Sleep Number Announces Record First Quarter 2021 Results

Sleep Number Corporation (Nasdaq: SNBR) today reported results for the quarter ended April 3, 2021.

“Guided by our purpose to improve the health and wellbeing of society through higher quality sleep, Sleep Number is broadening our brand relevance and driving significant performance acceleration,” said Shelly Ibach, President and CEO. “Our first-quarter demand growth of greater than 30% demonstrates consumers’ enthusiastic response to our sleep science-based innovations, digital solutions and authentic mission-driven culture. Sleep Number is improving millions of lives through better quality sleep, while delivering exceptional value for all stakeholders.”

First Quarter Overview

  • Net sales increased 20% to $568 million with a 20% comparable store sales gain; more than $50 million of deliveries (two weeks) shifted out of the quarter due to temporary foam supply constraints
  • Gross profit increased 18% to a record $356 million or 62.6% of net sales
  • Operating income increased 45% to $76 million, or 13.4% of net sales, up 220 bp versus the prior-year’s first quarter
  • Earnings per diluted share increased 85% to a record $2.51

Cash Flows and Liquidity Review

  • Generated $112 million in net cash from operating activities in the first quarter, up 31% versus the prior year; invested $12 million in capital expenditures and $167 million in Sleep Number stock
  • Leverage ratio of 2.3x EBITDAR at the end of the first quarter, compared with 2.6x a year ago
  • Increased return on invested capital (ROIC) to 27.6% for the trailing twelve-month period, up 850 bp versus the prior-year comparable period
  • Amended revolving credit facility to expand the aggregate availability from $450 million to $600 million

Share Repurchase Authorization

The company also replenished its outstanding share repurchase authorization to $600 million, effective at the beginning of the fiscal second quarter. The company remains committed to its capital deployment priorities focused on performance drivers.

Financial Outlook

The company raised its 2021 earnings per diluted share outlook to at least $6.50, which is more than 40% greater than 2020 full-year results excluding the impact of the 53rd week. The outlook assumes an estimated effective income tax rate of 25% for the balance of the year. The company expects to generate approximately $300 million of operating cash flows in 2021 with capital expenditures of approximately $75 million.

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 our foundation at Sleep Number. Our purpose driven company is comprised of over 5,000 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 over 13 million lives as we strive to improve society’s wellbeing through higher quality sleep.

Sleep science and data are the core of our innovations. Our award-winning 360 smart beds benefit from our proprietary SleepIQ® technology - learning from over 9 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 more than 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 disease, including the COVID-19 pandemic and related consequences such as supply shortages, labor disruptions, and recommendations and/or mandates from federal, state and local authorities to close certain businesses or limit occupancy or operating hours; the effectiveness of our marketing messages; the efficiency of our advertising and promotional efforts; our ability to execute our Total Retail distribution strategy; our ability to achieve and maintain acceptable levels of product and service quality, and acceptable product return and warranty claims rates; our ability to continue to improve and expand our product line, and consumer acceptance of our products, product quality, innovation and brand image; industry competition, the emergence of additional competitive products and the adequacy of our intellectual property rights to protect our products and brand from competitive or infringing activities; claims that our products, processes, advertising, or trademarks infringe the intellectual property rights of others or do not comply with laws or regulations; availability of attractive and cost-effective consumer credit options; our lean 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, outbreaks of pandemics or contagious diseases, such as the COVID-19 pandemic, strikes and the potential for shortages in supply; risks of disruption in the operation of any of our main manufacturing facilities or assembly and distribution facilities; increasing government regulation; pending or unforeseen litigation and the potential for adverse publicity associated with litigation; the adequacy of our and third-party information systems to meet the evolving needs of our business and existing and evolving risks and regulatory standards applicable to data privacy and cybersecurity; the costs and potential disruptions to our business related to enhancing, patching, upgrading our information systems; the vulnerability of our and third-party information systems to attacks by hackers or other cyber threats that could compromise the security or accessibility 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

April 3,

% of

March 28,

% of

2021

Net Sales

2020

Net Sales

 
Net sales

$

568,256

100.0

%

$

472,566

100.0

%

Cost of sales

212,338

37.4

%

170,435

36.1

%

Gross profit

355,918

62.6

%

302,131

63.9

%

Operating expenses:
Sales and marketing

223,617

39.4

%

207,744

44.0

%

General and administrative

42,592

7.5

%

31,072

6.6

%

Research and development

13,286

2.3

%

10,501

2.2

%

Total operating expenses

279,495

49.2

%

249,317

52.8

%

Operating income

76,423

13.4

%

52,814

11.2

%

Interest expense, net

977

0.2

%

2,344

0.5

%

Income before income taxes

75,446

13.3

%

50,470

10.7

%

Income tax expense

8,812

1.6

%

11,330

2.4

%

Net income

$

66,634

11.7

%

$

39,140

8.3

%

 
Net income per share – basic

$

2.63

$

1.40

 
Net income per share – diluted

$

2.51

$

1.36

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

25,377

27,858

Dilutive effect of stock-based awards

1,167

914

Diluted weighted-average shares outstanding

26,544

28,772

SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited – in thousands, except per share amounts)
subject to reclassification
 
April 3,January 2,

2021

2021

Assets
Current assets:
Cash and cash equivalents

$

2,238

$

4,243

Accounts receivable, net of allowances of $1,028 and $1,046, respectively

25,923

31,871

Inventories

82,308

81,362

Prepaid expenses

27,189

20,839

Other current assets

33,844

43,489

Total current assets

171,502

181,804

 
Non-current assets:
Property and equipment, net

182,113

175,223

Operating lease right-of-use assets

329,714

314,226

Goodwill and intangible assets, net

72,270

72,871

Other non-current assets

66,610

56,012

Total assets

$

822,209

$

800,136

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

$

314,900

$

244,200

Accounts payable

122,098

91,904

Customer prepayments

92,569

72,017

Accrued sales returns

24,610

24,765

Compensation and benefits

42,185

76,786

Taxes and withholding

39,098

23,339

Operating lease liabilities

64,076

62,077

Other current liabilities

57,833

60,856

Total current liabilities

757,369

655,944

 
Non-current liabilities:
Deferred income taxes

1,757

242

Operating lease liabilities

298,475

283,084

Other non-current liabilities

97,258

84,844

Total non-current liabilities

397,490

368,170

Total liabilities

1,154,859

1,024,114

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

-

-

Common stock, $0.01 par value; 142,500 shares authorized, 24,464 and 25,390 shares issued and outstanding, respectively

245

254

Additional paid-in capital

-

-

Accumulated deficit

(332,895

)

(224,232

)

Total shareholders’ deficit

(332,650

)

(223,978

)

Total liabilities and shareholders’ deficit

$

822,209

$

800,136

SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited - in thousands)
subject to reclassification
 
Three Months Ended
April 3,March 28,

2021

2020

 
Cash flows from operating activities:
Net income

$

66,634

$

39,140

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

14,638

15,371

Stock-based compensation

6,416

2,051

Net loss (gain) on disposals and impairments of assets

78

(22

)

Deferred income taxes

1,515

5,334

Changes in operating assets and liabilities:
Accounts receivable

5,948

12,808

Inventories

(946

)

5,044

Income taxes

6,847

5,798

Prepaid expenses and other assets

(3,113

)

7,478

Accounts payable

12,390

11,282

Customer prepayments

20,552

(8,432

)

Accrued compensation and benefits

(34,605

)

(13,157

)

Other taxes and withholding

8,912

(479

)

Other accruals and liabilities

6,332

2,725

Net cash provided by operating activities

111,598

84,941

 
Cash flows from investing activities:
Purchases of property and equipment

(11,546

)

(10,351

)

Proceeds from sales of property and equipment

12

25

Net cash used in investing activities

(11,534

)

(10,326

)

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

74,087

201,170

Repurchases of common stock

(178,613

)

(41,445

)

Proceeds from issuance of common stock

2,460

3,283

Debt issuance costs

(3

)

(3

)

Net cash (used in) provided by financing activities

(102,069

)

163,005

 
Net (decrease) increase in cash and cash equivalents

(2,005

)

237,620

Cash and cash equivalents, at beginning of period

4,243

1,593

Cash and cash equivalents, at end of period

$

2,238

$

239,213

SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)
 
 
Three Months Ended
April 3,March 28,

2021

2020

 
Percent of sales:
Retail stores

86.1

%

92.1

%

Online, phone, chat and other

13.9

%

7.9

%

Total Company

100.0

%

100.0

%

 
Sales change rates:
Retail comparable-store sales

12

%

6

%

Online, phone and chat

116

%

21

%

Total Retail comparable sales change

20

%

7

%

Net opened/closed stores and other

0

%

4

%

Total Company

20

%

11

%

 
Stores open:
Beginning of period

602

611

Opened

11

8

Closed

(6

)

(8

)

End of period

607

611

 
Other metrics:
Average sales per store ($ in 000's) 1, 4

$

3,196

$

2,932

Average sales per square foot 1, 4

$

1,095

$

1,040

Stores > $2 million net sales 2, 4

71

%

71

%

Stores > $3 million net sales 2, 4

33

%

32

%

Average revenue per mattress unit 3

$

5,030

$

4,884

 

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 (stores, online, phone and chat) net sales divided by Total Retail mattress units.

 

4 Fiscal 2020 included 53 weeks, as compared to 52 weeks in fiscal 2021 and 2019. The additional week in 2020 was in the fiscal fourth quarter. Total Retail comparable sales have been adjusted to remove the estimated impact of the additional week on those metrics.

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:
 
Fifty-ThreeFifty-Two
Three Months EndedWeeks EndedWeeks Ended

April 3,

March 28,

April 3,

March 28,

2021

2020

2021

2020

 
Net income

$

66,634

$

39,140

$

166,683

$

95,567

Income tax expense

8,812

11,330

34,265

25,313

Interest expense

978

2,357

7,642

11,338

Depreciation and amortization

14,519

15,253

60,049

61,026

Stock-based compensation

6,417

2,051

26,179

15,070

Asset impairments

89

3

388

49

 
Adjusted EBITDA

$

97,449

$

70,134

$

295,206

$

208,363

 
Free Cash Flow
(in thousands)
 
Fifty-ThreeFifty-Two
Three Months EndedWeeks EndedWeeks Ended

April 3,

March 28,

April 3,

March 28,

2021

2020

2021

2020

 
Net cash provided by operating activities

$

111,598

$

84,941

$

306,318

$

205,965

Subtract: Purchases of property and equipment

11,546

10,351

38,295

49,847

 
Free cash flow

$

100,052

$

74,590

$

268,023

$

156,118

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

Fifty-Three

Fifty-Two

Weeks Ended

Weeks Ended

April 3,

March 28,

2021

2020

 
Borrowings under revolving credit facility

$

314,900

$

446,003

Outstanding letters of credit

3,997

3,997

Finance lease obligations

622

730

Consolidated funded indebtedness

$

319,519

$

450,730

Capitalized operating lease obligations1

555,903

535,425

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

-

(199,213

)

Total debt including capitalized operating lease obligations (a)

$

875,422

$

786,942

 
Adjusted EBITDA (see above)

$

295,206

$

208,363

Consolidated rent expense

92,650

89,237

Consolidated EBITDAR (b)

$

387,856

$

297,600

 
Net Leverage Ratio under revolving credit facility (a divided by b)

2.3 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 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:
 
Fifty-ThreeFifty-Two
Weeks EndedWeeks Ended

April 3,

March 28,

2021

2020

Net operating profit after taxes (NOPAT)
Operating income

$

208,506

$

132,203

Add: Rent expense 1

92,650

89,237

Add: Interest income

84

15

Less: Depreciation on capitalized operating leases 2

(24,258

)

(22,883

)

Less: Income taxes 3

(66,118

)

(47,453

)

NOPAT

$

210,864

$

151,119

 
Average invested capital
Total deficit

$

(332,650

)

$

(155,909

)

Less: Cash greater than target 4

-

(113,397

)

Add: Long-term debt 5

315,522

446,733

Add: Capitalized operating lease obligations 6

741,200

713,896

Total invested capital at end of period

$

724,072

$

891,323

 
Average invested capital 7

$

763,227

$

790,420

 
Return on invested capital (ROIC) 8

27.6

%

19.1

%

 

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 23.9% for 2021 and 2020, 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; (414) 732-9840; julie.elepano@sleepnumber.com

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