Sleep Number Announces Second Quarter 2020 Results

  • High-single digit demand growth for the last two months of the quarter combined, after being down 48% in fiscal April
  • More than 95% of our retail stores are now open compared with 53% open on average during the second quarter
  • Cash and liquidity available under our credit facility was $295 million at the end of the second quarter, a $129 million increase versus the same period last year

 

MINNEAPOLIS--()--Sleep Number Corporation (Nasdaq: SNBR) today reported results for the quarter ended June 27, 2020.

“The mission of Sleep Number has never been more important or more relevant than it is today. The pandemic has heightened individuals’ concerns about their immunity and resilience, and there is increased understanding that sleep is vital for healthy living. With the proven quality sleep of our proprietary 360® smart beds, Sleep Number is at the forefront of delivering this life-changing benefit,” said Shelly Ibach, President and CEO. “Our increased relevance with consumers, combined with the significant competitive advantages of our integrated business model and the ingenuity of our purpose driven team, drove our stronger-than-expected second quarter results.”

Second Quarter Overview

  • Second quarter financial results reflect the significant impact of COVID-19
  • Net sales were $285 million, down 20% compared with $356 million last year
  • Gross profit rate of 57.2%, compared with 61.0% last year, reflecting product mix changes and sales deleverage as a result of COVID-19
  • Operating expense reduction of $35 million or 17% versus prior year, reflects immediate actions taken to reduce expenses
  • Net loss per diluted share of $0.45, compared to net income per diluted share of $0.14 last year

Cash Flows and Liquidity Review

  • Generated $87 million in net cash from operating activities for the first six months of 2020, up 24% versus last year, with year-to-date operating free cash flows of $65 million, up 79% versus prior year
  • Invested $22 million in year-to-date capital expenditures compared to $34 million for the prior year period
  • Recently acquired a patent portfolio from Gentherm to further strengthen our competitive position related to cooling and heating beds and bedding
  • Return on invested capital (ROIC) of 17.2% for the trailing twelve-month period, up 40 basis points versus the prior year comparable period
  • Leverage ratio of 2.8x EBITDAR at the end of the second quarter, compared with 3.0x for the same period last year (covenant maximum of 4.5x)
  • Cash and liquidity available under our credit facility was $295 million at the end of the second quarter, a $129 million increase versus the same period last year

Financial Outlook

On March 23, 2020, the company withdrew its fiscal 2020 financial guidance due to COVID-19. Given the continued uncertainty related to COVID-19, the company is not providing any further financial guidance at this time. The company expects to meet its liquidity needs from operating cash flows and its existing credit facility, while funding growth initiatives and other longer-term opportunities.

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 13 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 our approximately 600 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

June 27,

% of

June 29,

% of

2020

Net Sales

2019

Net Sales

 
Net sales

$

284,938

 

100.0

%

$

355,963

 

100.0

%

Cost of sales

 

121,928

 

42.8

%

 

138,777

 

39.0

%

Gross profit

 

163,010

 

57.2

%

 

217,186

 

61.0

%

Operating expenses:
Sales and marketing

 

130,165

 

45.7

%

 

168,839

 

47.4

%

General and administrative

 

36,716

 

12.9

%

 

33,045

 

9.3

%

Research and development

 

8,254

 

2.9

%

 

8,057

 

2.3

%

Total operating expenses

 

175,135

 

61.5

%

 

209,941

 

59.0

%

Operating (loss) income

 

(12,125

)

(4.3

%)

 

7,245

 

2.0

%

Interest expense, net

 

3,940

 

1.4

%

 

3,228

 

0.9

%

(Loss) income before income taxes

 

(16,065

)

(5.6

%)

 

4,017

 

1.1

%

Income tax benefit

 

(3,435

)

(1.2

%)

 

(263

)

(0.1

%)

Net (loss) income

$

(12,630

)

(4.4

%)

$

4,280

 

1.2

%

 
Net (loss) income per share – basic

$

(0.45

)

$

0.14

 

 
Net (loss) income per share – diluted

$

(0.45

)

$

0.14

 

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

 

27,923

 

 

29,873

 

Dilutive effect of stock-based awards 1

 

-

 

 

658

 

Diluted weighted-average shares outstanding 1

 

27,923

 

 

30,531

 

1

For the three months ended June 27, 2020, potentially dilutive stock-based awards have been excluded from the calculation of diluted weighted-average shares outstanding, as their inclusion would have had an anti-dilutive effect on our net loss per diluted share.
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)
 

Six Months Ended

June 27,

% of

June 29,

% of

2020

Net Sales

2019

Net Sales

 
Net sales

$

757,504

100.0

%

$

782,408

100.0

%

Cost of sales

 

292,363

38.6

%

 

302,989

38.7

%

Gross profit

 

465,141

61.4

%

 

479,419

61.3

%

Operating expenses:
Sales and marketing

 

337,909

44.6

%

 

355,666

45.5

%

General and administrative

 

67,788

8.9

%

 

67,368

8.6

%

Research and development

 

18,755

2.5

%

 

16,433

2.1

%

Total operating expenses

 

424,452

56.0

%

 

439,467

56.2

%

Operating income

 

40,689

5.4

%

 

39,952

5.1

%

Interest expense, net

 

6,284

0.8

%

 

5,837

0.7

%

Income before income taxes

 

34,405

4.5

%

 

34,115

4.4

%

Income tax expense

 

7,895

1.0

%

 

4,417

0.6

%

Net income

$

26,510

3.5

%

$

29,698

3.8

%

 
Net income per share – basic

$

0.95

$

0.98

 
Net income per share – diluted

$

0.93

$

0.95

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

 

27,890

 

30,247

Dilutive effect of stock-based awards

 

633

 

887

Diluted weighted-average shares outstanding

 

28,523

 

31,134

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

June 27,

December 28,

2020

2019

Assets
Current assets:
Cash and cash equivalents

$

1,651

 

$

1,593

 

Accounts receivable, net of allowance for doubtful accounts of $957 and $898, respectively

 

15,754

 

 

19,978

 

Inventories

 

81,674

 

 

87,065

 

Prepaid expenses

 

12,072

 

 

15,335

 

Other current assets

 

30,607

 

 

36,397

 

Total current assets

 

141,758

 

 

160,368

 

 
Non-current assets:
Property and equipment, net

 

186,943

 

 

197,421

 

Operating lease right-of-use assets

 

315,221

 

 

327,017

 

Goodwill and intangible assets, net

 

74,109

 

 

73,226

 

Other non-current assets

 

50,767

 

 

48,011

 

Total assets

$

768,798

 

$

806,043

 

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

$

227,240

 

$

231,000

 

Accounts payable

 

94,966

 

 

134,594

 

Customer prepayments

 

51,235

 

 

34,248

 

Accrued sales returns

 

17,196

 

 

19,809

 

Compensation and benefits

 

33,067

 

 

40,321

 

Taxes and withholding

 

21,085

 

 

22,171

 

Operating lease liabilities

 

60,180

 

 

59,561

 

Other current liabilities

 

57,547

 

 

53,070

 

Total current liabilities

 

562,516

 

 

594,774

 

 
Non-current liabilities:
Deferred income taxes

 

8,191

 

 

3,808

 

Operating lease liabilities

 

286,292

 

 

298,090

 

Other non-current liabilities

 

74,817

 

 

68,802

 

Total non-current liabilities

 

369,300

 

 

370,700

 

Total liabilities

 

931,816

 

 

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, 27,725 and 27,961 shares issued and outstanding, respectively

 

277

 

 

280

 

Additional paid-in capital

 

5,519

 

 

-

 

Accumulated deficit

 

(168,814

)

 

(159,711

)

Total shareholders’ deficit

 

(163,018

)

 

(159,431

)

Total liabilities and shareholders’ deficit

$

768,798

 

$

806,043

 

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

Six Months Ended

June 27,

June 29,

2020

2019

 
Cash flows from operating activities:
Net income

$

26,510

 

$

29,698

 

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

 

30,811

 

 

31,187

 

Stock-based compensation

 

7,084

 

 

7,888

 

Net loss (gain) on disposals and impairments of assets

 

224

 

 

(431

)

Deferred income taxes

 

4,383

 

 

721

 

Changes in operating assets and liabilities:
Accounts receivable

 

4,224

 

 

5,214

 

Inventories

 

5,391

 

 

(2,977

)

Income taxes

 

2,508

 

 

(9,195

)

Prepaid expenses and other assets

 

7,018

 

 

(8,580

)

Accounts payable

 

(14,804

)

 

12,408

 

Customer prepayments

 

16,987

 

 

3,407

 

Accrued compensation and benefits

 

(7,405

)

 

2,348

 

Other taxes and withholding

 

(3,594

)

 

(1,836

)

Other accruals and liabilities

 

7,664

 

 

495

 

Net cash provided by operating activities

 

87,001

 

 

70,347

 

 
Cash flows from investing activities:
Purchases of property and equipment

 

(21,695

)

 

(33,896

)

Proceeds from sales of property and equipment

 

25

 

 

2,571

 

Purchase of intangible assets

 

(945

)

 

-

 

Net cash used in investing activities

 

(22,615

)

 

(31,325

)

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

 

(26,364

)

 

56,758

 

Repurchases of common stock

 

(41,774

)

 

(99,684

)

Proceeds from issuance of common stock

 

4,100

 

 

4,995

 

Debt issuance costs

 

(290

)

 

(1,019

)

Net cash used in financing activities

 

(64,328

)

 

(38,950

)

 
Net increase in cash and cash equivalents

 

58

 

 

72

 

Cash and cash equivalents, at beginning of period

 

1,593

 

 

1,612

 

Cash and cash equivalents, at end of period

$

1,651

 

$

1,684

 

SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)
 
 
Three Months Ended Six Months Ended
June 27, June 29, June 27, June 29,

2020

2019

2020

2019

 
Percent of sales:
Retail

 

72.2

%

 

92.1

%

 

84.6

%

 

92.1

%

Online and phone

 

27.5

%

 

7.2

%

 

15.1

%

 

7.0

%

Wholesale/other

 

0.3

%

 

0.7

%

 

0.3

%

 

0.9

%

Total Company

 

100.0

%

 

100.0

%

 

100.0

%

 

100.0

%

 
Sales change rates:
Retail comparable-store sales

 

(40

%)

 

9

%

 

(14

%)

 

7

%

Online and phone

 

209

%

 

2

%

 

107

%

 

4

%

Total Retail comparable sales change

 

(21

%)

 

8

%

 

(5

%)

 

7

%

Net opened/closed stores

 

1

%

 

5

%

 

2

%

 

4

%

Total Retail

 

(20

%)

 

13

%

 

(3

%)

 

11

%

Wholesale/other

 

(72

%)

 

(44

%)

 

(71

%)

 

(23

%)

Total Company

 

(20

%)

 

13

%

 

(3

%)

 

11

%

 
Stores open:
Beginning of period

 

611

 

 

585

 

 

611

 

 

579

 

Opened

 

6

 

 

17

 

 

14

 

 

32

 

Closed

 

(19

)

 

(8

)

 

(27

)

 

(17

)

End of period

 

598

 

 

594

 

 

598

 

 

594

 

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

$

2,830

 

$

2,800

 

Average sales per square foot 1

$

988

 

$

1,015

 

Stores > $2 million net sales 2

 

63

%

 

69

%

Stores > $3 million net sales 2

 

25

%

 

28

%

Average revenue per mattress unit 3

$

4,767

 

$

4,945

 

$

4,839

 

$

4,868

 

1

Trailing twelve months Total Retail comparable sales per store open at least one year.

2

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

3

Represents Total Retail net sales divided by Total Retail mattress units.
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

June 27,

June 29,

June 27,

June 29,

2020

2019

2020

2019

 
Net (loss) income

$

(12,630

)

$

4,280

 

$

78,657

$

74,945

Income tax (benefit) expense

 

(3,435

)

 

(263

)

 

22,141

 

18,682

Interest expense

 

4,022

 

 

3,229

 

 

12,131

 

9,769

Depreciation and amortization

 

15,253

 

 

15,328

 

 

60,951

 

61,675

Stock-based compensation

 

5,033

 

 

4,250

 

 

15,853

 

12,558

Asset impairments

 

246

 

 

1

 

 

294

 

151

 
Adjusted EBITDA

$

8,489

 

$

26,825

 

$

190,027

$

177,780

 
Free Cash Flow
(in thousands)
 
Three Months Ended Trailing Twelve Months Ended

June 27,

June 29,

June 27,

June 29,

2020

2019

2020

2019

 
Net cash provided by operating activities

$

2,060

 

$

2,211

 

$

205,814

$

172,756

Subtract: Purchases of property and equipment

 

11,344

 

 

14,153

 

 

47,038

 

58,070

 
Free cash flow

$

(9,284

)

$

(11,942

)

$

158,776

$

114,686

 
Calculation of Net Leverage Ratio under Credit Facility
(in thousands)
 

Trailing Twelve Months Ended

June 27,

June 29,

2020

2019

 
Borrowings under credit facility

$

227,240

$

281,500

Outstanding letters of credit

 

3,997

 

3,497

Finance lease obligations

 

704

 

809

Consolidated funded indebtedness

$

231,941

$

285,806

Capitalized operating lease obligations1

 

542,095

 

505,260

Total debt including capitalized operating lease obligations (a)

$

774,036

$

791,066

 
Adjusted EBITDA (see above)

$

190,027

$

177,780

Consolidated rent expense

 

90,349

 

84,210

Consolidated EBITDAR (b)

$

280,376

$

261,990

 
Net Leverage Ratio under credit facility (a divided by b) 2.8 to 1.0 3.0 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 credit facility.

Note - Our Adjusted EBITDA and EBITDAR calculations, Free Cash Flow data and Calculation of Net Leverage Ratio under 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
June 27,
2020
June 29,
2019
Net operating profit after taxes (NOPAT)
Operating income

$

112,831

 

$

103,393

 

Add: Rent expense 1

 

90,349

 

 

84,210

 

Add: Interest income

 

97

 

 

4

 

Less: Depreciation on capitalized operating leases 2

 

(23,331

)

 

(21,310

)

Less: Income taxes 3

 

(42,735

)

 

(40,319

)

NOPAT

$

137,211

 

$

125,978

 

 
Average invested capital
Total deficit

$

(163,018

)

$

(157,302

)

Add: Long-term debt 4

 

227,944

 

 

282,308

 

Add: Capitalized operating lease obligations 5

 

722,792

 

 

673,680

 

Total invested capital at end of period

$

787,718

 

$

798,686

 

 
Average invested capital 6

$

797,862

 

$

750,375

 

 
Return on invested capital (ROIC) 7

 

17.2

%

 

16.8

%

1

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

2

Depreciation is based on the average of the last five fiscal quarters' ending capitalized operating lease obligations (see note 5) for the respective reporting periods with an assumed thirty-year useful life. This life assumption is based on our long-term participation in given markets though specific retail location lease commitments are generally 5 to 10 years at inception. This is subtracted from operating income to illustrate the impact of owning versus leasing the related assets.
 

3

Reflects annual effective income tax rates, before discrete adjustments, of 23.7% and 24.2% for 2020 and 2019, respectively.
 

4

Long-term debt includes existing finance lease liabilities.
 

5

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

6

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

7

ROIC equals NOPAT divided by average invested capital.
Note - Our ROIC calculation and data are considered non-GAAP financial measures and are not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts.
 
GAAP - generally accepted accounting principles in the U.S.

 

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