Sleep Number Announces Record Third Quarter 2020 Results

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Third quarter net sales grew 12% to a record $531 million, with demand growth of 16%
Third quarter operating income grew 78% and diluted EPS grew 90% to a record $1.79
Generated a 51% increase in year-to-date operating cash flows, and a trailing twelve-months ROIC of 20.8%
Provides 2020 earnings outlook of approximately $4.00 per diluted share, a 48% increase versus full-year 2019 earnings per diluted share of $2.70, on estimated net sales growth of 7% to 8%

October 14, 2020 04:01 PM Eastern Daylight Time

MINNEAPOLIS--(BUSINESS WIRE)--Sleep Number Corporation (Nasdaq: SNBR) today reported results for the quarter ended September 26, 2020.

"Our exceptional third quarter performance reflects the ongoing relevance of our life-changing 360^® smart beds as consumers deepen their understanding of the importance of quality sleep to their overall health and wellness,” said Shelly Ibach, President and CEO. “For the third consecutive year, since transitioning to our smart beds, our Q3 results reflect double-digit demand growth. We again demonstrated the resilience of our vertical business model through our top and bottom-line performance and a trailing twelve months ROIC of nearly 21%. I am thankful for our team's amazing dedication to our mission, their ingenuity and how they keep each other safe, healthy and happy. Driven by our purpose, we are accelerating our strategic initiatives, strengthening our competitive advantages and creating meaningful value for our customers, team, business partners and shareholders.”

Third Quarter Overview

Net sales increased 12% to $531 million, including an 11% comparable sales gain; online and phone sales were up 111% versus the prior year and represented 14% of net sales
Gross profit rate increased 70 basis points (bp) to 63.1% of net sales compared with 62.4% for the same period last year
Operating income increased 78% to $70 million, or 13.1% of net sales, up 490 bp versus the prior year’s third quarter
Earnings per diluted share increased 90% to $1.79, compared with $0.94 for the prior year

Cash Flows and Liquidity Review

Generated $287 million in net cash from operating activities for the first nine months of 2020, up 51% versus last year, with year-to-date operating free cash flows of $259 million, up 81% versus prior year
Invested $28 million in year-to-date capital expenditures compared to $47 million for the prior year period
Return on invested capital (ROIC) of 20.8% for the trailing twelve-month period, up 240 bp versus the prior year comparable period
Cash and liquidity available under our credit facility, before letters of credit, was $418 million at the end of the third quarter, up $180 million from the same period last year; repaid $75 million, 364-day term loan six months early and removed related LIBOR floor and share repurchase restriction
Leverage ratio was 1.9x EBITDAR at the end of the third quarter, compared with 2.6x for the same period last year

Financial Outlook

The company expects to generate full-year 2020 earnings per diluted share of approximately $4.00, which would represent a 48% increase versus full-year 2019 earnings per diluted share of $2.70. The outlook assumes 7% to 8% net sales growth for 2020, including an estimated two percentage points of growth and approximately 25 cents per share from the 53^rd week. The company also intends to resume share repurchases in the fourth quarter and to operate, over time, with leverage of 2.5x to 3.0x EBITDAR, with seasonal fluctuations expected.

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 https://ir.sleepnumber.com. The webcast replay will remain available for approximately 60 days.

About Sleep Number Corporation

Individuality is core to Sleep Number. Our purpose driven company is comprised of more than 4,300 passionate team members who are dedicated to our mission of improving lives by individualizing sleep experiences. Our 360^® smart beds provide each sleeper with adjustable, personalized comfort for proven quality sleep. We have improved nearly 13 million lives as we strive to improve society’s wellbeing through higher quality sleep.

Sleep science and data are the foundation of our innovations. Our award-winning 360^® smart beds benefit from our proprietary SleepIQ^® technology - learning from nearly 8 billion hours of highly accurate sleep data - to provide effortless comfort and individualized sleep health insights, including your daily SleepIQ^® score.

For life-changing sleep, visit SleepNumber.com or one of our 600 Sleep Number^® stores. More information is available on our newsroom and investor relations sites.

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
	September 26,		% of		September 28,		% of
	2020		Net Sales		2019		Net Sales

Net sales	$	531,155	100.0	%	$	474,778	100.0	%
Cost of sales		196,195	36.9	%		178,388	37.6	%
Gross profit		334,960	63.1	%		296,390	62.4	%
Operating expenses:
Sales and marketing		211,574	39.8	%		213,133	44.9	%
General and administrative		44,127	8.3	%		35,098	7.4	%
Research and development		9,644	1.8	%		9,007	1.9	%
Total operating expenses		265,345	50.0	%		257,238	54.2	%
Operating income		69,615	13.1	%		39,152	8.2	%
Interest expense, net		1,827	0.3	%		3,131	0.7	%
Income before income taxes		67,788	12.8	%		36,021	7.6	%
Income tax expense		16,468	3.1	%		7,967	1.7	%
Net income	$	51,320	9.7	%	$	28,054	5.9	%

Net income per share – basic	$	1.83			$	0.96

Net income per share – diluted	$	1.79			$	0.94


Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding		27,973				29,085
Dilutive effect of stock-based awards		661				711
Diluted weighted-average shares outstanding		28,634				29,796

SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)


	Nine Months Ended
	September 26,		% of		September 28,		% of
	2020		Net Sales		2019		Net Sales

Net sales	$	1,288,659	100.0	%	$	1,257,186	100.0	%
Cost of sales		488,558	37.9	%		481,377	38.3	%
Gross profit		800,101	62.1	%		775,809	61.7	%
Operating expenses:
Sales and marketing		549,483	42.6	%		568,799	45.2	%
General and administrative		111,915	8.7	%		102,466	8.2	%
Research and development		28,399	2.2	%		25,440	2.0	%
Total operating expenses		689,797	53.5	%		696,705	55.4	%
Operating income		110,304	8.6	%		79,104	6.3	%
Interest expense, net		8,111	0.6	%		8,968	0.7	%
Income before income taxes		102,193	7.9	%		70,136	5.6	%
Income tax expense		24,363	1.9	%		12,384	1.0	%
Net income	$	77,830	6.0	%	$	57,752	4.6	%

Net income per share – basic	$	2.79			$	1.93

Net income per share – diluted	$	2.73			$	1.88


Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding		27,918				29,859
Dilutive effect of stock-based awards		642				829
Diluted weighted-average shares outstanding		28,560				30,688

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

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

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

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

Non-current liabilities:
Deferred income taxes		7,037			3,808
Operating lease liabilities		281,733			298,090
Other non-current liabilities		81,616			68,802
Total non-current liabilities		370,386			370,700
Total liabilities		882,944			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, 27,757 and 27,961 shares issued and outstanding, respectively		278			280
Additional paid-in capital		14,390			-
Accumulated deficit		(117,495	)		(159,711	)
Total shareholders’ deficit		(102,827	)		(159,431	)
Total liabilities and shareholders’ deficit	$	780,117		$	806,043

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

	Nine Months Ended
	September 26,			September 28,
	2020			2019

Cash flows from operating activities:
Net income	$	77,830		$	57,752
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		46,244			46,267
Stock-based compensation		15,554			12,034
Net loss (gain) on disposals and impairments of assets		208			(409	)
Deferred income taxes		3,229			(895	)
Changes in operating assets and liabilities:
Accounts receivable		(12,710	)		(746	)
Inventories		3,807			(1,626	)
Income taxes		5,103			535
Prepaid expenses and other assets		3,666			(8,065	)
Accounts payable		58,547			45,051
Customer prepayments		40,795			12,758
Accrued compensation and benefits		21,376			11,763
Other taxes and withholding		4,756			5,784
Other accruals and liabilities		18,877			9,629
Net cash provided by operating activities		287,282			189,832

Cash flows from investing activities:
Purchases of property and equipment		(28,074	)		(46,757	)
Proceeds from sales of property and equipment		53			2,577
Purchase of intangible assets		(945	)		-
Net cash used in investing activities		(28,966	)		(44,180	)

Cash flows from financing activities:
Net decrease in short-term borrowings		(220,968	)		(11,270	)
Repurchases of common stock		(41,923	)		(139,178	)
Proceeds from issuance of common stock		4,650			5,752
Debt issuance costs		(303	)		(1,023	)
Net cash used in financing activities		(258,544	)		(145,719	)

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

SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)


	Three Months Ended						Nine Months Ended
	September 26,			September 28,			September 26,			September 28,
	2020			2019			2020			2019

Percent of sales:
Retail		86.0	%		92.2	%		85.2	%		92.1	%
Online and phone		13.7	%		7.3	%		14.5	%		7.2	%
Wholesale/other		0.3	%		0.5	%		0.3	%		0.7	%
Total Company		100.0	%		100.0	%		100.0	%		100.0	%

Sales change rates:
Retail comparable-store sales		2	%		9	%		(8	%)		7	%
Online and phone		111	%		20	%		109	%		10	%
Total Retail comparable sales change		11	%		10	%		1	%		8	%
Net opened/closed stores		1	%		4	%		2	%		5	%
Total Retail		12	%		14	%		3	%		13	%
Wholesale/other		(28	%)		8	%		(60	%)		(17	%)
Total Company		12	%		14	%		3	%		12	%

Stores open:
Beginning of period		598			594			611			579
Opened		6			15			20			47
Closed		(8	)		(7	)		(35	)		(24	)
End of period		596			602			596			602

Other metrics:
Average sales per store ($ in 000's) ¹	$	2,920		$	2,858
Average sales per square foot ¹	$	1,012		$	1,029
Stores > $2 million net sales ²		64	%		70	%
Stores > $3 million net sales ²		26	%		28	%
Average revenue per mattress unit ³	$	4,802		$	4,788		$	4,824		$	4,837

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

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

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
	September 26,		September 28,		September 26,		September 28,
	2020		2019		2020		2019

Net income	$	51,320	$	28,054	$	101,923	$	84,742
Income tax expense		16,468		7,967		30,642		21,421
Interest expense		1,829		3,131		10,829		11,064
Depreciation and amortization		15,083		14,963		61,071		61,155
Stock-based compensation		8,470		4,146		20,177		13,348
Asset impairments		11		29		276		150

Adjusted EBITDA	$	93,181	$	58,290	$	224,918	$	191,880

Free Cash Flow
(in thousands)

	Three Months Ended				Trailing Twelve Months Ended
	September 26,		September 28,		September 26,		September 28,
	2020		2019		2020		2019

Net cash provided by operating activities	$	200,281	$	119,485	$	286,610	$	186,922
Subtract: Purchases of property and equipment		6,379		12,861		40,556		58,260

Free cash flow	$	193,902	$	106,624	$	246,054	$	128,662

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

					Trailing Twelve Months Ended
					September 26,		September 28,
					2020		2019

Borrowings under credit facility					$	33,500	$	213,700
Outstanding letters of credit						3,997		3,497
Finance lease obligations						677		783
Consolidated funded indebtedness					$	38,174	$	217,980
Capitalized operating lease obligations¹						546,850		514,921
Total debt including capitalized operating lease obligations (a)					$	585,024	$	732,901

Adjusted EBITDA (see above)					$	224,918	$	191,880
Consolidated rent expense						91,142		85,807
Consolidated EBITDAR (b)					$	316,060	$	277,687

Net Leverage Ratio under credit facility (a divided by b)					1.9 to 1.0		2.6 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.

	Trailing Twelve Months Ended
	September 26, 2020			September 28, 2019
Net operating profit after taxes (NOPAT)
Operating income	$	143,295		$	117,224
Add: Rent expense ¹		91,142			85,807
Add: Interest income		97			4
Less: Depreciation on capitalized operating leases ²		(23,700	)		(21,821	)
Less: Income taxes ³		(50,584	)		(44,298	)
NOPAT	$	160,250		$	136,916

Average invested capital
Total deficit	$	(102,827	)	$	(164,487	)
Add: Long-term debt⁴		34,177			214,482
Add: Capitalized operating lease obligations ⁵		729,136			686,456
Total invested capital at end of period	$	660,486		$	736,451

Average invested capital ⁶	$	770,197		$	743,271

Return on invested capital (ROIC) ⁷		20.8	%		18.4	%

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

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.

Reflects annual effective income tax rates, before discrete adjustments, of 24.0% and 24.4% for 2020 and 2019, respectively.

⁴

Long-term debt includes existing finance lease liabilities.

⁵

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

⁶

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

⁷

ROIC equals NOPAT divided by average invested capital.

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

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

Investor Contact: Dave Schwantes; (763) 551-7498; investorrelations@sleepnumber.com
Media Contact: Julie Elepano; (414) 732-9840; julie.elepano@sleepnumber.com

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: