Washington, D.C. 20549
ITEM 1. FINANCIAL STATEMENTS
See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
1. Business and Summary of Significant Accounting Policies
The Company prepared the condensed consolidated financial statements as of and for the three months ended April 1, 2023March 30, 2024 of Sleep Number Corporation and its 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 its financial position as of April 1, 2023March 30, 2024 and December 31, 2022,30, 2023, and the consolidated results of operations and cash flows for the periods presented. The 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.
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 the most recent audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 202230, 2023 and other recent filings with the SEC.
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the Company 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. Changes in these estimates will be reflected in the consolidated financial statements in future periods and could be material. The Company’s 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 its 100%-owned subsidiaries. All significant intra-entity balances and transactions have been eliminated in consolidation.
2. Fair Value Measurements
3. Inventories
4. Goodwill and Intangible Assets, Net
5. Credit Agreement
security interest in substantially all of the Company’s assets and those of its subsidiaries and requires the Company to comply with, among other things, a maximum net leverage ratio (5.0x) and a minimum interest coverage ratio (3.0x).ratio.
6. Leases
The Company’s 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 the Company takes possession of the property. During lease renewal negotiations that extend beyond the original lease term, the Company estimates 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.
8. Revenue Recognition
Revenue from goods and services transferred to customers at a point in time accounted for approximately 98% of revenues for both the three months ended March 30, 2024 and April 1, 2023 and April 2, 2022.2023.
9. Stock-based Compensation Expense
10. Profit Sharing and 401(k) Plan
Under the Company’s 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, the Company may makemakes a discretionary contribution equal to a percentage of the employee’s contribution. During the three months ended March 30, 2024 and April 1, 2023, and April 2, 2022, the Company’s contributions, net of forfeitures, were $2.0 million and $2.4 million, respectively.
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
Additional potential dilutive stock-based awards totaling 1.1 million and 0.4 million for the three months ended April 1, 2023 and April 2, 2022, respectively, have been excluded from the diluted net income per share calculations because these stock-based awards were anti-dilutive.
12.13. Commitments and Contingencies
Warranty Liabilities
The activity in the accrued warranty liabilities account was as follows (in thousands): | | Three Months Ended |
| April 1,
2023 | | April 2,
2022 |
| Balance at beginning of year | $ | 8,997 | | | $ | 10,069 | |
| Three Months Ended | | | Three Months Ended |
| March 30,
2024 | | | March 30,
2024 | | April 1,
2023 |
| Balance at beginning of period | |
| Additions charged to costs and expenses for current-year sales | Additions charged to costs and expenses for current-year sales | 4,371 | | | 4,447 | |
| Deductions from reserves | Deductions from reserves | (4,325) | | | (4,750) | |
| 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 | (88) | | | (31) | |
| Balance at end of period | Balance at end of period | $ | 8,955 | | | $ | 9,735 | |
Legal Proceedings
The Company is involved from time to time in various legal proceedings arising in the ordinary course of its business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with U.S. generally accepted accounting principles, the Company records a liability in its 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, the Company has not established an estimated range of reasonably possible material losses either because it believes that is has valid defenses to claims asserted against it, the proceeding has not advanced to a stage of discovery that would enable it to establish an estimate, or the potential loss is not material. The Company currently does not expect the outcome of pending legal proceedings to have a material effect on its 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 the Company could adversely impact its consolidated results of operations, financial position or cash flows. The Company expenses legal costs as incurred.
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11 | 1Q 2023 FORM 10-Q | SLEEP NUMBER CORPORATION |
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)Purported Class Action Complaint
On December 15, 2023, a former Field Services team member filed a purported class action Complaint in the Superior Court of California, County of Santa Clara, alleging violations of California’s meal and rest break law and additional wage and hour derivative claims under the California Labor Code. While the representative plaintiff was in the Field Services workforce, the Complaint does not limit the purported plaintiff class to that group, but rather extends to all non-exempt Sleep Number employees in the state. The plaintiff alleges that Sleep Number failed to provide compliant meal or rest breaks, failed to pay wages owed due to alleged off the clock work, failed to pay overtime, minimum wage and wages due at termination, thus resulting in inaccurate wage statements, all in violation of California law. The Complaint seeks damages in the form of unpaid regular and premium wages, statutory penalties, pre-judgment and post-judgment interest, plaintiffs’ attorneys’ fees and costs. On February 22, 2024, the plaintiff filed a related lawsuit in the same county alleging violations of a broad range of California Labor Code wage and hour violations under the state’s Private Attorney General Act (PAGA), including the same meal and rest break, and wage and hour, violations as appear in the purported class action. The cases are set for a case management conference on May 8, 2024, after which we expect a scheduling order will be issued.
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, the Company’s former
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SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
Executive Vice President and Chief Financial Officer. Steamfitters alleges material misstatements and omissions in certain of Sleep Number’s public disclosures during the purported class period, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as 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 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. On September 19, 2022, Defendants moved to dismiss the consolidated amended complaint, on September 19, 2022, which motion was heard by the Court on January 17, 2023. On July 10, 2023, and remains pending.the Court issued an order dismissing the Plaintiffs’ consolidated amended complaint with prejudice.
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.
On September 13, 2022, the District of Minnesota entered a joint stipulation staying all proceedings in the Derivative Action pending the outcome of any motion to dismiss the Steamfitters consolidated amended complaint. On July 10, 023, the District of Minnesota in the Steamfitters case dismissed the consolidated amended complaint with prejudice, as noted above. The Plaintiff in the Derivative Action subsequently moved the Court to voluntarily dismiss its the Complaint and on January 22, 2024, the District of Minnesota dismissed the Derivative Action without prejudice.
Stockholder Demand
On March 25, 2022, Sleep Number received a shareholder litigation demand (the “Demand”), requesting that the Board investigate the allegations in the securities class actionSteamfitters 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.
On October 5 and October 12, 2022, Sleep Number received two additional shareholder litigation demands, which adopted and incorporated the allegations and requests in the Demand. Both of these additional litigation demands were referred to the special litigation committee.
The special litigation committee has concluded that it would not be in the best interests of Sleep Number and its shareholders to take any of the actions requested in the demands at this time.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of the Company’s condensed consolidated financial statements with a narrative from the perspective of management on its financial condition, results of operations, liquidity and certain other factors that may affect the Company’s future results. MD&A is presented in eightseven sections:
•Forward-Looking Statements and Risk Factors
•Business Overview
•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 the Company’s historical experience and its present expectations or projections. These risks and uncertainties include, among others:
•Current and futureChanges in economic conditions and consumer sentiment;
•Bank failures or other events affecting financial institutions;sentiment and related impacts on discretionary consumer spending;
•Increases in interest rates, which have increased the cost of servicing the Company’s indebtedness;
•Availability of attractive and cost-effective consumer credit options;
•Operating with minimal levels of inventory, which may leave the Company vulnerableAbility to supply shortages;achieve savings and efficiencies from cost savings plans related to business restructuring actions and to avoid unexpected adverse effects;
•Sleep Number’s dependenceDependence on, and ability to maintain strong working relationships and favorable contractual terms with key suppliers and third parties;
•RisingFluctuations in commodity costs or third-party delivery or logistics costs and other inflationary pressures;
•Risks inherent in global-sourcing activities, including tariffs, foreign regulation, geo-political turmoil, war, strikes,pandemics, labor challenges, government-mandated work closures, outbreaks of pandemicsforeign currency fluctuations, inflation, and climate or contagious diseases,other disasters, and resulting supply shortages and production and delivery delays and disruptions;
•RisksOperating with minimal levels of disruption dueinventory, which may leave the Company vulnerable to health epidemics or pandemics, suchsupply shortages, as well as carrying excess levels of inventory for various products from time to time, which may leave the COVID-19 pandemic;
•Regional risks relatedCompany vulnerable to having global operationsinventory obsolescence and suppliers, including climate and other disasters;write-downs;
•The effectiveness of the Company’s marketing strategy and promotional efforts;
•The execution of Sleep Number’s Total Retail distribution strategy;
•Ability to achieve and maintain high levels of product quality;quality and to improve and expand the product line;
•Ability to improve and expand Sleep Number’s product line and execute successful new product introductions;
•Ability to prevent third parties from usingprotect the Company’s technology, or trademarks, and brand and the adequacy of its intellectual property rights to protect its products and brand;rights;
•Ability to effectively compete;
•Risks of disruption in the operation of any of the Company’s mainfacilities and operations, including manufacturing, assembly, distribution, logistics, field services, home delivery, headquarters, product development, retail or customer service operations;
•The Company’s abilityAbility to comply with existing and changing government regulation;regulations and laws;
•Pending or unforeseen litigation and the potential for associated adverse publicity;
•The adequacy of the Company’s and third-party information systems and costs and disruptions related to upgrading or maintaining these systems;
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1315 | 1Q 20232024 FORM 10-Q | SLEEP NUMBER CORPORATION |
•The Company’s ability to identify and withstand cyber threats that could compromise the security of its systems, result in a data breach or business disruption;
•Risks associated with advancements in or adoption of artificial intelligence technologies;
•Sleep Number’s ability, and the ability of its suppliers and vendors, to attract, retain and motivate qualified and effective personnel;
•The volatility of Sleep Number stock;stock, its removal from various stock indices, and the potential negative effects of shareholder activism or of changes in coverage by securities analysts;
•Environmental, social and governance (ESG) risks, including increasing regulation and stakeholder expectations; and
•The Company’s ability to adapt to climate change and readiness for legal or regulatory responses thereto.
Additional information concerning these, and other risks and uncertainties is contained under the caption “Risk Factors” in Part I, Item 1A. in the Company’s Annual Report on Form 10-K.10-K and in Part II. Item 1A. in subsequent Quarterly Reports on Form 10-Q.
The Company has no obligation to publicly update or revise any of the forward-looking statements contained in this Quarterly Report on Form 10-Q.
Business Overview
Sleep Number is a wellness technology company. Over 14.5company and market leader in the design, manufacturing, marketing and distribution of highly innovative sleep solutions. The Company’s purpose is to improve the health and wellbeing of society through higher quality sleep; to date, it has improved the lives of over 15 million people have had their lives improved by the Company’s award-winningpeople. Sleep Number’s Smart Sleepers benefit from individualized sleep innovationsexperiences, night after night, and are experiencing the physical, mental and emotional benefits of life-changing sleep performance. Sleep Number’s proprietary smart beds combine the physical and digital worlds, pairing exceptional sleep with a highly advanced digital technology platform. Only Sleep Number can provide a dynamic, adjustable and adaptive sleep experience that effortlessly responds to the needs of each sleeper helping them reach their full potential. More than two million Smart Sleepers benefit from the Company’s smart beds, which change with the sleeper over time and provide individualized sleep that is unique, like they are.sleep.
Sleep Number’s life-changing, differentiated smart beds combine physical and digital innovations, integrating unparalleled physical comfort with a highly advanced technology platform. The smart beds offer the Company’s signature firmness adjustability, enabling each sleeper adjustable comfort. Embedded digital sensors learn the sleep needs of each individual; “sense and do” technology uses the sensed data to automatically adjust the smart bed to keep the sleeper comfortable throughout the night. Active temperature balancing technology supports the ideal climate for both sleepers and solves a prevalent sleep challenge. Additionally, the smart beds are an exceptional value, with personalized sleep insights delivered daily, new features regularly added to all smart beds through over-the-air updates, and prices to meet most budgets. Sleep Number® smart beds provide unmatched features, benefits and comfort that can lead to improved sleep health and wellness for both sleepers.
The Company’s advantaged business model is guidedsupported by its purposeconsumer innovation strategy: an individualized sleep wellness platform, a network of highly engaged Smart Sleepers, a vertically integrated operating model, and a culture of individuality, with an ambitious vision to improvebecome one of the healthworld’s most beloved brands. Sleep Number’s exclusive distribution meets its customers whenever and wellbeing of societywherever they choose – through higher quality sleep.digital and in-store touchpoints – to provide an exceptional experience and a lifelong relationship. The Company partners with world-leading sleep and health institutions to bring the power of 19nearly 26 billion hours of longitudinal sleep data to sleep science and research. The Company’s retail experience meets its consumers whenever and wherever they choose – through online and in-store touchpoints. And Sleep Number’s 5,000 mission-driven4,000 purpose-driven team members passionately deliver individualizedare dedicated to the Company’s mission of improving lives by individualizing sleep experiences for everyone.experiences.
Through investments in its consumer innovation strategy and vertically integrated business model, Sleep Number strengthens its competitive advantagesis focused on cost improvement through broad-based restructuring actions to become a stronger, more durable company, poised for accelerating growth and creates a digital flywheel for sustainable growth, driving consumersuperior shareholder returns as the bedding industry demand and performance. Itenvironment improves. The Company generates revenue by marketing and selling its innovationsinnovative smart beds directly to new and existing customers through its vertically integrated, exclusive, direct-to-consumer retail touch points including Stores, Online, Phone, and Chat (Total Retail). Sleep Number is committed to creating long-term superior value for all stakeholders as it focuses on the Company’s three performance drivers: (1) increasing consumer demand; (2) leveraging its vertically integrated business model; and (3) deploying capital efficiently.
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| 16 | 1Q 2024 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 the Company’s 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 sentiment and general economic conditions. The extent to which these external factors will impact the Company’s business and its consolidated financial results will depend on future developments, which are highly uncertain and cannot be predicted. Therefore, the historical results of operations may not be indicative of the results that may be achieved for any future period.
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14 | 1Q 2023 FORM 10-Q | SLEEP NUMBER CORPORATION |
Highlights
Financial highlights for the three months ended April 1, 2023March 30, 2024 were as follows:
•Net sales for the three months ended April 1, 2023 were consistent atMarch 30, 2024 of $470 million decreased 11% from $527 million withfor the prior-year period. Demand was impacted by historically lowsame period one year ago. The mattress industry is in a historic recession, while consumer sentiment.sentiment is improving, consumer purchasing power remains limited, and consumers are scrutinizing their spending.
•The net sales change consisted of a 2%resulted from an 11% comparable sales decrease in Total Retail offset by additional sales from 18 net new stores opened in the past 12 months that added 2 percentage points (ppt.) of growth.Retail. For additional details, see the components of total net sales change on page 1619. •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 1, 2023March 30, 2024 totaled $3.2$2.8 million, compared with $3.5$3.2 million for the same period last year.
•Operating income for the three months ended April 1, 2023March 30, 2024 was $26$6 million, compared with $4$26 million in the prior-year period. The $22$20 million increasedecrease in operating income was driven by the lower net sales and a 1.60.2 ppt. increasedecrease in the gross profit rate, andpartly offset by a $14 million reduction in the operating expenses. Operating expenses for the three months ended March 30, 2024 included $11 million of restructuring costs.
•Adjusted EBITDA for the three months ended March 20, 2024 was $37 million, compared to $49 million in the prior-year period as ongoing cost reduction actions partially offset the year-over-year net sales decline.
•The 1.60.2 ppt. gross profit rate increasedecrease was primarily due to pricing actions take over the past twelve months.product mix of our FlexFit smart adjustable bases, partly offset by improvement in commodity prices and operating efficiencies. See the Gross profit discussion on page 1820 for additional details. •The $14 million reduction in the Company’s operating expenses was mainly due to lower sales and marketing expenses.and research and development expenses, partly offset by $11 million of restructuring costs.
•Net incomeloss for the three months ended April 1, 2023 increased to $11March 30, 2024 was $7 million, compared with $2net income of $11 million for the same period one year ago. Net loss per diluted share was $0.33, compared with net income per diluted share wasof $0.51 compared with $0.09 last year.
•The Company achieved anCompany’s adjusted return on invested capital (Adjusted ROIC) of 20.4%was 4.5% on a trailing twelve-month basis for the period ended April 1, 2023,March 30, 2024, compared with 32.0%20.4% for the comparable period one year ago.
•The Company generated $19$34 million in cash from operating activities for the three months ended April 1, 2023,March 30, 2024, compared with $25$19 million for the same period one year ago.
•Free cash flow of $24 million for the three months ended March 30, 2024, compared with $3 million for the same period one year ago.
•As of April 1, 2023,March 30, 2024, the Company had $471$524 million of borrowings under its revolving credit facility and available net liquidity of $347 million.facility.
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1517 | 1Q 20232024 FORM 10-Q | SLEEP NUMBER CORPORATION |
The following table sets forth the Company’s 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 | |
| April 1,
2023 | | April 2,
2022 | |
| Three Months Ended | |
| Three Months Ended | |
| Three Months Ended | |
| March 30,
2024 | |
| March 30,
2024 | |
| March 30,
2024 | |
| Net sales | |
| Net sales | |
| Net sales | Net sales | $ | 526.5 | | | 100.0 | % | | $ | 527.1 | | | 100.0 | % | |
| Cost of sales | Cost of sales | 216.3 | | | 41.1 | % | | 224.8 | | | 42.7 | % | |
| Cost of sales | |
| Cost of sales | |
| Gross profit | |
| Gross profit | |
| Gross profit | Gross profit | 310.3 | | | 58.9 | % | | 302.3 | | | 57.3 | % | |
| Operating expenses: | Operating expenses: | | |
| Operating expenses: | |
| Operating expenses: | |
| Sales and marketing | |
| Sales and marketing | |
| Sales and marketing | Sales and marketing | 230.5 | | | 43.8 | % | | 240.3 | | | 45.6 | % | |
| General and administrative | General and administrative | 39.4 | | | 7.5 | % | | 41.3 | | | 7.8 | % | |
| General and administrative | |
| General and administrative | |
| Research and development | Research and development | 14.4 | | | 2.7 | % | | 16.3 | | | 3.1 | % | |
| Research and development | |
| Research and development | |
| Restructuring costs | |
| Restructuring costs | |
| Restructuring costs | |
| Total operating expenses | |
| Total operating expenses | |
| Total operating expenses | Total operating expenses | 284.3 | | | 54.0 | % | | 297.9 | | | 56.5 | % | |
| Operating income | Operating income | 25.9 | | | 4.9 | % | | 4.4 | | | 0.8 | % | |
| Operating income | |
| Operating income | |
| Interest expense, net | Interest expense, net | 9.1 | | | 1.7 | % | | 2.1 | | | 0.4 | % | |
| Income before income taxes | 16.8 | | | 3.2 | % | | 2.3 | | | 0.4 | % | |
| Interest expense, net | |
| Interest expense, net | |
| (Loss) income before income taxes | |
| (Loss) income before income taxes | |
| (Loss) income before income taxes | |
| Income tax expense | Income tax expense | 5.4 | | | 1.0 | % | | 0.2 | | | 0.0 | % | |
| Net income | $ | 11.5 | | | 2.2 | % | | $ | 2.1 | | | 0.4 | % | |
| Income tax expense | |
| Income tax expense | |
| Net (loss) income | |
| Net (loss) income | |
| Net (loss) income | |
| | Net income per share: | | |
| Net (loss) income per share: | |
| | Net (loss) income per share: | |
| | Net (loss) income per share: | |
| Basic | Basic | $ | 0.51 | | | $ | 0.09 | | | |
| Basic | |
| Basic | |
| Diluted | |
| Diluted | |
| Diluted | Diluted | $ | 0.51 | | | $ | 0.09 | | | |
| | Weighted-average number of common shares: | Weighted-average number of common shares: | | |
| | Weighted-average number of common shares: | |
| | Weighted-average number of common shares: | |
| Basic | |
| Basic | |
| Basic | Basic | 22.3 | | | 22.8 | | | |
| Diluted | Diluted | 22.6 | | | 23.6 | | | |
| Diluted | |
| Diluted | |
The percentage of total net sales, by dollar volume, was as follows: | | Three Months Ended | |
| April 1,
2023 | | April 2,
2022 | |
| Three Months Ended | |
| Three Months Ended | |
| Three Months Ended | |
| March 30,
2024 | |
| March 30,
2024 | |
| March 30,
2024 | |
| Retail stores | |
| Retail stores | |
| Retail stores | Retail stores | 87.1 | % | | 84.3 | % | |
| Online, phone, chat and other | Online, phone, chat and other | 12.9 | % | | 15.7 | % | |
| Online, phone, chat and other | |
| Online, phone, chat and other | |
| Total Company | Total Company | 100.0 | % | | 100.0 | % | |
| Total Company | |
| Total Company | |
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The components of total net sales change, including comparable net sales changes, were as follows: | | Three Months Ended | |
| April 1,
2023 | | April 2,
2022 | |
| Three Months Ended | |
| Three Months Ended | |
| Three Months Ended | |
| March 30,
2024 | |
| March 30,
2024 | |
| March 30,
2024 | |
| Sales change rates: | |
| Sales change rates: | |
| Sales change rates: | Sales change rates: | | |
Retail comparable-store sales (1) | Retail comparable-store sales (1) | 1 | % | | (14 | %) | |
Retail comparable-store sales (1) | |
Retail comparable-store sales (1) | |
| Online, phone and chat | |
| Online, phone and chat | |
| Online, phone and chat | Online, phone and chat | (18 | %) | | 5 | % | |
Total Retail comparable sales change (1) | Total Retail comparable sales change (1) | (2 | %) | | (11 | %) | |
Total Retail comparable sales change (1) | |
Total Retail comparable sales change (1) | |
| Net opened/closed stores and other | |
| Net opened/closed stores and other | |
| Net opened/closed stores and other | Net opened/closed stores and other | 2 | % | | 4 | % | |
| Total Company | Total Company | 0 | % | | (7 | %) | |
| Total Company | |
| Total Company | |
___________________________
(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.
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Other sales metrics were as follows: | | Three Months Ended | |
| April 1,
2023 | | April 2,
2022 | |
| Three Months Ended | |
| Three Months Ended | |
| Three Months Ended | |
| March 30,
2024 | |
| March 30,
2024 | |
| March 30,
2024 | |
Average sales per store (1) (in thousands) | |
Average sales per store (1) (in thousands) | |
Average sales per store (1) (in thousands) | Average sales per store (1) (in thousands) | $ | 3,239 | | | $ | 3,487 | | |
Average sales per square foot (1) | Average sales per square foot (1) | $ | 1,060 | | | $ | 1,167 | | |
Average sales per square foot (1) | |
Average sales per square foot (1) | |
Stores > $2 million in net sales (2) | |
Stores > $2 million in net sales (2) | |
Stores > $2 million in net sales (2) | Stores > $2 million in net sales (2) | 75 | % | | 82 | % | |
Stores > $3 million in net sales (2) | Stores > $3 million in net sales (2) | 36 | % | | 46 | % | |
Stores > $3 million in net sales (2) | |
Stores > $3 million in net sales (2) | |
Average revenue per smart bed unit (3) | Average revenue per smart bed unit (3) | $ | 5,848 | | | $ | 4,905 | | |
Average revenue per smart bed unit (3) | |
Average revenue per smart bed unit (3) | |
___________________________
(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 | |
| April 1,
2023 | | April 2,
2022 | |
| Three Months Ended | |
| Three Months Ended | |
| Three Months Ended | |
| March 30,
2024 | |
| March 30,
2024 | |
| March 30,
2024 | |
| Beginning of period | |
| Beginning of period | |
| Beginning of period | Beginning of period | 670 | | | 648 | | |
| Opened | Opened | 12 | | | 13 | | |
| Opened | |
| Opened | |
| Closed | |
| Closed | |
| Closed | Closed | (11) | | | (8) | | |
| End of period | End of period | 671 | | | 653 | | |
| End of period | |
| End of period | |
| | | | | | | | |
1719 | 1Q 20232024 FORM 10-Q | SLEEP NUMBER CORPORATION |
Comparison of Three Months Ended April 1, 2023March 30, 2024 with Three Months Ended April 2, 20221, 2023
Net sales
Net sales for the three months ended April 1, 2023March 30, 2024 of $470 million decreased 11% from $527 million were consistent withfor the same period one year ago. Demand was impacted by historically lowThe mattress industry is in a historic recession, while consumer sentiment.sentiment is improving, consumer purchasing power remains limited, and consumers are scrutinizing their spending.
The net sales change consisted primarily of a 2%an 11% comparable sales decrease in Total Retail offset by additional sales from 18 net new stores opened in the past 12 months that added 2 percentage points (ppt.) of growth.Retail.
The $0.6$56.1 million net sales decrease compared with the same period one year ago was comprised of the following: (i) a $10.6 $44.3 million decrease in Total Retail comparable net sales; (ii) a $12.6 million decrease from online, phone and chat; slightly offset by (ii)(iii) a $10.0$0.8 million increase from net store openings.openings and other. Total Retail smart bed unit sales decreased 16%9% compared with the prior year. Total Retail average revenue per smart bed unit increaseddecreased by 19%1% to $5,848,$5,765, compared with $4,905$5,848 in the prior-year period. Prior year average revenue per smart bed unit was impacted by a less favorable sales mix due to supply constraints impacting adjustable bases and smart bed deliveries at the higher end of the Company’s product line.
Gross profit
Gross profit of $310$276 million for the three months ended April 1, 2023 increasedMarch 30, 2024 decreased by $8$34 million, or 3%11%, compared with $302$310 million for the same period one year ago. The gross profit rate increaseddecreased to 58.9%58.7% of net sales for the three months ended April 1, 2023,March 30, 2024, compared with 57.3%58.9% for the prior-year comparable period.
The current-year gross profit rate increasedecrease of 1.60.2 ppt. was mainly due to: (i) pricing actions taken overproduct mix of our FlexFit smart adjustable bases, which pressured the past twelve months (1.8rate by 1.3 ppt.); (ii) partly offset by improvement in commodity prices and operating efficiencies, (0.6increasing the rate by 1.0 ppt.); and (iii) favorable product mix changes (0.6 ppt.); partially offset by (iv) incremental logistics and delivery costs including labor inflation and investments in our distribution network (0.5 ppt.); (v) 16% lower delivered smart bed volume (0.3 ppt.); and (vi) higher performance-based incentive compensation (0.2 ppt.). In addition, the gross profit rate willmay fluctuate from quarter to quarter due to a variety of other factors, including changes in warranty expenses, and return and exchange costs.costs, manufacturing and supply chain operations and performance-based incentive compensation.
Sales and marketing expenses
Sales and marketing expenses for the three months ended April 1, 2023March 30, 2024 were $230$209 million, or 43.8%44.3% of net sales, compared with $240$230 million, or 45.6%43.8% of net sales, for the same period one year ago. The current-year sales and marketing expenses rate decreaseincrease of 1.80.5 ppt. was primarily due to lower media expense withthe deleveraging impact of a decrease in11% net sales decline. Media spend of 11%was 8% lower year-over-year.
General and administrative expenses
General and administrative (G&A) expenses totaled $39 million, or 7.5%8.3% of net sales, for the three months ended April 1, 2023,March 30, 2024, compared with $41$39 million, or 7.8%7.5% of net sales, in the prior-year period. The $1.9$0.3 million decrease in G&A expenses consisted mainly of: (i) $2.4of a $2.3 million reductiondecrease in employee compensation on lower headcount; (ii) a $0.8 million reduction in professional and consulting fees; (iii) a $0.5 million decrease in travel and training expenses; and (iv) a $1.9 million net decrease in other miscellaneous expenses; partiallyheadcount, largely offset by (v) a $3.7 millionan increase in company-wide performance-based incentive compensation.miscellaneous other expenses, which benefited during the same period one year ago from legal and insurance settlements of $1.8 million. The G&A expenses rate decreasedincreased by 0.30.8 ppt. in the current-year period, compared with the same period one year ago due to the items discussed above.above and the deleveraging impact of lower net sales.
Research and development expenses
Research and development (R&D) expenses decreased to $14$12 million for the three months ended April 1, 2023,March 30, 2024, compared with $16$14 million with the same period last year onprimarily due to lower headcount. The Company continues to maintain a flexible mindset, to capitalize on profitable opportunities asheadcount and outside services. While the environment improves, and deliver tangible life-long health benefits for Smart Sleepers.Company’s consumer innovation pipeline remains robust, it is re-prioritizing R&D resources in this highly constrained environment.
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18 | 1Q 2023 FORM 10-Q | SLEEP NUMBER CORPORATION |
Interest expense, net
Interest expense, net increased to $9$12 million for the three months ended April 1, 2023,March 30, 2024, compared with $2$9 million for the same period one year ago. The $7$3 million increase was mainly driven by a higher weighted-average interest rate compared with the same period one year ago.
| | | | | | | | |
| 20 | 1Q 2024 FORM 10-Q | SLEEP NUMBER CORPORATION |
Restructuring Costs
In the fourth quarter of 2023, the Company initiated cost reduction actions to reduce operating expenses and accelerate gross margin initiatives, and recognized $15.7 million of restructuring costs in that quarter. In addition to the costs incurred in 2023, the Company incurred an additional $10.6 million of restructuring costs in the first quarter of 2024. Charges incurred related to this initiative were comprised of contract termination costs, severance and employee-related benefits, professional fees and other, and asset impairment charges and are included in the restructuring costs line in the Company’s consolidated statement of operations. The Company expects an additional $3 million of restructuring costs to be incurred throughout the remainder of 2024.
Income tax expense
Income tax expense totaled $5$0.7 million for the three months ended April 1, 2023,March 30, 2024, compared with $0.2$5 million for the same period last year. The effectivechange in income tax rate forexpense was primarily due to the three months ended April 1, 2023 was 31.9%, compared with 9.4% for the comparable period last year.impact of discrete tax expenses and (loss) income before income taxes levels. Discrete tax expenses,expense, primarily stock-based compensation excess tax expense, were $0.8shortfalls, was $2.2 million for the three months ended April 1, 2023,March 30, 2024, compared with discrete tax benefits of $0.4to $0.8 million infor the same period last year’s first quarter.year.
Liquidity and Capital Resources
Managing liquidity and capital resources is an important part of the Company’s commitment to deliver superior shareholder value over time. The Company’s primary sources of liquidity are cash flows provided by operating activities and cash available under its $825$682.5 million revolving credit facility.facility, as amended. As of April 1, 2023,March 30, 2024, the Company does not have any off-balance sheet financing other than its $7 million in outstanding letters of credit. The cash generated from ongoing operations and cash available under the 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 months ended April 1, 2023March 30, 2024 primarily consisted of $19$34 million of cash provided by operating activities, offset by a $21 million decrease in short-term borrowings which included a reduction of $16 million in the revolving credit facility, $9 million of cash used to purchase property and equipment and $3 million of cash used to repurchase its common stock (based on settlement, in connection with the vesting of employee restricted stock grants).issue notes receivable.
The following table summarizes cash flows (in millions). Amounts may not add due to rounding differences: | | Three Months Ended |
| April 1,
2023 | | April 2,
2022 |
| Three Months Ended | | | Three Months Ended |
| March 30,
2024 | | | March 30,
2024 | | April 1,
2023 |
| Total cash provided by (used in): | Total cash provided by (used in): | |
| Operating activities | |
| Operating activities | |
| Operating activities | Operating activities | $ | 18.6 | | | $ | 24.6 | |
| Investing activities | Investing activities | (15.6) | | | (19.6) | |
| Financing activities | Financing activities | (3.4) | | | (5.8) | |
| Net decrease in cash and cash equivalents | Net decrease in cash and cash equivalents | $ | (0.3) | | | $ | (0.8) | |
Cash provided by operating activities for the three months ended April 1, 2023March 30, 2024 was $19$34 million, compared with $25$19 million for the three months ended April 2, 2022.1, 2023. Significant components of the year-over-year change in cash provided by operating activities included: (i) a $9 million increase in net income for the three months ended April 1, 2023, compared with the same period one year ago; (ii) a $25 million fluctuation in accrued compensation and benefits primarily related to year-over-year changes in company-wide performance-based compensation that was earned in 2021 and paid in the first quarter of 2022, compared with no company-wide performance-based compensation earned in 2022 and paid in the first quarter of 2023; (iii) a $17 million fluctuation in customer prepaymentsinventory due to timing of deliveries;lower sales volumes and (iv)operational improvements; (ii) a $22$17 million fluctuationchange in prepaid expenses and other assets primarily due to the amount and timing of rebate payments.and rent payments; and (iii) a $6 million fluctuation in customer prepayments; partly offset by (iv) a $19 milliondecrease in net income for the three months ended March 30, 2024 compared with the three months ended April 1, 2023; and (v) a $7 millionfluctuation in income taxes payable.
Net cash used in investing activities to purchase property and equipment was $16$9 million for the three months ended April 1, 2023,March 30, 2024, compared with $20$16 million for the same period one year ago. The year-over-year decrease was primarily due toIn addition, the timingCompany issued $3 million of cash flows associated with investments in information technology.notes receivable during the three months ended March 30, 2024.
Net cash used in financing activities was $3$22 million for the three months ended April 1, 2023,March 30, 2024, compared with $6net cash used in financing activities of $3 million for the same period last year. DuringShort-term borrowings decreased by $21 million during the three months ended April 1, 2023, the Company repurchased $3current-year period due to a $16 million of its stock (based on settlement dates,decrease in connection with the vesting of employee restricted stock awards), compared with $51 million (based on settlement dates, $42 millionborrowings under the Board-approved share repurchase program and $9 millionrevolving credit facility to
| | | | | | | | |
1921 | 1Q 20232024 FORM 10-Q | SLEEP NUMBER CORPORATION |
$524 million and a $5 million decrease in book overdrafts, which are included in the net change in short-term borrowings. During the three months ended March 30, 2024, the Company repurchased $1 million of its stock compared with $3 million (based on settlement dates, in connection with the vesting of employee restricted stock awards) during the same period one year ago. Short-term borrowings decreased by $0.4 million during the current-year period due to an $11.0 million increaseThe Company made no share repurchases under its Board-approved share repurchase program in borrowings under the revolving credit facility to $471 million offset by an $11.4 million decrease in book overdrafts which are included in the net change in short-term borrowings. Short-term borrowings increased by $45 million during the prior-year period due to a $31 million increase in borrowings under the credit facility to $413 million and a $14 million increase in book overdrafts.either period.
With the incremental macroeconomic pressures, inIn the second quarter of fiscal 2022, the Company suspended share repurchases under its Board-approved share repurchase program. At April 1, 2023,March 30, 2024, there was $348 millionremaining authorization under the Board-approved $600 million share repurchase program. There is no expiration date governing the period over which the Company can repurchase shares.
The Company has a credit facility (Credit Agreement) which is for general corporate purposes, to meet its seasonal working capital requirements and to repurchase its stock. The Company amended the Credit Agreement on October 26, 2022. The amendment, among other things, (a) provides relief from the requirement that the net leverage ratio not exceed 3.75x for certain corporate actions including Permitted Capital Distributions for Performance or Taxes (as defined in the Credit Agreement) and certain acquisition activity; (b) increases the permissible net leverage ratio to 5.0x for the three consecutive quarterly reporting periods ending July 1, 2023; (c) increases the commitment fee rate to 50 basis points and the margin applicable to interest rates for all borrowings by an additional 50 basis points, in each case if the net leverage ratio is greater than or equal to 4.5x; and (d) replaces the option to borrow at an interest rate based on London Interbank Offered Rate (LIBOR) to one based on a Term SOFR Rate. The Term SOFR Rate equals the sum of (x) the Term SOFR Screen Rate (as defined in the Credit Agreement) for the applicable interest period (but in no event less than zero), plus (y) 0.10%, plus (z) the margin based on Sleep Number’s net leverage ratio. Under the terms of the Credit agreement, the Company pays a variable rate of interest and a commitment fee based on its leverage ratio.
At April 1, 2023,March 30, 2024, the Company had $471$524 million of borrowings under its revolving credit facility, $7 million in outstanding letters of credit and net liquidity available under the credit facility of $347$152 million. Total availability under its revolving credit facility was $682.5 million, which amortizes by $2.5 million per quarter through December 2026. At April 1, 2023,March 30, 2024, the Company’s leverage ratio as defined in the credit agreement was 4.0x,4.2x versus the permissible net leverage ratio of 5.0x, the weighted-average interest rate on borrowings under the credit facility was 7.1%8.4% and the Company was in compliance with all financial covenants.
Sleep Number has an agreement with Synchrony Bank to offer qualified customers revolving credit arrangements to finance their purchases from the Company (Synchrony Agreement). The Synchrony Agreement contains financial covenants consistent with the credit facility, including a maximum net leverage ratio and a minimum interest coverage ratio. As of April 1, 2023, the Company was in compliance with all financial covenants.
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2022 | 1Q 20232024 FORM 10-Q | SLEEP NUMBER CORPORATION |
Non-GAAP Data Reconciliations
Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)
The Company defines earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation, restructuring costs and asset impairments. Management believes Adjusted EBITDA is a useful indicator of its financial performance and its ability to generate cash from operating activities. The Company’s 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.
Adjusted EBITDA calculations are as follows (in thousands): | | Three Months Ended | | Trailing-Twelve
Months Ended |
| April 1,
2023 | | April 2,
2022 | | April 1,
2023 | | April 2,
2022 |
| Net income | $ | 11,465 | | | $ | 2,074 | | | $ | 46,001 | | | $ | 89,186 | |
| Income tax expense | 5,366 | | | 214 | | | 17,437 | | | 24,947 | |
| Three Months Ended | | | Three Months Ended | | Trailing-Twelve
Months Ended |
| March 30,
2024 | | | March 30,
2024 | | April 1,
2023 | | March 30,
2024 | | April 1,
2023 |
| Net (loss) income | |
| Income tax expense (benefit) | |
| Interest expense | Interest expense | 9,102 | | | 2,127 | | | 25,960 | | | 7,394 | |
| Depreciation and amortization | Depreciation and amortization | 17,991 | | | 15,683 | | | 68,934 | | | 60,943 | |
| Stock-based compensation | Stock-based compensation | 4,639 | | | 4,133 | | | 13,729 | | | 20,930 | |
| Restructuring costs | |
| Asset impairments | Asset impairments | 12 | | | 103 | | | 204 | | | 186 | |
| Adjusted EBITDA | Adjusted EBITDA | $ | 48,575 | | | $ | 24,334 | | | $ | 172,265 | | | $ | 203,586 | |
Free Cash Flow
The Company’s “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, the Company is providing this information as it believes it facilitates analysis for investors and financial analysts.
The following table summarizes free cash flow calculations (in thousands): | | Three Months Ended | | Trailing-Twelve
Months Ended |
| April 1,
2023 | | April 2,
2022 | | April 1,
2023 | | April 2,
2022 |
| Three Months Ended | | | Three Months Ended | | Trailing-Twelve
Months Ended |
| March 30,
2024 | | | March 30,
2024 | | April 1,
2023 | | March 30,
2024 | | April 1,
2023 |
| Net cash provided by operating activities | Net cash provided by operating activities | $ | 18,581 | | | $ | 24,558 | | | $ | 30,161 | | | $ | 212,970 | |
| Subtract: Purchases of property and equipment | Subtract: Purchases of property and equipment | 15,556 | | | 19,604 | | | 65,406 | | | 74,958 | |
| Free cash flow | Free cash flow | $ | 3,025 | | | $ | 4,954 | | | $ | (35,245) | | | $ | 138,012 | |
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2123 | 1Q 20232024 FORM 10-Q | SLEEP NUMBER CORPORATION |
Non-GAAP Data Reconciliations (continued)
Return on Invested Capital (Adjusted ROIC)
(dollars in thousands)
Adjusted ROIC is a financial measure the Company uses to determine how efficiently it deploys its capital. It quantifies the return the Company earns on its adjusted invested capital. Management believes Adjusted ROIC is also a useful metric for investors and financial analysts. The Company computes Adjusted ROIC as outlined below. Its definition and calculation of Adjusted ROIC may not be comparable to similarly titled definitions and calculations used by other companies.
The tables below reconcile adjusted net operating profit after taxes (Adjusted NOPAT) and total adjusted invested capital, which are non-GAAP financial measures, to the comparable GAAP financial measures (in thousands): | | Trailing-Twelve Months Ended |
| April 1,
2023 | | April 2,
2022 |
| Trailing-Twelve Months Ended | | | Trailing-Twelve Months Ended |
| March 30,
2024 | | | March 30,
2024 | | April 1,
2023 |
| Adjusted net operating profit after taxes (Adjusted NOPAT) | Adjusted net operating profit after taxes (Adjusted NOPAT) | |
| Operating income | |
| Operating income | |
| Operating income | Operating income | $ | 89,398 | | | $ | 121,527 | |
Add: Operating lease expense (1) | Add: Operating lease expense (1) | 26,487 | | | 24,907 | |
| Less: Income taxes (2) | Less: Income taxes (2) | (29,674) | | | (34,753) | |
| Less: Income taxes (2) | |
| Less: Income taxes (2) | |
| Adjusted NOPAT | Adjusted NOPAT | $ | 86,211 | | | $ | 111,681 | |
| | Average adjusted invested capital | Average adjusted invested capital | |
| Average adjusted invested capital | |
| Average adjusted invested capital | |
| Total deficit | |
| Total deficit | |
| Total deficit | Total deficit | $ | (425,047) | | | $ | (469,213) | |
Add: Long-term debt (3) | Add: Long-term debt (3) | 470,991 | | | 413,709 | |
Add: Operating lease obligations (4) | Add: Operating lease obligations (4) | 436,939 | | | 412,574 | |
| Total adjusted invested capital at end of period | Total adjusted invested capital at end of period | $ | 482,883 | | | $ | 357,070 | |
| Average adjusted invested capital (5) | Average adjusted invested capital (5) | $ | 423,287 | | | $ | 348,804 | |
Average adjusted invested capital (5) | |
Average adjusted invested capital (5) | |
| Adjusted return on invested capital (Adjusted ROIC) (6) | Adjusted return on invested capital (Adjusted ROIC) (6) | 20.4 | % | | 32.0 | % |
Adjusted return on invested capital (Adjusted ROIC) (6) | |
Adjusted return on invested capital (Adjusted ROIC) (6) | | 4.5 | % | | 20.4 | % |
___________________________
(1) Represents the interest expense component of lease expense included in the Company’s financial statements under ASC 842, Leases.
(2) Reflects annual effective income tax rates, before discrete adjustments, of 24.6% and 25.6% for March 30, 2024 and 23.7% for April 1, 2023, and April 2, 2022, respectively.
(3) Long-term debt includes existing finance lease liabilities.
(4) Reflects operating lease liabilities included in the Company’s financial statements under ASC 842.
(5) Average adjusted invested capital represents the average of the last five fiscal quarters’ ending adjusted invested capital balances.
(6) Adjusted ROIC equals Adjusted NOPAT divided by average adjusted invested capital.
Note - the Company’s adjusted ROIC calculation and data are considered non-GAAP financial measures and are not in accordance with, or preferable to, GAAP financial data. However, the Company is providing this information as it believe it facilitates analysis of the Company's financial performance by investors and financial analysts. The Company updated its Adjusted ROIC calculation effective beginning with the reporting period ended December 31, 2022, to reflect adjustments consistent with ASC 842. The prior period has been updated to reflect this calculation.
GAAP - generally accepted accounting principles in the U.S.
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22 | 1Q 2023 FORM 10-Q | SLEEP NUMBER CORPORATION |
Off-Balance-Sheet Arrangements
As of April 1, 2023, the Company was not involved in any unconsolidated special purpose entity transactions. Other than it’s $7 million in outstanding letters of credit, the Company does not have any off-balance-sheet financing.
There have been no material changes in the Company’s contractual obligations since the end of fiscal 2022. See Note 5, Credit Agreement, of the Notes to the Condensed Consolidated Financial Statements for information regarding the Company’s credit agreement. See the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for additional information regarding its other contractual obligations.
Critical Accounting Policies
The Company discusses its critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.30, 2023. There were no significant changes in the Company’s critical accounting policies since the end of fiscal 2022.
2023.
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| 24 | 1Q 2024 FORM 10-Q | SLEEP NUMBER CORPORATION |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in market-based short-term interest rates that will impact net interest expense. If overall interest rates were one percentage point higher than current rates, annual net income would decrease by $3.4$3.9 million based on the $471$524 million of borrowings under the credit facility at April 1, 2023.March 30, 2024. The Company does not manage the interest-rate volatility risk of borrowings under the credit facility through the use of derivative instruments.
ITEM 4. CONTROLS AND PROCEDURES
Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures
The Company maintains 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. The Company’s management, with the participation of its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, its principal executive officer and principal financial officer concluded that the Company’s 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 the Company’s internal control over financial reporting during the fiscal quarter ended April 1, 2023,March 30, 2024, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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2325 | 1Q 20232024 FORM 10-Q | SLEEP NUMBER CORPORATION |
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company’s 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
In addition to the risks discussed below and other information set forth in this Quarterly Report on Form 10-Q, theThe Company’s business, financial condition and operating results are subject to a number of risks and uncertainties, including both those that are specific to the Company’s 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 the Company’s most recent Annual Report on Form 10-K.10-K and in subsequent Quarterly Reports on Form 10-Q. The risk factors discussed in the Annual Report on Form 10-K and in subsequent Quarterly Reports on Form 10-Q including this Quarterly Report on Form 10-Q do not identify all risks that the Company faces because its business operations could also be affected by additional risk factors that are not presently known to the Company or that it currently considers to be immaterial to its operations.
Bank failures or other events affecting financial institutions could adversely affect our liquidity and financial performance.
The recent and potential future disruptions in access to bank deposits or lending commitments due to bank failures and banking industry instability could materially and adversely affect the Company’s liquidity, access to cash and credit, and the Company’s business, financial condition and results of operations, as well those of the Company’s third-party suppliers or vendors. The recent closures of Silicon Valley Bank (SVB) and Signature Bank and their placement into receivership with the Federal Deposit Insurance Company (FDIC) along with the FDIC’s seizure and sale of First Republic Bank created market disruption and uncertainty with respect to the financial condition of a number of other banking institutions in the United States. While the Company does not have any direct exposure to SVB, Signature Bank, or First Republic Bank, the Company does maintain its cash at financial institutions, occasionally in balances that exceed the current FDIC insurance limits.
If other banks and financial institutions enter receivership or become insolvent in the future due to financial conditions affecting the banking system and financial markets, the Company’s ability to access its cash and cash equivalents, including transferring funds, making payments or receiving funds, and the Company’s access to credit, as well as those of its third-party suppliers or vendors, may be threatened and could have a material adverse effect on the Company’s business and financial condition.
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2426 | 1Q 20232024 FORM 10-Q | SLEEP NUMBER CORPORATION |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) – (b) Not applicable.
(c) Issuer Purchases of Equity Securities
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased(1)(2) | | Average Price
Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(3) |
| January 1, 2023 through January 28, 2023 | | 131 | | | $ | 34.13 | | | — | | | $ | 348,071,000 | |
| January 29, 2023 through February 25, 2023 | | 445 | | | $ | 35.53 | | | — | | | $ | 348,071,000 | |
| February 26, 2023 through April 1, 2023 | | 117,662 | | | $ | 28.42 | | | — | | | $ | 348,071,000 | |
| Total | | 118,238 | | | $ | 28.45 | | | — | | | $ | 348,071,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) |
| December 31, 2023 through January 27, 2024 | | 790 | | | $ | 13.47 | | | — | | | $ | 348,071,000 | |
| January 28, 2024 through February 24, 2024 | | 668 | | | $ | 9.87 | | | — | | | $ | 348,071,000 | |
| February 25, 2024 through March 30, 2024 | | 40,902 | | | $ | 13.53 | | | — | | | $ | 348,071,000 | |
| Total | | 42,360 | | | $ | 13.47 | | | — | | | $ | 348,071,000 | |
___________________________
(1)The Company did not purchase any shares under its Board-approved $600 million share repurchase program (effective April 4, 2021), during the three months ended April 1, 2023.March 30, 2024.
(2)In connection with the vesting of employee restricted stock grants, the Company repurchased 118,23842,360 shares of its common stock at a cost of $3.4$0.6 million during the three months ended April 1, 2023.March 30, 2024.
(3)There is no expiration date governing the period over which the Company can repurchase shares under it’sits 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.Rule 10b5-1 Trading Plan and Non-rule 10b5-1 Trading Arrangement Adoptions, Modifications and Terminations
The Company’s Board Chair, Chief Executive Officer and President, Shelly Ibach, adopted a trading arrangement for the sale of securities of the Company’s common stock (a Rule 10b5-1 Trading Plan) that satisfied the affirmative defense conditions of Securities Exchange Act Rule 10b5-1(c). Ms. Ibach’s Rule 10b5-1 Trading Plan was adopted on February 26, 2024, provides for the sale of up to 65,000 shares of common stock pursuant to the terms of the plan, and expires on November 28, 2025 or upon the earlier termination of the plan or sale of all shares subject to the plan.
None of the Company’s other directors or officers adopted, modified or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement,” as defined in Item 408(c) of SEC Regulation S-K, during the quarter ended March 30, 2024.
| | | | | | | | |
2527 | 1Q 20232024 FORM 10-Q | SLEEP NUMBER CORPORATION |
ITEM 6. EXHIBITS
| | | | | | | | |
Exhibit
Number | | Description |
10.1*† | | |
10.2*†
| | |
10.3*10.2*†
| | |
10.4* | | |
| 31.1* | | |
| 31.2* | | |
| 32.1* | | |
| 32.2* | | |
| 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 Herein.
† Management contract or compensatory plan or arrangement.
(1) Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10).
| | | | | | | | |
2628 | 1Q 20232024 FORM 10-Q | SLEEP NUMBER CORPORATION |
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | SLEEP NUMBER CORPORATION |
| | (Registrant) |
| | | |
| Dated: | May 9, 20237, 2024 | 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) |
| | | | | | | | |
2729 | 1Q 20232024 FORM 10-Q | SLEEP NUMBER CORPORATION |
