Sleep Number Announces First Quarter 2020 Results

  • First quarter net sales increased 11% to $473 million
  • First quarter diluted EPS grew 70% to a record $1.36
  • Executing more than $250 million of cost and capital deployment actions to support business continuity
  • Cash at quarter end of $239 million, with additional cash funding of $75 million on April 3rd

MINNEAPOLIS--()--Sleep Number Corporation (Nasdaq: SNBR) today reported results for the quarter ended March 28, 2020.

“As a purpose driven company, Sleep Number has been intently focused on keeping our team members safe, serving our customers and ensuring our business continuity during this time of uncertainty and disruption created by the COVID-19 pandemic,” stated Shelly Ibach, President and CEO. “Our record first quarter performance reflects the exceptional consumer demand for our life-changing 360® smart beds, our significant competitive advantages and strong business fundamentals. We are effectively managing the near-term challenges caused by the pandemic. The measures we have taken in recent weeks, combined with our team’s agility, resilience and innovation, give me great confidence in our ability to rebound with strength as this crisis abates and the economy recovers.”

First Quarter Overview

  • Net sales increased 11% to $473 million, including a 7% comparable sales gain and 5 percentage points of growth from new stores
  • Gross profit rate increased 240 basis points (bp) to 63.9% of net sales
  • Operating income increased 61% to $53 million, or 11.2% of net sales, up 350 bp versus the prior year’s first quarter while investing in growth drivers, including 25% higher year-over-year R&D spending
  • Earnings per diluted share increased 70% to a record $1.36, while absorbing 11 cents of year-over-year income tax rate headwind

Cash Flows and Liquidity Review

  • Generated $85 million in net cash from operating activities, up 25% versus the prior year; trailing twelve-month net cash from operating activities of $206 million grew 37% versus prior year comparable period
  • Reduced 2020 planned capital expenditures to approximately $35 million versus previous plan of $60 million, with $10 million incurred in the first quarter
  • As previously disclosed, we suspended share repurchases for balance of the year
  • Leverage ratio of 2.6x EBITDAR at the end of the first quarter (covenant maximum of 4.5x)
  • Return on invested capital (ROIC) increased to 19.1% for the trailing twelve-month period, up 260 bp versus the prior year comparable period
  • Cash at end of first quarter of $239 million, including drawing down the remaining availability under our revolving credit facility on March 17th; on April 3rd we added $75 million additional cash through an incremental term loan under the credit facility’s $150 million accordion

COVID-19 Update
The company has taken decisive actions to manage liquidity and costs through the challenging economic environment caused by COVID-19. The pandemic and ensuing government restrictions have resulted in the temporary closure of most of our retail stores since mid-March. The company took immediate measures to preserve cash: suspended share repurchases for the balance of the year, significantly reduced capital expenditures, compensation, benefits and discretionary spending, and temporarily furloughed 40% of its team members, with approximately another 30% working reduced hours. These actions are collectively expected to result in more than $250 million of reduced cash spending versus plan in 2020.

Financial Outlook
The company remains focused on managing liquidity and balance sheet strength, and expects to meet its liquidity needs from operating cash flow and its existing credit facilities. On March 23, 2020, the company withdrew its fiscal 2020 financial guidance due to the COVID-19 pandemic. The company is not providing any further financial guidance at this time.

Conference Call Information
Management will host its regularly scheduled conference call to discuss the company’s results at 5 p.m. EDT (4 p.m. CDT; 2 p.m. PDT) today. To access the webcast, please visit the investor relations area of the Sleep Number website at http://www.sleepnumber.com/eng/aboutus/InvestorRelations.cfm. The webcast replay will remain available for approximately 60 days.

About Sleep Number Corporation
As a purpose driven company, Sleep Number’s mission is to improve lives by individualizing sleep experiences. Our revolutionary Sleep Number 360® smart beds deliver proven, quality sleep through effortless, adjustable comfort. Our integrated SleepIQ® operating system captures over 10 billion biometric data points every night and offers actionable insights to improve your overall sleep health and wellness.

To experience proven quality sleep, visit SleepNumber.com or one of over 610 Sleep Number® stores. More information is available on our newsroom and investor relations site.

Forward-looking Statements
Statements used in this news release relating to future plans, events, financial results or performance are forward-looking statements subject to certain risks and uncertainties including, among others, such factors as current and future general and industry economic trends and consumer confidence; risks inherent in outbreaks of pandemics or contagious diseases; the effectiveness of our marketing messages; the efficiency of our advertising and promotional efforts; our ability to execute our company-controlled 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; 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; pending and unforeseen litigation and the potential for adverse publicity associated with litigation; our manufacturing processes with minimal levels of inventory, which may leave us vulnerable to shortages in supply; our dependence on significant suppliers and third parties and our ability to maintain relationships with key suppliers or third-parties, including several sole-source suppliers or providers of services; rising commodity costs and other inflationary pressures; risks inherent in global sourcing activities, including tariffs, pandemics, strikes, and the potential for shortages in supply; risks of disruption in the operation of our main manufacturing facilities or assembly distribution facilities; increasing government regulation; the adequacy of our and third-party information systems to meet the evolving needs of our business and existing and evolving risks and regulatory standards applicable to data privacy and security; the costs and potential disruptions to our business related to upgrading our management information systems; the vulnerability of our and third-party information systems to attacks by hackers or other cyber threats that could compromise the security of our systems, result in a data breach or disrupt our business; and our ability to attract, retain and motivate qualified management, executive and other key team members, including qualified retail sales professionals and managers. Additional information concerning these and other risks and uncertainties is contained in the company’s filings with the Securities and Exchange Commission (SEC), including the Annual Report on Form 10-K, and other periodic reports filed with the SEC. The company has no obligation to publicly update or revise any of the forward-looking statements in this news release.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited – in thousands, except per share amounts)

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 28,

 

 

% of

 

 

March 30,

 

 

% of

 

 

 

2020

 

 

Net Sales

 

 

2019

 

 

Net Sales

 
Net sales

$

472,566

100.0

%

$

426,445

100.0

%

Cost of sales

 

170,435

36.1

%

 

164,212

38.5

%

Gross profit

 

302,131

63.9

%

 

262,233

61.5

%

Operating expenses:
Sales and marketing

 

207,744

44.0

%

 

186,827

43.8

%

General and administrative

 

31,072

6.6

%

 

34,323

8.0

%

Research and development

 

10,501

2.2

%

 

8,376

2.0

%

Total operating expenses

 

249,317

52.8

%

 

229,526

53.8

%

Operating income

 

52,814

11.2

%

 

32,707

7.7

%

Interest expense, net

 

2,344

0.5

%

 

2,609

0.6

%

Income before income taxes

 

50,470

10.7

%

 

30,098

7.1

%

Income tax expense

 

11,330

2.4

%

 

4,680

1.1

%

Net income

$

39,140

8.3

%

$

25,418

6.0

%

 
Net income per share – basic

$

1.40

$

0.83

Net income per share – diluted

$

1.36

$

0.80

 
 
Reconciliation of weighted-average
shares outstanding:
Basic weighted-average shares outstanding

 

27,858

 

30,620

Dilutive effect of stock-based awards

 

914

 

1,118

Diluted weighted-average shares outstanding

 

28,772

 

31,738

SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited – in thousands, except per share amounts)
subject to reclassification
 

March 28,

 

December 28,

2020

 

2019

Assets
Current assets:
Cash and cash equivalents

$

239,213

 

$

1,593

 

Accounts receivable, net of allowance for doubtful accounts
of $1,067 and $898, respectively

 

7,170

 

 

19,978

 

Inventories

 

82,021

 

 

87,065

 

Prepaid expenses

 

13,492

 

 

15,335

 

Other current assets

 

30,889

 

 

36,397

 

Total current assets

 

372,785

 

 

160,368

 

 
Non-current assets:
Property and equipment, net

 

194,707

 

 

197,421

 

Operating lease right-of-use assets

 

323,770

 

 

327,017

 

Goodwill and intangible assets, net

 

72,681

 

 

73,226

 

Other non-current assets

 

49,871

 

 

48,011

 

Total assets

$

1,013,814

 

$

806,043

 

 
Liabilities and Shareholders’ Deficit
Current liabilities:
Borrowings under revolving credit facility

$

446,003

 

$

231,000

 

Accounts payable

 

132,939

 

 

134,594

 

Customer prepayments

 

25,816

 

 

34,248

 

Accrued sales returns

 

22,273

 

 

19,809

 

Compensation and benefits

 

27,292

 

 

40,321

 

Taxes and withholding

 

27,490

 

 

22,171

 

Operating lease liabilities

 

60,210

 

 

59,561

 

Other current liabilities

 

53,054

 

 

53,070

 

Total current liabilities

 

795,077

 

 

594,774

 

 
Non-current liabilities:
Deferred income taxes

 

9,142

 

 

3,808

 

Operating lease liabilities

 

294,548

 

 

298,090

 

Other non-current liabilities

 

70,956

 

 

68,802

 

Total non-current liabilities

 

374,646

 

 

370,700

 

Total liabilities

 

1,169,723

 

 

965,474

 

 
Shareholders’ deficit:
Undesignated preferred stock; 5,000 shares authorized,
no shares issued and outstanding

 

-

 

 

-

 

Common stock, $0.01 par value; 142,500 shares authorized,
27,636 and 27,961 shares issued and outstanding, respectively

 

276

 

 

280

 

Additional paid-in capital

 

-

 

 

-

 

Accumulated deficit

 

(156,185

)

 

(159,711

)

Total shareholders’ deficit

 

(155,909

)

 

(159,431

)

Total liabilities and shareholders’ deficit

$

1,013,814

 

$

806,043

 

SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited - in thousands)
subject to reclassification
 

Three Months Ended

March 28,

 

 

March 30,

2020

 

 

2019

 
Cash flows from operating activities:
Net income

$

39,140

 

$

25,418

 

Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization

 

15,371

 

 

15,743

 

Stock-based compensation

 

2,051

 

 

3,638

 

Net gain on disposals and impairments of assets

 

(22

)

 

(433

)

Deferred income taxes

 

5,334

 

 

824

 

Changes in operating assets and liabilities:
Accounts receivable

 

12,808

 

 

6,182

 

Inventories

 

5,044

 

 

1,568

 

Income taxes

 

5,798

 

 

4,208

 

Prepaid expenses and other assets

 

7,478

 

 

(5,283

)

Accounts payable

 

11,282

 

 

5,857

 

Customer prepayments

 

(8,432

)

 

3,452

 

Accrued compensation and benefits

 

(13,157

)

 

1,750

 

Other taxes and withholding

 

(479

)

 

1,254

 

Other accruals and liabilities

 

2,725

 

 

3,958

 

Net cash provided by operating activities

 

84,941

 

 

68,136

 

 
Cash flows from investing activities:
Purchases of property and equipment

 

(10,351

)

 

(19,743

)

Proceeds from sales of property and equipment

 

25

 

 

2,571

 

Net cash used in investing activities

 

(10,326

)

 

(17,172

)

 
Cash flows from financing activities:
Net increase in short-term borrowings

 

201,170

 

 

2,955

 

Repurchases of common stock

 

(41,445

)

 

(55,656

)

Proceeds from issuance of common stock

 

3,283

 

 

2,836

 

Debt issuance costs

 

(3

)

 

(1,015

)

Net cash provided by (used in) financing activities

 

163,005

 

 

(50,880

)

 
Net increase in cash and cash equivalents

 

237,620

 

 

84

 

Cash and cash equivalents, at beginning of period

 

1,593

 

 

1,612

 

Cash and cash equivalents, at end of period

$

239,213

 

$

1,696

 

 
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)
 

Three Months Ended

March 28,

 

March 30,

2020

 

2019

 
Percent of sales:
Retail

 

92.1%

 

92.0%

Online and phone

 

7.6%

 

7.0%

Wholesale/other

 

0.3%

 

1.0%

Total

 

100.0%

 

100.0%

 
Sales change rates:
Retail comparable-store sales

 

6%

 

5%

Online and phone

 

21%

 

6%

Company-Controlled comparable sales change

 

7%

 

5%

Net opened/closed stores

 

5%

 

5%

Total Company-Controlled Channel

 

12%

 

10%

Wholesale/other

 

(71%)

 

(3%)

Total

 

11%

 

10%

 
Stores open:
Beginning of period

 

611

 

579

Opened

 

8

 

15

Closed

 

(8)

 

(9)

End of period

 

611

 

585

 
Other metrics:
Average sales per store ($ in 000's) 1

$

2,932

$

2,744

Average sales per square foot 1

$

1,040

$

1,003

Stores > $2 million net sales 2

 

71%

 

66%

Stores > $3 million net sales 2

 

32%

 

26%

Average revenue per mattress unit 3

$

4,884

$

4,804

1

Trailing twelve months Company-Controlled comparable sales per store open at least one year.

2

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

3

Represents Company-Controlled Channel total net sales divided by Company-Controlled Channel mattress units.
SLEEP NUMBER CORPORATION AND SUBSIDIARIES
 
Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)
(in thousands)

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

Three Months Ended

Trailing Twelve Months Ended

March 28,

March 30,

March 28,

March 30,

2020

2019

2020

2019

 
Net income

$

39,140

$

25,418

$

95,567

$

74,409

Income tax expense

 

11,330

 

4,680

 

25,313

 

15,834

Interest expense

 

2,357

 

2,610

 

11,338

 

7,994

Depreciation and amortization

 

15,253

 

15,637

 

61,026

 

61,673

Stock-based compensation

 

2,051

 

3,638

 

15,070

 

11,966

Asset impairments

 

3

 

139

 

49

 

235

Adjusted EBITDA

$

70,134

$

52,122

$

208,363

$

172,111

 
Free Cash Flow
(in thousands)
 

Three Months Ended

Trailing Twelve Months Ended

March 28,

March 30,

March 28,

March 30,

2020

2019

2020

2019

 
Net cash provided by operating activities

$

84,941

$

68,136

$

205,965

$

150,420

Subtract: Purchases of property and equipment

 

10,351

 

19,743

 

49,847

 

56,453

Free cash flow

$

74,590

$

48,393

$

156,118

$

93,967

Calculation of Leverage Ratio under Revolving Credit Facility

(in thousands)

 

Trailing Twelve Months Ended

March 28,

March 30,

2020

2019

 
Borrowings under revolving credit facility

$

446,003

 

$

218,700

Outstanding letters of credit

 

3,997

 

 

3,497

Finance lease obligations

 

730

 

 

834

Consolidated funded indebtedness

$

450,730

 

$

223,031

Capitalized operating lease obligations1

 

535,425

 

 

491,690

Aggregate unrestricted cash-on-hand and cash equivalents in excess of $40,000,000

 

 

(199,213

)

 

 

-

Total debt including capitalized operating lease obligations (a)

$

786,942

 

$

714,721

 
Adjusted EBITDA (see above)

$

208,363

 

$

172,111

Consolidated rent expense

 

89,237

 

 

81,949

Consolidated EBITDAR (b)

$

297,600

 

$

254,060

 
Leverage Ratio per revolving credit facility (a divided by b)

2.6 to 1.0

2.8 to 1.0

1 A multiple of six times annual rent expense is used as an estimate for capitalizing our operating lease obligations in accordance with our revolving credit facility.

 

Note - Our Adjusted EBITDA and EBITDAR calculations, Free Cash Flow data and Calculation of Leverage Ratio under Revolving Credit Facility are considered non-GAAP financial measures and are not in accordance with, or preferable to, "as reported," or GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts.

 

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

SLEEP NUMBER CORPORATION AND SUBSIDIARIES
Calculation of Return on Invested Capital (ROIC)
(in thousands)
 
ROIC is a financial measure we use to determine how efficiently we deploy our capital. It quantifies the return we earn on our invested capital. Management believes ROIC is also a useful metric for investors and financial analysts. We compute ROIC as outlined below. Our definition and calculation of ROIC may not be comparable to similarly titled definitions and calculations used by other companies. The tables below reconcile net operating profit after taxes (NOPAT) and total invested capital, which are non-GAAP financial measures, to the comparable GAAP financial measures:
Trailing Twelve Months Ended
March 28,
2020
March 30,
2019
Net operating profit after taxes (NOPAT)
Operating income

$

132,203

 

$

98,234

 

Add: Rent expense 1

 

89,237

 

 

81,949

 

Add: Interest income

 

15

 

 

4

 

Less: Depreciation on capitalized operating leases 2

 

(22,883

)

 

(20,815

)

Less: Income taxes 3

 

(47,453

)

 

(38,490

)

NOPAT

$

151,119

 

$

120,882

 

 
Average invested capital
Total deficit

$

(155,909

)

$

(124,640

)

Less: Cash greater than target 4

 

(113,397

)

 

-

 

Add: Long-term debt 5

 

446,733

 

 

219,533

 

Add: Capitalized operating lease obligations 6

 

713,896

 

 

655,592

 

Total invested capital at end of period

$

891,323

 

$

750,485

 

 
Average invested capital 7

$

790,420

 

$

732,890

 

 
Return on invested capital (ROIC) 8

 

19.1%

 

16.5%

1

Rent expense is added back to operating income to show the impact of owning versus leasing the related assets.
 

2

Depreciation is based on the average of the last five fiscal quarters' ending capitalized operating lease obligations (see note 6) 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 23.9% and 24.2% for 2020 and 2019, respectively.
 

4

Cash greater than target is defined as cash, cash equivalents and marketable debt securities less customer prepayments in excess of $100 million.
 

5

Long-term debt includes existing finance lease liabilities.
 

6

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

7

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

8

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.

 

Contacts

Investor Contact: Dave Schwantes; (763) 551-7498; investorrelations@sleepnumber.com
Media Contact: Julie Elepano; (763) 551-7459; julie.elepano@sleepnumber.com

Contacts

Investor Contact: Dave Schwantes; (763) 551-7498; investorrelations@sleepnumber.com
Media Contact: Julie Elepano; (763) 551-7459; julie.elepano@sleepnumber.com