Sleep Number Announces Third Quarter 2023 Results

• Third quarter net sales declined 13% versus the prior year to $473 million; third quarter diluted loss per share of $0.10
• Initiated approximately $50 million of additional operating expense reduction actions for 2024 on top of an estimated $80 million for 2023
• Updated 2023 EPS outlook to a loss of up to $0.70 per share, which includes an estimated $10 million or $0.35 per share of restructuring charges to be recorded in the fourth quarter
• Amended and right-sized bank facility to provide additional covenant flexibility through 2024

Sleep Number Corporation (NASDAQ:SNBR) today reported results for the quarter ended September 30, 2023.

"The third quarter was challenging for Sleep Number and the bedding industry as the consumer demand trajectory changed abruptly midway through the quarter," said Shelly Ibach, Chair, President and CEO, Sleep Number. "In response, we acted quickly to further reduce costs, recalibrate our sales and marketing approach, and amend our credit agreement to provide additional covenant flexibility through the end of 2024. We expect these actions and broad-based restructuring initiatives to result in a more durable operating model with improved profitability and cash flows in a range of economic environments. We remain confident in our strategic direction and ability to deliver superior value creation over time."

Third Quarter Financial Overview

• Net sales decreased 13% to $473 million; demand decelerated abruptly in August and September, leading to a low double-digit demand decline for the quarter versus prior year
• Gross margin of 57.4% was up 130 bp versus the prior year, primarily benefiting from pricing actions and easing commodity prices
• Operating expenses were reduced by $25 million to $266 million compared with $290 million last year
• Loss per diluted share of $0.10 compared with diluted earnings per share of $0.22 last year

Cash Flows Overview

• Net cash from operating activities of $32 million for the first nine months of the year, compared with $80 million for the same period last year
• Leverage ratio of 4.8x EBITDAR at the end of the third quarter versus covenant maximum of 5.0x
• Adjusted ROIC of 14.9% for the trailing twelve months

Business Restructuring Actions

In light of the demand trajectory change in August, the company initiated additional cost reduction actions which are expected to reduce 2024 operating expenses by approximately $50 million, and also accelerated gross margin initiatives. The operating expense reductions are incremental to the $80 million of operating expense reductions we expect to realize in 2023.

• The cost restructuring actions are broad-based and include a reduction in headcount across all areas of the organization, including in corporate and R&D functions
• We are rationalizing our store portfolio with a planned closure of 40 to 50 stores by the end of 2024, along with slowing the rate of new store openings and remodels, and also reducing our 2024 capital expenditures
• Gross margin improvement actions include value engineering and cost optimization strategies, including driving additional efficiencies through our manufacturing and home delivery network
• The business restructuring actions are expected to result in up to $20 million of one-time restructuring costs, with an estimated $10 million of the costs being recorded in the fourth quarter of this year

Amended Credit Agreement

• The company also amended the financial covenants of the revolving credit facility to provide greater flexibility through 2024, and right-sized the aggregate availability of the credit facility to $685 million
• Prospectively, the company will be utilizing a new definition for net leverage as highlighted on page 9 of this news release; our leverage ratio under the new definition was 3.8x EBITDAR at end of the third quarter

Financial Outlook

The company updated its full-year 2023 diluted EPS outlook to a loss of up to $0.70 per share. The updated EPS outlook includes an estimated $10 million, or $0.35 per share, of restructuring charges to be recorded in the fourth quarter. The 2023 outlook assumes net sales are down low double digits versus the prior year, with approximately 100 basis points of gross margin rate improvement year-over-year. The company anticipates 2023 capital expenditures of approximately $60 million.

Conference Call Information

Management will host its regularly scheduled conference call to discuss the company's results at 5 p.m. EST (4 p.m. CST; 2 p.m. PST) today. To access the webcast, 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

Sleep Number is a wellness technology company. We are guided by our purpose to improve the health and wellbeing of society through higher quality sleep; to date, our innovations have improved over 15 million lives. Our wellness technology platform helps solve sleep problems, whether it's providing individualized temperature control for each sleeper through our Climate360® smart bed or applying our 23 billion hours of longitudinal sleep data and expertise to research with global institutions.

Our smart bed ecosystem drives best-in-class engagement through dynamic, adjustable, and effortless sleep with personalized digital sleep and health insights; our millions of Smart Sleepers are loyal brand advocates. And our almost 4,500 mission-driven team members passionately innovate to drive value creation through our vertically integrated business model, including our exclusive direct-to-consumer selling in over 650 stores and online.

To learn more about life-changing, individualized sleep, visit a Sleep Number store near you, our newsroom. and investor relations sites, or SleepNumber.com

Forward-looking Statements

Statements used in this news release relating to future plans, events, financial results or performance, such as the company's full-year 2023 diluted EPS and future capital expenditures and operating expenses, are forward-looking statements subject to certain risks and uncertainties including, among others, such factors as current and future economic conditions and consumer sentiment; ability to realize expected cost savings and other benefits related to cost restructuring actions and to avoid unexpected adverse effects on the company; increases in interest rates, which have increased the cost of servicing the company's indebtedness; availability of attractive and cost-effective consumer credit options; the effectiveness of the company's marketing strategy and promotional efforts; the execution of Sleep Number's Total Retail distribution strategy; operating with minimal levels of inventory, which may leave the company vulnerable to supply shortages; bank failures or other events affecting financial institutions; Sleep Number's dependence on, and ability to maintain strong working relationships with key suppliers and third parties; rising commodity costs or third-party logistics costs and other inflationary pressures; risks inherent in global-sourcing activities, including tariffs, geo-political turmoil, war, strikes, labor challenges, government-mandated work closures, outbreaks of pandemics or contagious diseases, and resulting supply shortages and production and delivery delays and disruptions; risks of disruption due to health epidemics or pandemics, such as the COVID-19 pandemic; regional risks related to having global operations and suppliers, including climate and other disasters; ability to achieve and maintain high levels of product quality; ability to improve and expand Sleep Number's product line and execute successful new product introductions; ability to prevent third parties from using the company's technology or trademarks, and the adequacy of its intellectual property rights to protect its products and brand; ability to compete; risks of disruption in the operation of any of the company's main manufacturing, distribution, logistics, home delivery, product development or customer service operations; the company's ability to comply with existing and changing government regulation; 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; the company's ability to withstand cyber threats that could compromise the security of its systems, result in a data breach or business disruption; Sleep Number's ability, and the ability of its suppliers and vendors, to attract, retain and motivate qualified personnel; the volatility of Sleep Number stock; 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 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.

For the three months ended September 30, 2023, 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.

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 smart bed 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:

Note - Our Adjusted EBITDA calculations and Free Cash Flow data 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 Net Leverage Ratio under Revolving Credit Facility

(in thousands)

Our calculation of Net Leverage Ratio under Revolving Credit Facility was changed effective with the amendment of our credit facility on November 2, 2023. Prior to the amendment, the calculation included capitalized operating lease obligations based on a multiple of six times annual rent expense. The amendment replaced this line item with operating lease liabilities included in our financial statements under ASC 842. The calculations in accordance with the credit facility prior to, and subsequent to, the November 2, 2023 amendment are presented below:

PRIOR TO AMENDMENT OF OUR CREDIT FACILITY ON NOVEMBER 2, 2023

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.

SUBSEQUENT TO AMENDMENT OF OUR CREDIT FACILITY ON NOVEMBER 2, 2023

¹ Reflects operating lease liabilities included in our financial statements under ASC 842.

Note - Our Net Leverage Ratio under Revolving Credit Facility, EBITDA and EBITDAR calculations 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 (Adjusted ROIC)

(in thousands)

Adjusted ROIC is a financial measure we use to determine how efficiently we deploy our capital. It quantifies the return we earn on our adjusted invested capital. Management believes Adjusted ROIC is also a useful metric for investors and financial analysts. We compute Adjusted ROIC as outlined below. Our 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:

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