payments(2)	Total operating lease payments(2)	493,900		Total operating lease payments(2)	503,142
Less: Interest	Less: Interest	81,326		Less: Interest	82,626
Present value of operating lease liabilities	Present value of operating lease liabilities	$	412,574	Present value of operating lease liabilities	$	420,516

___________________________

(1)Total operating lease payments exclude ~~$102~~$101 million of legally binding minimum lease payments for leases signed but not yet commenced.

(2)Includes the current portion of ~~$74~~$76 million for operating lease liabilities.

Other information related to operating leases was as follows:


		April 2, 2022		January 1, 2022			July 2, 2022		January 1, 2022
Weighted-average remaining lease term (years)		6.3		6.4
Weighted-average remaining lease term (in years)						Weighted-average remaining lease term (in years)	6.3		6.4
Weighted-average discount rate	Weighted-average discount rate	6.0	%	6.1	%	Weighted-average discount rate	6.0	%	6.1	%


		Three Months Ended					Six Months Ended
(in thousands)	(in thousands)	April 2, 2022		April 3, 2021		(in thousands)	July 2, 2022		July 3, 2021
Cash paid for amounts included in present value of operating lease liabilities	Cash paid for amounts included in present value of operating lease liabilities	$	24,209	$	21,386	Cash paid for amounts included in present value of operating lease liabilities	$	48,964	$	43,414
Right-of-use assets obtained in exchange for operating lease liabilities	Right-of-use assets obtained in exchange for operating lease liabilities	$	17,564	$	29,454	Right-of-use assets obtained in exchange for operating lease liabilities	$	36,180	$	50,667

7. Repurchases of Common Stock

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


		Three Months Ended				Three Months Ended				Six Months Ended
		April 2, 2022		April 3, 2021				July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Amount repurchased under Board-approved share repurchase program	Amount repurchased under Board-approved share repurchase program	$	42,308	$	167,418		Amount repurchased under Board-approved share repurchase program	$	12,561	$	100,015	$	54,868	$	267,433
Amount repurchased in connection with the vesting of employee restricted stock grants	Amount repurchased in connection with the vesting of employee restricted stock grants	8,690		16,764			Amount repurchased in connection with the vesting of employee restricted stock grants	85		287		8,776		17,051
Total amount repurchased (based on trade dates)	Total amount repurchased (based on trade dates)	$	50,998	$	184,182		Total amount repurchased (based on trade dates)	$	12,646	$	100,302	$	63,644	$	284,484

As of ~~April~~July 2, 2022, the remaining authorization under the $600 million share repurchase program was ~~$361~~$348 million.


8 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of Contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

8. Revenue Recognition

Deferred contract assets and deferred contract liabilities are included in our condensed consolidated balance sheets as follows (in thousands):


		April 2, 2022		January 1, 2022			July 2, 2022		January 1, 2022
Deferred contract assets included in:	Deferred contract assets included in:					Deferred contract assets included in:
Other current assets	Other current assets	$	26,926	$	28,048	Other current assets	$	27,269	$	28,048
Other non-current assets	Other non-current assets	53,244		49,343		Other non-current assets	53,377		49,343
		$	80,170	$	77,391		$	80,646	$	77,391


		April 2, 2022		January 1, 2022			July 2, 2022		January 1, 2022
Deferred contract liabilities included in:	Deferred contract liabilities included in:					Deferred contract liabilities included in:
Other current liabilities	Other current liabilities	$	34,999	$	36,490	Other current liabilities	$	35,405	$	36,490
Other non-current liabilities	Other non-current liabilities	68,657		63,680		Other non-current liabilities	68,610		63,680
		$	103,656	$	100,170		$	104,015	$	100,170

The deferred revenue and costs related to SleepIQ® technology are currently recognized on a straight-line basis over the product's estimated life of 4.5 to 5.0 years because our inputs are generally expended evenly throughout the performance period. During the three months ended ~~April~~July 2, 2022 and ~~April~~July 3, 2021, we recognized revenue of $9 million and $7$8 million, respectively, that were included in the deferred contract liability balances at the beginning of the respective periods. During the six months ended July 2, 2022 and July 3, 2021, we recognized revenue of $18 million and $15 million, respectively, that were included in the deferred contract liability balances at the beginning of the respective periods.

Revenue from goods and services transferred to customers at a point in time accounted for approximately 98% of our revenues for the three and six months ended ~~April~~July 2, 2022 and ~~99% of our revenues~~ for the three and six months ended ~~April~~July 3, 2021.

Net sales were as follows (in thousands):


		Three Months Ended				Three Months Ended				Six Months Ended
		April 2, 2022		April 3, 2021				July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Retail stores	Retail stores	$	444,336	$	489,188		Retail stores	$	490,820	$	426,653	$	935,157	$	915,841
Online, phone, chat and other	Online, phone, chat and other	82,794		79,068			Online, phone, chat and other	58,253		57,663		141,046		136,731
Total Company	Total Company	$	527,130	$	568,256		Total Company	$	549,073	$	484,316	$	1,076,203	$	1,052,572

Obligation for Sales Returns

The activity in the sales returns liability account was as follows (in thousands):


		Three Months Ended					Six Months Ended
		April 2, 2022		April 3, 2021			July 2, 2022		July 3, 2021
Balance at beginning of year	Balance at beginning of year	$	22,368	$	24,765	Balance at beginning of year	$	22,368	$	24,765
Additions that reduce net sales	Additions that reduce net sales	26,667		23,711		Additions that reduce net sales	53,964		42,272
Deductions from reserves	Deductions from reserves	(28,758)		(23,866)		Deductions from reserves	(51,676)		(45,820)
Balance at end of period	Balance at end of period	$	20,277	$	24,610	Balance at end of period	$	24,656	$	21,217


9 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of Contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

9. Stock-based Compensation Expense

Total stock-based compensation expense was as follows (in thousands):


		Three Months Ended				Three Months Ended				Six Months Ended
		April 2, 2022		April 3, 2021				July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Stock awards	Stock awards	$	3,274	$	5,808		Stock awards	$	2,940	$	5,218	6,214		$	11,027
Stock options	Stock options	859		608			Stock options	970		750		1,829		1,358
Total stock-based compensation expense (1)	Total stock-based compensation expense (1)	4,133		6,416			Total stock-based compensation expense (1)	3,910		5,968		8,043		12,385
Income tax benefit	Income tax benefit	1,033		1,598			Income tax benefit	946		1,473		1,979		3,071
Total stock-based compensation expense, net of tax	Total stock-based compensation expense, net of tax	$	3,100	$	4,818		Total stock-based compensation expense, net of tax	$	2,964	$	4,495	$	6,064	$	9,314

___________________________

(1) Changes in 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 ~~April~~July 2, 2022 and ~~April~~July 3, 2021, our contributions, net of forfeitures, were ~~$2.8~~$2.5 million and ~~$1.9~~$1.8 million, respectively. During the six months ended July 2, 2022 and July 3, 2021, our contributions, net of forfeitures, were $5.3 million and $3.7 million, respectively.

11. Net Income per Common Share

The components of basic and diluted net income per share were as follows (in thousands, except per share amounts):
Three Months Ended
April 2,
2022 April 3,
2021
Net income $ 2,074 $ 66,634
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding 22,760 25,377
Dilutive effect of stock-based awards 831 1,167
Diluted weighted-average shares outstanding 23,591 26,544
Net income per share – basic $ 0.09 $ 2.63
Net income per share – diluted $ 0.09 $ 2.51


	Three Months Ended				Six Months Ended
	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Net income	$	34,933	$	22,250	$	37,007	$	88,884
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	22,355		24,371		22,558		24,874
Dilutive effect of stock-based awards	358		823		594		995
Diluted weighted-average shares outstanding	22,713		25,194		23,152		25,869
Net income per share – basic	$	1.56	$	0.91	$	1.64	$	3.57
Net income per share – diluted	$	1.54	$	0.88	$	1.60	$	3.44

For the three and six months ended ~~April~~July 2, 2022 and ~~April~~July 3, 2021, anti-dilutive stock-based awards excluded from the diluted net income per share calculations were immaterial.


10 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of Contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

12. Commitments and Contingencies

Warranty Liabilities

The activity in the accrued warranty liabilities account was as follows (in thousands):


		Three Months Ended					Six Months Ended
		April 2, 2022		April 3, 2021			July 2, 2022		July 3, 2021
Balance at beginning of year	Balance at beginning of year	$	10,069	$	12,152	Balance at beginning of year	$	10,069	$	12,152
Additions charged to costs and expenses for current-year sales	Additions charged to costs and expenses for current-year sales	4,447		4,330		Additions charged to costs and expenses for current-year sales	7,930		7,863
Deductions from reserves	Deductions from reserves	(4,750)		(4,717)		Deductions from reserves	(8,995)		(9,235)
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	(31)		(156)		Changes in liability for pre-existing warranties during the current year, including expirations	(240)		(237)
Balance at end of period	Balance at end of period	$	9,735	$	11,609	Balance at end of period	$	8,764	$	10,543

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.

Shareholder Class Action Complaints

On December 14, 2021, purported Sleep Number shareholder, Steamfitters Local 449 Pension & Retirement Security Funds (Steamfitters), filed a putative class action complaint in the United States District Court for the District of Minnesota (the District of Minnesota) on behalf of all purchasers of Sleep Number common stock between February 18, 2021 and July 20, 2021, inclusive, against Sleep Number, Shelly Ibach and David Callen. ~~Plaintiff~~Steamfitters alleges material misstatements and omissions in certain of Sleep Number’s public disclosures during the purported class period, in violation of ~~Section~~Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as ~~amended.~~amended (the Exchange Act). The complaint seeks, among other things, unspecified monetary damages, reasonable costs and expenses and equitable/injunctive or other relief as deemed appropriate by the ~~Court. We~~District of Minnesota.

On February 14, 2022, a second purported Sleep Number shareholder, Ricardo Dario Schammas, moved for appointment as lead plaintiff in the action. On March 24, 2022, the District of Minnesota heard argument on Schammas’s motion, and subsequently appointed Steamfitters and Schammas as Co-Lead Plaintiffs (together, Co-Lead Plaintiffs). On July 19, 2022, Co-Lead Plaintiffs filed a consolidated amended complaint, which, like the predecessor complaint, asserts claims against Sleep Number, Shelly Ibach, and David Callen under Sections 10(b) and 20(a) of the Exchange Act. Co-Lead Plaintiffs purport to assert these claims on behalf of all purchasers of Sleep Number common stock between February 18, 2021 and July 20, 2021. Defendants have not yet responded to the consolidated amended complaint, but believe ~~these~~the claims are without merit and intend to vigorously defend the matter.


11 \| 2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of Contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

Shareholder Derivative Complaint

On May 12, 2022, Gwendolyn Calla Moore, as the appointed representative of purported Sleep Number shareholder Matthew Gelb, filed a derivative action (the Derivative Action) in the District of Minnesota against Jean-Michel Valette, Shelly Ibach, Barbara Matas, Brenda Lauderback, Daniel Alegre, Deborah Kilpatrick, Julie Howard, Kathleen Nedorostek, Michael Harrison, Stephen Gulis, Jr., David Callen, and Kevin Brown. Moore purports to assert claims on behalf of Sleep Number for breaches of fiduciary duty, waste, and contribution under Sections 10(b) and 21(d) of the Exchange Act. Moore’s allegations generally mirror those asserted in the securities complaint described above. The Moore complaint seeks damages in an unspecified amount, disgorgement, interest, and costs and expenses, including attorneys’ and experts’ fees. Defendants have not yet responded to the complaint in the Derivative Action, but believe the claims are without merit and intend to vigorously defend the matter.

Stockholder Demand

On March 25, 2022, Sleep Number received a stockholder litigation demand, requesting that the Board investigate the allegations in the securities class action complaint and pursue claims on Sleep Number’s behalf based on those allegations. On May 12, 2022, the Board established a special litigation committee to investigate the demand.

13. COVID-19 Pandemic

The COVID-19 pandemic impacted our 2021 and 2022 financial performance. In the first ~~quarter~~six months of 2021, even with the COVID-19 challenges, we generated strong demand and financial performance. In the first ~~quarter~~six months of 2022, our financial performance was impacted by: (i) the disruptive flow of semiconductor chips which affected our ability to deliver products to our ~~customers and suppressed consumer confidence;~~customers; (ii) incremental costs from labor and material inflation, and expediting costs resulting from current-period global supply chain shortages; and (iii) ~~increased investments in our long- and near-term innovations and demand drivers, partly offset by cost containment actions.~~record low consumer sentiment. The pandemic's future effects on our global supply chain and the potential for supply disruption (e.g., the lack or slowing of critical components caused by labor shortages or government-mandated work closures), effects on consumer demand and effects on our ongoing financial performance remains uncertain. See Part II, 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.


1112 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

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;~~sentiment;

•Risks inherent in outbreaks of pandemics or contagious disease, including the COVID-19 pandemic;

•Risks inherent in global-sourcing activities, including tariffs, outbreaks of pandemics or contagious diseases, such as the COVID-19 pandemic, geo-political turmoil, acts of terrorism, global conflicts or war (such as the current war in Ukraine), strikes, labor shortages, government-mandated work closures, and the potential for shortages in supply or disruption or delay of production and delivery of materials and products in our global supply chain;

•Risks of disruption in the operation of any of our main manufacturing, distribution, logistics, home delivery, product development, or customer service facilities or operations;

•Our manufacturing processes operate with minimal levels of inventory, which may leave us vulnerable to shortages in supply;

•Our dependence on significant suppliers and third parties and our ability to maintain relationships with key suppliers or third parties, including several sole-source suppliers or service providers;

•Rising commodity costs and other inflationary pressures;

•The effectiveness of our marketing messages;

•The efficiency of our advertising and promotional efforts;

•Our ability to execute our Total Retail distribution strategy;

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

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

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

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

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

•Increasing government regulation;

•Pending or unforeseen litigation and the potential for adverse publicity associated with litigation;


1213 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

•The adequacy of our and third-party information systems to meet the evolving needs of our business and existing and evolving risks and regulatory standards applicable to data privacy and cybersecurity;

•The costs and potential disruptions to our business related to upgrading or maintaining our information systems;

•The vulnerability of our and third-party information systems to attacks by hackers or other cyber threats that could compromise the security of our systems, result in a data breach or disrupt our business;

•Environmental risks, including increasing environmental regulation and the broader impacts of climate change such as from weather-related events; and

•Our ability, and the ability of our suppliers and vendors, to attract, retain and motivate qualified management, executive and other key team members, including qualified retail sales professionals and managers.

Additional information concerning these, and other risks and uncertainties is contained under the caption “Risk Factors” ~~below~~ in Part ~~II:~~I, Item ~~1A of this Quarterly Report on Form 10-Q and under the same caption~~1A. 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.

Business Overview

At Sleep Number, our purpose is to improve the health and wellbeing of society through higher quality sleep. WeOur more than 5,500 mission-driven team members, supported by our culture of individuality and innovation, are

~~committed~~ dedicated to ~~leveraging~~utilizing the ~~power~~science of sleep ~~and sleep science,~~ to ~~improve lives and~~ create a healthier, kinder, more

inclusive world. ~~And because our more than 5,500 team members are dedicated to our mission as well as the disciplined~~

~~execution of our vertically integrated business model~~

As a leader in sleep health, research, and ~~differentiated strategy,~~science, Sleep Number is at the forefront of

sleep innovation. AsWe are the exclusive ~~designer,~~developer, manufacturer, marketer, retailer and servicer of award-winning Sleep Number 360 smart

beds and SleepIQ® ~~technology, Sleep Number is uniquely equipped~~technology. Our smart bed platform delivers benefits to ~~offer the life-changing benefit~~deepen sleep through individualized, real-time, adaptive physical and digital experiences, and our more than 15 billion hours of ~~high-quality,~~

~~individualized~~longitudinal data enable groundbreaking research that helps solve sleep ~~solutions and services.~~issues to fulfill our purpose. To date, we have improved ~~over~~more than 14 million lives.

~~With our enterprise-wide investments in innovation, technology, logistics, marketing and customer service, Sleep~~

~~Number has created a highly relevant, competitively advantaged strategy and has become a beloved brand built on a~~

~~foundation of individuality and wellbeing. Together with our expertise in sleep research, commitment to data science~~

~~and analytics, and deep understanding of consumers – including structural shifts in their behavior that we have~~

~~anticipated since the 2012 inception of our consumer innovation strategy and which were accelerated by the global~~

~~pandemic – we are driving profitable growth and delivering superior value for all our stakeholders.~~

We continue to advance our differentiated, consumer-focused strategic initiatives through enterprise-wide investments that strengthen our competitive advantages. This has resulted in Sleep Number being a broadly relevant, beloved brand which continues to benefit from the ongoing connectivity and advocacy of millions of smart sleepers. We generate revenue by marketing and selling our innovations directly to new and existing customers ~~and selling products~~ through our vertically integrated, exclusive, direct-to-consumer retail touch points including Stores, Online, Phone, and Chat (Total Retail) ~~and Other.~~

. We are committed to ~~delivering~~creating long-term superior ~~shareholder~~ value ~~by:~~for all stakeholders as we focus on our three performance drivers: (1) increasing consumer demand; (2) leveraging our vertically integrated business model; and (3) deploying capital efficiently.

COVID-19 Pandemic - Impact on our Business


1314 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

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 global supplies or third-party service providers, seasonality of retail and bedding industry sales, consumer ~~confidence~~sentiment and general economic conditions. In addition, based on the duration and severity of the current global situation involving the COVID-19 pandemic, the war in Ukraine and other external factors, including but not limited to general economic conditions, inflation, consumer ~~confidence,~~sentiment, store restrictions mandated by federal, state or local authorities and global supply chain disruptions, the extent to which these external factors will impact our business and our consolidated financial results 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 ~~April~~July 2, 2022 were as follows:

•Net sales for the three months ended ~~April~~July 2, 2022 ~~decreased 7%~~increased 13% to ~~$527~~$549 million, compared with ~~$568~~$484 million for the three months ended ~~April~~July 3, 2021. Demand was negatively impacted by ~~acute~~a worsening macro ~~factors including~~environment with record low consumer sentiment. Net sales benefited from the ~~COVID-19 variant in January and~~delivery of high-revenue smart beds awaiting the ~~war in Ukraine in March. Global supply constraints continued to impact~~arrival of a semiconductor chip for our ~~delivered net sales for the three months ended April 2, 2022.~~Flexfit adjustable base.

•The 7%13% net sales ~~decrease~~increase consisted of ~~an 11%~~a 9% comparable sales ~~decline~~increase in Total Retail ~~offset by~~in addition to sales from 4638 net new stores opened in the past 12 months that added 4 percentage points (ppt.) of growth. For additional details, see the components of total net sales change on page 1516.

•Sales per store (sales for stores open at least one year, Total Retail, including online, phone and chat) on a trailing twelve-month basis for the period ended ~~April~~July 2, 2022 totaled $3.5 million, ~~9% higher than~~consistent with the same period last year.

•Operating income for the three months ended ~~April~~July 2, 2022 was $4$50 million, compared with ~~$76~~$30 million in the prior-year period. The ~~$72~~$20 million ~~decrease~~increase in operating income was driven by the ~~7% decrease~~13% increase in net sales, ~~constrained by semiconductor chip supply,~~ a ~~7.3~~4.2 ppt. ~~increase~~decrease in our operating expenses rate, ~~and~~partially offset by a ~~5.3~~1.3 ppt. decrease in our gross profit ~~rate that was negatively affected by cost pressures and an unfavorable mix of smart bed deliveries as constrained by semiconductor chip supply.~~rate.

•The ~~5.3~~1.3 ppt. gross profit rate decrease was primarily due to the operating inefficiencies resulting from the uneven flow of electronics supply and incremental costs from labor and material inflation, ~~and inefficiencies resulting from current-period global supply chain shortages, in addition to the deleveraging impact of the 7% net sales decline and~~partially offset by a ~~less~~ favorable sales mix of ~~lower-margin products.~~our smart beds. See the Gross profit discussion on page 1718 for additional details.

•The ~~7.3~~4.2 ppt. ~~increase~~decrease in our operating expenses rate was ~~partially~~mainly due to the ~~deleveraging~~leveraging impact of the 7%13% net sales ~~decline.~~increase. In addition, we continued to prioritize investments in near- and long-term growth drivers, including $16 million of R&D expenses during the three months ended ~~April~~July 2, ~~2022, 23% more than the same period one year ago.~~2022.

•Net income for the three months ended ~~April~~July 2, 2022 ~~decreased~~increased to $2$35 million, compared with ~~$67~~$22 million for the same period one year ago. Net income per diluted share was ~~$0.09,~~$1.54, compared with ~~$2.51~~$0.88 last year.

•We achieved a return on invested capital (ROIC) of ~~20.5%~~21.8% on a trailing twelve-month basis for the period ended ~~April~~July 2, 2022, compared with ~~27.6%~~33.3% for the comparable period one year ago.

•Cash provided by operating activities was pressured by year-over-year changes in working capital and lower net income for the ~~three~~six months ended ~~April~~July 2, 2022 and decreased to ~~$25~~$29 million, compared with ~~$112~~$161 million for the same period one year ago.

•As of ~~April~~July 2, 2022, we had ~~$413~~$443 million of borrowings under our revolving credit facility and available net liquidity of ~~$406~~$376 million.


1415 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

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								Three Months Ended					Six Months Ended
		April 2, 2022				April 3, 2021					July 2, 2022		July 3, 2021				July 2, 2022				July 3, 2021
Net sales	Net sales	$	527.1	100.0	%	$	568.3	100.0	%			Net sales	$	549.1	100.0	%	$	484.3	100.0	%	$	1,076.2	100.0	%	$	1,052.6	100.0	%
Cost of sales	Cost of sales	224.8		42.7	%	212.3		37.4	%			Cost of sales	224.1		40.8	%	191.5		39.5	%	449.0		41.7	%	403.8		38.4	%
Gross profit	Gross profit	302.3		57.3	%	355.9		62.6	%			Gross profit	324.9		59.2	%	292.9		60.5	%	627.2		58.3	%	648.8		61.6	%
Operating expenses:	Operating expenses:											Operating expenses:
Sales and marketing	Sales and marketing	240.3		45.6	%	223.6		39.4	%			Sales and marketing	220.5		40.2	%	206.0		42.5	%	460.7		42.8	%	429.6		40.8	%
General and administrative	General and administrative	41.3		7.8	%	42.6		7.5	%			General and administrative	38.7		7.1	%	41.2		8.5	%	80.0		7.4	%	83.8		8.0	%
Research and development	Research and development	16.3		3.1	%	13.3		2.3	%			Research and development	15.8		2.9	%	15.9		3.3	%	32.1		3.0	%	29.2		2.8	%
Total operating expenses	Total operating expenses	297.9		56.5	%	279.5		49.2	%			Total operating expenses	275.0		50.1	%	263.1		54.3	%	572.9		53.2	%	542.6		51.6	%
Operating income	Operating income	4.4		0.8	%	76.4		13.4	%			Operating income	49.9		9.1	%	29.7		6.1	%	54.3		5.0	%	106.1		10.1	%
Interest expense, net	Interest expense, net	2.1		0.4	%	1.0		0.2	%			Interest expense, net	3.6		0.7	%	1.6		0.3	%	5.7		0.5	%	2.6		0.2	%
Income before income taxes	Income before income taxes	2.3		0.4	%	75.4		13.3	%			Income before income taxes	46.3		8.4	%	28.1		5.8	%	48.6		4.5	%	103.6		9.8	%
Income tax expense	Income tax expense	0.2		—	%	8.8		1.6	%			Income tax expense	11.4		2.1	%	5.9		1.2	%	11.6		1.1	%	14.7		1.4	%
Net income	Net income	$	2.1	0.4	%	$	66.6	11.7	%			Net income	$	34.9	6.4	%	$	22.3	4.6	%	$	37.0	3.4	%	$	88.9	8.4	%

Net income per share:	Net income per share:											Net income per share:
Basic	Basic	$	0.09			$	2.63					Basic	$	1.56			$	0.91			$	1.64			$	3.57
Diluted	Diluted	$	0.09			$	2.51					Diluted	$	1.54			$	0.88			$	1.60			$	3.44

Weighted-average number of common shares:	Weighted-average number of common shares:											Weighted-average number of common shares:
Basic	Basic	22.8				25.4						Basic	22.4				24.4				22.6				24.9
Diluted	Diluted	23.6				26.5						Diluted	22.7				25.2				23.2				25.9

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


		Three Months Ended				Three Months Ended				Six Months Ended
		April 2, 2022		April 3, 2021				July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Retail stores	Retail stores	84.3	%	86.1	%		Retail stores	89.4	%	88.1	%	86.9	%	87.0	%
Online, phone, chat and other	Online, phone, chat and other	15.7	%	13.9	%		Online, phone, chat and other	10.6	%	11.9	%	13.1	%	13.0	%
Total Company	Total Company	100.0	%	100.0	%		Total Company	100.0	%	100.0	%	100.0	%	100.0	%

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


		Three Months Ended				Three Months Ended				Six Months Ended
		April 2, 2022		April 3, 2021				July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Sales change rates:	Sales change rates:						Sales change rates:
Retail comparable-store sales (1)	Retail comparable-store sales (1)	(14	%)	12	%		Retail comparable-store sales (1)	10	%	102	%	(3	%)	41	%
Online, phone and chat	Online, phone and chat	5	%	116	%		Online, phone and chat	2	%	(28	%)	4	%	17	%
Total Retail comparable sales change (1)	Total Retail comparable sales change (1)	(11	%)	20	%		Total Retail comparable sales change (1)	9	%	65	%	(2	%)	37	%
Net opened/closed stores and other	Net opened/closed stores and other	4	%	—	%		Net opened/closed stores and other	4	%	5	%	4	%	2	%
Total Company	Total Company	(7	%)	20	%		Total Company	13	%	70	%	2	%	39	%

___________________________

(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.


1516 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Other sales metrics were as follows:


		Three Months Ended						Three Months Ended					Six Months Ended
		April 2, 2022			April 3, 2021					July 2, 2022			July 3, 2021			July 2, 2022		July 3, 2021
Average sales per store (1) (in thousands)	Average sales per store (1) (in thousands)	$	3,487		$	3,196			Average sales per store (1) (in thousands)	$	3,526		$	3,542
Average sales per square foot (1)	Average sales per square foot (1)	$	1,167		$	1,095			Average sales per square foot (1)	$	1,172		$	1,203
Stores > $2 million in net sales (2)	Stores > $2 million in net sales (2)	82		%	71		%		Stores > $2 million in net sales (2)	82		%	82		%
Stores > $3 million in net sales (2)	Stores > $3 million in net sales (2)	46		%	33		%		Stores > $3 million in net sales (2)	45		%	47		%
Average revenue per smart bed unit (3)	Average revenue per smart bed unit (3)	$	4,905		$	5,030			Average revenue per smart bed unit (3)	$	6,485		$	5,094		$	5,601	$	5,059

___________________________

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

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

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

The number of retail stores operating was as follows:


		Three Months Ended		Three Months Ended			Six Months Ended
		April 2, 2022	April 3, 2021			July 2, 2022	July 3, 2021	July 2, 2022	July 3, 2021
Beginning of period	Beginning of period	648	602		Beginning of period	653	607	648	602
Opened	Opened	13	11		Opened	10	26	23	37
Closed	Closed	(8)	(6)		Closed	(4)	(12)	(12)	(18)
End of period	End of period	653	607		End of period	659	621	659	621


1617 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Comparison of Three Months Ended ~~April~~July 2, 2022 with Three Months Ended ~~April~~July 3, 2021

Net sales

Net sales for the three months ended ~~April~~July 2, 2022 ~~decreased~~increased by ~~$41~~$65 million, or 7%13%, to ~~$527~~$549 million, compared with ~~$568~~$484 million for the same period one year ago. Demand was negatively impacted by ~~acute~~a worsening macro ~~factors including~~environment with record low consumer sentiment. Net sales benefited from the ~~COVID-19 variant in January and war in Ukraine in March. Global supply constraints negatively impacted~~delivery of high-revenue smart beds awaiting the arrival of a semiconductor chip for our ~~delivered net sales for the three months ended April 2, 2022.~~Flexfit adjustable base.

The 7%13% net sales ~~decrease~~increase consisted primarily of ~~an 11%~~a 9% comparable sales ~~decline~~increase in Total Retail ~~offset by~~in addition to sales from 4638 net new stores opened in the past 12 months that added 4 percentage points (ppt.) of growth. For additional details, see the components of total net sales change on page 1516.

The ~~$41~~$65 million net sales ~~decline~~increase compared with the same period one year ago was comprised of the following: (i) a ~~$59~~$41 million ~~decrease~~increase in our Total Retail comparable net sales; and (ii) ~~an $18~~a $24 million increase from net store openings. Total Retail smart bed unit sales decreased 5%11% compared with the prior ~~year.~~year due to disruptive electronics supply. Total Retail average revenue per smart bed unit ~~decreased~~increased by 2%27% to ~~$4,905,~~$6,485, compared with ~~$5,030~~$5,094 in the prior-year period and was ~~negatively~~ impacted favorably by ~~a less favorable sales~~the high mix ~~due to supply constraints impacting smart bed deliveries at the higher end~~ of our ~~product line.~~most profitable smart beds that had been awaiting the arrival of semiconductor chips for our FlexFit® adjustable bases.

Gross profit

Gross profit of ~~$302~~$325 million for the three months ended ~~April~~July 2, 2022 ~~decreased~~increased by ~~$54~~$32 million, or ~~15%~~11%, compared with ~~$356~~$293 million for the same period one year ago. The gross profit rate declined to ~~57.3%~~59.2% of net sales for the three months ended ~~April~~July 2, 2022, compared with ~~62.6%~~60.5% for the prior-year comparable period.

The current-year gross profit rate decrease of ~~5.3~~1.3 ppt. was mainly due to: (i) operating inefficiencies resulting from the uneven flow of electronics supply; (ii) incremental costs from labor and material inflation and inefficiencies resulting from current-period global supply chain shortages (4.2 ppt.); (ii) the deleverage from the 7% net sales decrease; and (iii) a less favorable sales mix of lower-margin products due to supply constraints impacting smart bed deliveries at the higher end of our product line. These pressures wereinflation; partially offset byby; (iii) pricing actions taken over the past twelve ~~months (1.7 ppt.).~~months; and (iv) a more favorable sales mix of our most profitable smart beds that had been awaiting the arrival of semiconductor chips for our FlexFit® adjustable bases. 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 changes in performance-based incentive compensation.

Sales and marketing expenses

Sales and marketing expenses for the three months ended ~~April~~July 2, 2022 were ~~$240~~$220 million, or ~~45.6%~~40.2% of net sales, compared with ~~$224~~$206 million, or ~~39.4%~~42.5% of net sales, for the same period one year ago. The current-year sales and marketing expenses rate ~~increase~~decrease of ~~6.2~~2.3 ppt. was primarily due to: (i) the ~~deleveraging~~leveraging impact of the 7%13% net sales ~~decrease as constrained~~increase; offset by ~~semiconductor chip supply;~~ (ii) ~~addition of 46~~the additional costs associated with operating 38 net new stores; and (iii) ~~increased marketing expenses resulting from a 9% increase in media expenses.~~higher fees associated with our customer credit-based promotional offers.

General and administrative expenses

General and administrative (G&A) expenses totaled ~~$41~~$39 million, or ~~7.8%~~7.1% of net sales, for the three months ended ~~April~~July 2, 2022, compared with ~~$43~~$41 million, or ~~7.5%~~8.5% of net sales, in the prior-year period. The ~~$1.3~~$2.5 million decrease in G&A expenses consisted mainly of: (i) a ~~$6.7~~$4.1 million decrease in employee compensation primarily resulting from a year-over-year ~~decrease~~reduction in Company-wide performance-based incentive compensation; offset by (ii) a ~~$5.4~~$1.6 million increase in other miscellaneous expenses, including technology ~~investments and travel expenses (minimal travel in the prior year due to the pandemic).~~investments. The G&A expenses rate ~~increased~~decreased by ~~0.3~~1.4 ppt. in the current-year period, compared with the same period one year ago due to the ~~deleveraging~~leveraging impact of the 7%13% net sales ~~decrease,~~increase, in addition to the items discussed above.

Research and development expenses

Research and development (R&D) expenses ~~increased by 23% to~~were $16 million for the three months ended ~~April~~July 2, 2022, ~~compared~~consistent with ~~$13 million for~~ the same period last year as we continued to prioritize our long-term life-changing sleep innovation initiatives.


1718 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Interest expense

Interest expense, net increased to $2$4 million for the three months ended ~~April~~July 2, 2022, compared with $1$2 million for the same period one year ago. The $1$2 million increase was mainly driven by a higher weighted-average interest rate compared with the same period one year ago, and a higher level of outstanding borrowings during the three months ended ~~April~~July 2, 2022 compared with the same period in 2021.

Income tax expense

Income tax expense totaled $11.4 million for the three months ended July 2, 2022, compared with $5.9 million last year. The effective income tax rate for the three months ended July 2, 2022 was 24.5%, compared with 20.9% for the comparable period last year. Discrete tax benefits were minimal for the three months ended July 2, 2022, compared with $1.0 million in last year’s second quarter, primarily related to stock-based compensation excess tax benefits.

Comparison of Six Months Ended July 2, 2022 with Six Months Ended July 3, 2021

Net sales

Net sales for the six months ended July 2, 2022 increased by $24 million, or 2%, to $1.08 billion, compared with $1.05 billion for the same period one year ago. Demand was negatively impacted by a worsening macro environment with record low consumer sentiment.

The 2% net sales increase consisted of 4 percentage points (ppt.) of sales growth from net new stores opened in the past 12 months partially offset by a 2% comparable sales decrease in Total Retail. For additional details, see the components of total net sales change on page 16.

The $24 million net sales increase compared with the same period one year ago was comprised of the following: (i) a $42 million increase resulting from net store openings; partially offset by (ii) an $18 million decrease in our Total Retail comparable net sales. Total smart bed unit sales declined 8% compared with the prior year. Average revenue per smart bed unit in Total Retail increased by 11% to $5,601, compared with $5,059 in the prior-year period.

Gross profit

Gross profit of $627 million decreased by $22 million, or 3%, compared with $649 million for the same period one year ago. The gross profit rate decreased to 58.3% of net sales for the six months ended July 2, 2022, compared with 61.6% for the prior-year comparable period.

The current-year gross profit rate decrease of 3.3 ppt. was mainly due to: (i) incremental costs from labor and material inflation; (ii) operating inefficiencies resulting from the uneven flow of electronics supply and constrained deliveries; partially offset by (iii) pricing actions taken over the past twelve months. Our gross profit rate will fluctuate from quarter to quarter due to a variety of other factors, including return and exchange costs, product mix and changes in performance-based incentive compensation.

Sales and marketing expenses

Sales and marketing expenses for the six months ended July 2, 2022 were $461 million, or 42.8% of net sales, compared with $430 million, or 40.8% of net sales, for the same period one year ago. The current-year sales and marketing expenses rate increase of 2.0 ppt. was primarily due to: (i) the additional costs associated with operating 38 net new stores; (ii) higher fees associated with our customer credit-based promotional offers; (iii) a 6% increase in media expenses; partially offset by (iv) lower variable compensation due to the negatively impacted demand.

General and administrative expenses

General and administrative (G&A) expenses totaled $80 million, or 7.4% of net sales, for the six months ended July 2, 2022, compared with $84 million, or 8.0% of net sales, in the prior-year period. The $4 million decrease in G&A expenses consisted of: (i) an $11 million decrease in employee compensation primarily resulting from a year-over-year decrease in Company-wide performance-based incentive compensation; partially offset by (ii) a $7 million increase in other miscellaneous expenses, including technology investments and travel expenses. The G&A expenses rate


19 \| 2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

decreased by 0.6 ppt. in the current-year period, compared with the same period one year ago due to the net expense reductions discussed above and the leveraging impact of the 2% net sales increase.

Research and development expenses

Research and development (R&D) expenses increased by 10% to $32 million for the six months ended July 2, 2022, compared with $29 million for the same period one year ago. The R&D expense rate for the six months ended July 2, 2022 increased to 3.0% of net sales, compared with 2.8% of net sales for the prior year. The spending level increase supports our continued prioritization in our long-term life-changing sleep innovation initiatives.

Interest expense, net

Interest expense, net increased to $6 million for the six months ended July 2, 2022, compared with $3 million for the same period one year ago. The $3 million increase was mainly driven by a higherlevel of outstanding borrowings during the six months ended July 2, 2022, compared with the same period one year ago, and a higher weighted-average interest rate compared with the same period one year ago.

Income tax expense

Income tax expense totaled ~~$0.2~~$12 million for the ~~three~~six months ended ~~April~~July 2, 2022, compared with ~~$8.8~~$15 million last year. The effective income tax rate for the ~~three~~six months ended ~~April~~July 2, 2022 ~~was 9.4%~~increased to 23.8%, compared with ~~11.7%~~14.2% for the comparable period last ~~year. Discrete tax benefits, primarily~~year, reflecting lower stock-based compensation excess tax benefits ~~were $0.4 million for~~in the ~~three months ended April 2, 2022, compared with $10.0 million in last year’s first quarter.~~current-year six-month 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. Our primary sources of liquidity are cash flows provided by operating activities and cash available under our $825 million revolving credit facility. As of ~~April~~July 2, 2022, we do not have any off-balance sheet financing other than our $6 million in outstanding letters of credit. 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, strategic initiatives and contractual obligations such as lease payments and capital commitments for new retail stores for the foreseeable future.

Changes in cash and cash equivalents during the ~~three~~six months ended ~~April~~July 2, 2022 primarily consisted of ~~$25~~$29 million of cash provided by operating activities and a ~~$45~~$71 million net increase in short-term borrowings, offset by ~~$20~~$37 million of cash used to purchase property and equipment, and ~~$51~~$64 million of cash used to repurchase our common stock (based on settlement, ~~$42~~$55 million under our Board-approved share repurchase program and $9 million in connection with the vesting of employee restricted stock grants).

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


		Three Months Ended					Six Months Ended
		April 2, 2022		April 3, 2021			July 2, 2022		July 3, 2021
Total cash provided by (used in):	Total cash provided by (used in):					Total cash provided by (used in):
Operating activities	Operating activities	$	24.6	$	111.6	Operating activities	$	28.7	$	161.4
Investing activities	Investing activities	(19.6)		(11.5)		Investing activities	(36.5)		(32.0)
Financing activities	Financing activities	(5.8)		(102.1)		Financing activities	7.7		(131.5)
Net decrease in cash and cash equivalents	Net decrease in cash and cash equivalents	$	(0.8)	$	(2.0)	Net decrease in cash and cash equivalents	$	(0.1)	$	(2.1)

Cash provided by operating activities for the ~~three~~six months ended ~~April~~July 2, 2022 was ~~$25~~$29 million, compared with ~~$112~~$161 million for the ~~three~~six months ended ~~April~~July 3, 2021. Significant components of the year-over-year change in cash provided by operating activities included: (i) a ~~$65~~$52 million decrease in net income for the ~~three~~six months ended ~~April~~July 2, 2022, compared with the same period one year ago; (ii) a ~~$14~~$62 million fluctuation in customer prepayments due to timing of deliveries; (iii) a $25 million change in accounts payable with both periods impacted by business changes and timing of payments; (iv) a $20 million fluctuation in prepaid expenses and other assets due to both periods being impacted by the timing of rent payments and a reduction in business activities due to the pandemic; (iii) a $12 million change in other accruals and liabilities due to the timing of payments; (iv) a $10 million fluctuation in accounts payable with both periods impacted by business changes and timing of payments; and (v) a $9$16 million fluctuation in ~~the amount of compensation and benefits accrued and timing of the related payments resulting from year-over-year~~income taxes due to changes in ~~Company-wide performance-based incentive compensation.~~taxable income.


20 \| 2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Net cash used in investing activities to purchase property and equipment was ~~$20~~$37 million for the ~~three~~six months ended ~~April~~July 2, 2022, compared with ~~$12~~$32 million for the same period one year ago. The year-over-year increase was primarily due to the timing of cash flows associated with ~~new and remodeled stores’ property and equipment, and~~ investments in information technology.

Net cash provided by financing activities was $8 million for the six months ended July 2, 2022, compared with net cash used in financing activities ~~was $6 million for the three months ended April 2, 2022, compared with $102~~of $131 million for the same period last year. During the ~~three~~six months ended ~~April~~July 2, 2022, we repurchased ~~$51~~$64 million of


~~18 \| 1Q 2022 FORM 10-Q~~						~~SLEEP NUMBER CORPORATION~~

our stock (based on settlement dates, ~~$42~~$55 million under our Board-approved share repurchase program and $9 million in connection with the vesting of employee restricted stock awards), compared with ~~$179~~$281 million during the same period one year ago. Short-term borrowings increased by ~~$45~~$71 million during the current-year period due to a ~~$31~~$61 million increase in borrowings under our revolving credit facility to ~~$413~~$443 million and a ~~$14~~$10 million increase in book overdrafts which are included in the net change in short-term borrowings. Short-term borrowings increased by ~~$74~~$146 million during the prior-year period due to a ~~$71~~$138 million increase in borrowings under our credit facility to ~~$315~~$382 million and ~~a $3~~an $8 million increase in book overdrafts.

Under our Board-approved share repurchase program, we repurchased ~~0.7~~1.0 million shares at a cost of ~~$42~~$55 million (based on trade dates, an average of ~~$63.95~~$57.46 per share) during the ~~three~~six months ended ~~April~~July 2, 2022. During the ~~three~~six months ended ~~April~~July 3, 2021, we repurchased ~~1.2~~2.1 million shares at a cost of ~~$167~~$267 million (based on trade dates, an average of ~~$136.27~~$125.86 per share). There is no expiration date governing the period over which we can repurchase shares. At ~~April~~July 2, 2022, there is ~~$361~~$348 million remaining authorization under our Board-approved $600 million share repurchase program.

As of ~~April~~July 2, 2022, we had ~~$413~~$443 million of borrowings under our revolving credit facility. We also had $6 million in outstanding letters of credit. Net liquidity available under our credit facility was ~~$406~~$376 million at ~~April~~July 2, 2022. 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 ~~3.4x~~3.3x as of ~~April~~July 2, 2022. 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, to meet our seasonal working capital requirements and to repurchase our stock. As of ~~April~~July 2, 2022, the weighted-average interest rate on borrowings under the credit facility was ~~2.2%~~3.7% 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 their 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. As of ~~April~~July 2, 2022, we were in compliance with all financial covenants.

On July 15, 2022, we executed a fifth amendment to the Synchrony Agreement that extended the term from December 31, 2023 to December 31, 2028, subject to earlier termination upon certain events. Under the terms of the Synchrony Agreement, Synchrony Bank sets the minimum acceptable credit ratings, the interest rates, fees and all other terms and conditions of the customer accounts, including collection policies and procedures, and is the owner of the accounts. As the accounts are owned by Synchrony Bank, at no time are the accounts purchased or acquired from us. We are not liable to Synchrony Bank for our customers’ credit defaults.


1921 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

Non-GAAP Data Reconciliations

Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)

We define earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation and asset impairments. Management believes Adjusted EBITDA is a useful indicator of our financial performance and our ability to generate cash from operating activities. Our definition of Adjusted EBITDA may not be comparable to similarly titled definitions used by other companies. The table below reconciles Adjusted EBITDA, which is a non-GAAP financial measure, to the comparable GAAP financial measure.

Our Adjusted EBITDA calculations are as follows (in thousands):


		Three Months Ended				Trailing-Twelve Months Ended					Three Months Ended				Trailing-Twelve Months Ended
		April 2, 2022		April 3, 2021		April 2, 2022		April 3, 2021			July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Net income	Net income	$	2,074	$	66,634	$	89,186	$	166,683	Net income	$	34,933	$	22,250	$	101,869	$	201,563
Income tax expense	Income tax expense	214		8,812		24,947		34,265		Income tax expense	11,359		5,864		30,442		43,564
Interest expense	Interest expense	2,127		978		7,394		7,642		Interest expense	3,619		1,607		9,406		5,227
Depreciation and amortization	Depreciation and amortization	15,683		14,519		60,943		60,049		Depreciation and amortization	15,920		15,006		61,857		59,802
Stock-based compensation	Stock-based compensation	4,133		6,417		20,930		26,179		Stock-based compensation	3,910		5,968		18,872		27,114
Asset impairments	Asset impairments	103		89		186		388		Asset impairments	80		—		266		142
Adjusted EBITDA	Adjusted EBITDA	$	24,334	$	97,449	$	203,586	$	295,206	Adjusted EBITDA	$	69,821	$	50,695	$	222,712	$	337,412

Free Cash Flow

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

The following table summarizes our free cash flow calculations (in thousands):


		Three Months Ended				Trailing-Twelve Months Ended					Six Months Ended				Trailing-Twelve Months Ended
		April 2, 2022		April 3, 2021		April 2, 2022		April 3, 2021			July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Net cash provided by operating activities	Net cash provided by operating activities	$	24,558	$	111,598	$	212,970	$	306,318	Net cash provided by operating activities	$	28,691	$	161,420	$	167,281	$	354,080
Subtract: Purchases of property and equipment	Subtract: Purchases of property and equipment	19,604		11,546		74,958		38,295		Subtract: Purchases of property and equipment	36,559		32,012		71,447		47,417
Free cash flow	Free cash flow	$	4,954	$	100,052	$	138,012	$	268,023	Free cash flow	$	(7,868)	$	129,408	$	95,834	$	306,663


2022 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

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
		April 2, 2022			April 3, 2021				July 2, 2022			July 3, 2021
Net operating profit after taxes (NOPAT)	Net operating profit after taxes (NOPAT)							Net operating profit after taxes (NOPAT)
Operating income	Operating income	$	121,527		$	208,506		Operating income	$	141,718		$	250,352
Add: Rent expense (1)	Add: Rent expense (1)	104,937			92,650			Add: Rent expense (1)	107,035			95,226
Add: Interest income	Add: Interest income	—			84			Add: Interest income	—			2
Less: Depreciation on capitalized operating leases (2)	Less: Depreciation on capitalized operating leases (2)	(26,311)			(24,258)			Less: Depreciation on capitalized operating leases (2)	(27,078)			(24,577)
Less: Income taxes (3)	Less: Income taxes (3)	(47,503)			(66,118)			Less: Income taxes (3)	(52,891)			(76,939)
NOPAT	NOPAT	$	152,650		$	210,864		NOPAT	$	168,784		$	244,064

Average invested capital	Average invested capital							Average invested capital
Total deficit	Total deficit	$	(469,213)		$	(332,650)		Total deficit	$	(442,962)		$	(403,658)

Add: Long-term debt (4)	Add: Long-term debt (4)	413,709			315,522			Add: Long-term debt (4)	443,779			382,794
Add: Capitalized operating lease obligations (5)	Add: Capitalized operating lease obligations (5)	839,496			741,200			Add: Capitalized operating lease obligations (5)	856,280			761,808
Total invested capital at end of period	Total invested capital at end of period	$	783,992		$	724,072		Total invested capital at end of period	$	857,097		$	740,944

Average invested capital (6)	Average invested capital (6)	$	746,167		$	763,227		Average invested capital (6)	$	772,772		$	733,151

Return on invested capital (ROIC) (7)	Return on invested capital (ROIC) (7)	20.5		%	27.6		%	Return on invested capital (ROIC) (7)	21.8		%	33.3		%

___________________________

(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%~~23.9% and ~~23.9%~~24.0% for July 2, 2022 and July 3, 2021, respectively.

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

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

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

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

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

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


2123 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

Off-Balance-Sheet Arrangements

As of ~~April~~July 2, 2022, we were not involved in any unconsolidated special purpose entity transactions. Other than our $6 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 since the end of fiscal 2021. 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 January 1, 2022 for additional information regarding our other contractual obligations.

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 January 1, 2022. There were no significant changes in our critical accounting policies since the end of fiscal 2021.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to changes in market-based short-term interest rates that will impact our net interest expense. If overall interest rates were one percentage point higher than current rates, our annual net income would decrease by ~~$3.1~~$3.3 million based on the ~~$413~~$443 million of borrowings under our credit facility at ~~April~~July 2, 2022. 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 ~~April~~July 2, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


2224 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Our legal proceedings are discussed in Note 12, Commitments and Contingencies, Legal Proceedings, in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

ITEM 1A. RISK FACTORS

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.

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)
January 2, 2022 through January 29, 2022 396 $ 86.60 — $ 402,939,000
January 30, 2022 through February 26, 2022 59,272 $ 81.41 58,487 $ 399,093,000
February 27, 2022 through April 2, 2022 753,687 $ 77.47 603,053 $ 360,631,000
Total 813,355 $ 82.82 661,540 $ 360,631,000


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)
April 3, 2022 through April 30, 2022	982	$	49.62	—	$	360,631,000
May 1, 2022 through May 28, 2022	215,629	$	42.81	215,139��	$	351,421,000
May 29, 2022 through July 2, 2022	78,607	$	42.82	78,170	$	348,071,000
Total	295,218	$	42.83	293,309	$	348,071,000

___________________________

(1)Under our Board-approved $600 million share repurchase program (effective April 4, 2021), we repurchased ~~0.7~~0.3 million shares of our common stock at a cost of ~~$42~~$13 million (based on trade dates) during the three months ended ~~April~~July 2, 2022.

(2)In connection with the vesting of employee restricted stock grants, we repurchased ~~151,815~~1,909 shares of our common stock at a cost of ~~$8.7 million~~$85 thousand during the three months ended ~~April~~July 2, 2022.

(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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.


2325 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

ITEM 6. EXHIBITS


Exhibit Number						Description
~~10.1~~10.1*						~~Seventh Amendment to~~ Amended and Restated ~~Credit~~Sleep Number Corporation Executive Severance Pay Plan
10.2*						Fifth Amendment to Retailer Program Agreement, dated July 15, 2022 by and ~~Security Agreement~~ ~~(incorporated by reference to Exhibit 10.36~~ ~~contained in~~between Synchrony Bank, Sleep ~~Number’s Annual Report on Form 10-K filed March 1, 2022 (File No. 000-25121)~~Number Corporation and Select Comfort Retail Corporation)(1)
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*						Inline 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*						Inline XBRL Taxonomy Extension Schema Document
101.CAL*						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*						Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

* Filed Herewith

(1) Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10).


2426 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		SLEEP NUMBER CORPORATION
		(Registrant)

Dated:	~~April 29,~~August 9, 2022	By:	/s/ Shelly R. Ibach
			Shelly R. Ibach
			Chief Executive Officer
			(principal executive officer)

		By:	/s/ Joel J. Laing
			Joel J. Laing
			Chief Accounting Officer
			(principal accounting officer)


2527 \| 1Q2Q 2022 FORM 10-Q						SLEEP NUMBER CORPORATION


		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	1213
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2224
Item 4.	Controls and Procedures	2224

PART II: OTHER INFORMATION		2325

Item 1.	Legal Proceedings	2325
Item 1A.	Risk Factors	2325
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2325
Item 3.	Defaults Upon Senior Securities	2325
Item 4.	Mine Safety Disclosures	2325
Item 5.	Other Information	2325
Item 6.	Exhibits	2426
SIGNATURES		2527