Business Wire | Oct 14, 2020 04:01PM EDT

Sleep Number Announces Record Third Quarter 2020 Results

Oct. 14, 2020

MINNEAPOLIS--(BUSINESS WIRE)--Oct. 14, 2020--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(r) 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 53rd 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(r) 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(r) smart beds benefit from our proprietary SleepIQ(r) 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(r) score.

For life-changing sleep, visit SleepNumber.com or one of our 600 Sleep Number(r) 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 CORPORATIONAND SUBSIDIARIESConsolidated Statements of Operations(unaudited - in thousands, except per share amounts) Three Months Ended September % of September % of 26, 28,

2020 Net 2019 Net Sales 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-averageshares outstanding:Basic weighted-average shares 27,973 29,085outstandingDilutive effect of stock-based awards 661 711

Diluted weighted-average shares 28,634 29,796outstandingSLEEP NUMBER CORPORATIONAND SUBSIDIARIESConsolidated Statements of Operations(unaudited - in thousands, except per share amounts)Nine Months EndedSeptember 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 sales488,558

37.9

%

481,377

38.3

%

Gross profit800,101

62.1

%

775,809

61.7

%

Operating expenses:Sales and marketing549,483

42.6

%

568,799

45.2

%

General and administrative111,915

8.7

%

102,466

8.2

%

Research and development28,399

2.2

%

25,440

2.0

%

Total operating expenses689,797

53.5

%

696,705

55.4

%

Operating income110,304

8.6

%

79,104

6.3

%

Interest expense, net8,111

0.6

%

8,968

0.7

%

Income before income taxes102,193

7.9

%

70,136

5.6

%

Income tax expense24,363

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 outstanding27,918

29,859

Dilutive effect of stock-based awards642

829

Diluted weighted-average shares outstanding28,560

30,688

SLEEP NUMBER CORPORATIONAND SUBSIDIARIESConsolidated Statements of Operations(unaudited - in thousands, except per share amounts) Nine Months Ended September % of September % of 26, 28,

2020 Net 2019 Net Sales 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 ofweighted-average sharesoutstanding:Basic weighted-average shares 27,918 29,859outstandingDilutive effect of stock-based 642 829awardsDiluted weighted-average shares 28,560 30,688outstandingSLEEP NUMBER CORPORATIONAND SUBSIDIARIESConsolidated Balance Sheets(unaudited - in thousands, except per share amounts)subject to reclassificationSeptember 26,

December 28,

2020

2019

AssetsCurrent assets:Cash and cash equivalents$

1,365

$

1,593

Accounts receivable, net of allowance for doubtful accounts of $823 and $898, respectively32,688

19,978

Inventories83,258

87,065

Prepaid expenses10,923

15,335

Other current assets36,127

36,397

Total current assets164,361

160,368

Non-current assets:Property and equipment, net178,482

197,421

Operating lease right-of-use assets311,179

327,017

Goodwill and intangible assets, net73,508

73,226

Other non-current assets52,587

48,011

Total assets$

780,117

$

806,043

Liabilities and Shareholders' DeficitCurrent liabilities:Borrowings under credit facility$

33,500

$

231,000

Accounts payable167,139

134,594

Customer prepayments75,043

34,248

Accrued sales returns24,085

19,809

Compensation and benefits61,751

40,321

Taxes and withholding32,030

22,171

Operating lease liabilities60,561

59,561

Other current liabilities58,449

53,070

Total current liabilities512,558

594,774

Non-current liabilities:Deferred income taxes7,037

3,808

Operating lease liabilities281,733

298,090

Other non-current liabilities81,616

68,802

Total non-current liabilities370,386

370,700

Total liabilities882,944

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, respectively278

280

Additional paid-in capital14,390

-

Accumulated deficit(117,495

)

(159,711

)

Total shareholders' deficit(102,827

)

(159,431

)

Total liabilities and shareholders' deficit$

780,117

$

806,043

SLEEP NUMBER CORPORATIONAND SUBSIDIARIESConsolidated Balance Sheets(unaudited - in thousands, except per share amounts)subject to reclassification September December 28, 26,

2020 2019

AssetsCurrent assets:Cash and cash equivalents $ 1,365 $ 1,593

Accounts receivable, net of allowance for doubtful 32,688 19,978 accounts of $823 and $898, respectivelyInventories 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' DeficitCurrent 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 outstandingCommon stock, $0.01 par value; 142,500 shares 278 280 authorized, 27,757 and 27,961 shares issued andoutstanding, respectivelyAdditional 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 CORPORATIONAND SUBSIDIARIESConsolidated Statements of Cash Flows(unaudited - in thousands)subject to reclassificationNine Months EndedSeptember 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 amortization46,244

46,267

Stock-based compensation15,554

12,034

Net loss (gain) on disposals and impairments of assets208

(409

)

Deferred income taxes3,229

(895

)

Changes in operating assets and liabilities:Accounts receivable(12,710

)

(746

)

Inventories3,807

(1,626

)

Income taxes5,103

535

Prepaid expenses and other assets3,666

(8,065

)

Accounts payable58,547

45,051

Customer prepayments40,795

12,758

Accrued compensation and benefits21,376

11,763

Other taxes and withholding4,756

5,784

Other accruals and liabilities18,877

9,629

Net cash provided by operating activities287,282

189,832

Cash flows from investing activities:Purchases of property and equipment(28,074

)

(46,757

)

Proceeds from sales of property and equipment53

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 stock4,650

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 period1,593

1,612

Cash and cash equivalents, at end of period$

1,365

$

1,545

SLEEP NUMBER CORPORATIONAND SUBSIDIARIESConsolidated Statements of Cash Flows(unaudited - in thousands)subject to reclassification Nine Months Ended September September 26, 28,

2020 2019

Cash flows from operating activities:Net income $ 77,830 $ 57,752

Adjustments to reconcile net income to net cashprovided 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 208 (409 )assetsDeferred 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 CORPORATIONAND SUBSIDIARIESSupplemental Financial Information(unaudited)Three Months EndedNine Months EndedSeptember 26,

September 28,

September 26,

September 28,

2020

2019

2020

2019

Percent of sales:Retail86.0

%

92.2

%

85.2

%

92.1

%

Online and phone13.7

%

7.3

%

14.5

%

7.2

%

Wholesale/other0.3

%

0.5

%

0.3

%

0.7

%

Total Company100.0

%

100.0

%

100.0

%

100.0

%

Sales change rates:Retail comparable-store sales2

%

9

%

(8

%)

7

%

Online and phone111

%

20

%

109

%

10

%

Total Retail comparable sales change11

%

10

%

1

%

8

%

Net opened/closed stores1

%

4

%

2

%

5

%

Total Retail12

%

14

%

3

%

13

%

Wholesale/other(28

%)

8

%

(60

%)

(17

%)

Total Company12

%

14

%

3

%

12

%

Stores open:Beginning of period598

594

611

579

Opened6

15

20

47

Closed(8

)

(7

)

(35

)

(24

)

End of period596

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 264

%

70

%

Stores > $3 million net sales 226

%

28

%

Average revenue per mattress unit 3$

4,802

$

4,788

$

4,824

$

4,837

SLEEP NUMBER CORPORATIONAND SUBSIDIARIESSupplemental Financial Information(unaudited) Three Months Ended Nine Months Ended September September September September 26, 28, 26, 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 2 % 9 % (8 %) 7 %salesOnline and phone 111 % 20 % 109 % 10 %

Total Retail comparable 11 % 10 % 1 % 8 %sales changeNet 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 ($ $ 2,920 $ 2,858 in 000's) ^1Average sales per square $ 1,012 $ 1,029 foot ^1Stores > $2 million net 64 % 70 %sales ^2Stores > $3 million net 26 % 28 %sales ^2Average revenue per mattress $ 4,802 $ 4,788 $ 4,824 $ 4,837 unit ^31

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.

^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:

SLEEP NUMBER CORPORATION AND SUBSIDIARIES



Earnings before Interest, Taxes, Depreciation and Amortization (AdjustedEBITDA)

(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 financialperformance and our ability to generate cash from operating activities. Ourdefinition of Adjusted EBITDA may not be comparable to similarly titleddefinitions used by other companies. The table below reconciles AdjustedEBITDA, which is a non-GAAP financial measure, to the comparable GAAP financialmeasure:

Three Months EndedTrailing Twelve Months EndedSeptember 26,September 28,September 26,September 28,2020

2019

2020

2019

Net income$

51,320

$

28,054

$

101,923

$

84,742

Income tax expense16,468

7,967

30,642

21,421

Interest expense1,829

3,131

10,829

11,064

Depreciation and amortization15,083

14,963

61,071

61,155

Stock-based compensation8,470

4,146

20,177

13,348

Asset impairments11

29

276

150

Adjusted EBITDA$

93,181

$

58,290

$

224,918

$

191,880

Free Cash Flow(in thousands)Three Months EndedTrailing Twelve Months EndedSeptember 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 equipment6,379

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 EndedSeptember 26,September 28,2020

2019

Borrowings under credit facility$

33,500

$

213,700

Outstanding letters of credit3,997

3,497

Finance lease obligations677

783

Consolidated funded indebtedness$

38,174

$

217,980

Capitalized operating lease obligations1546,850

514,921

Total debt including capitalized operating lease obligations (a)$

585,024

$

732,901

Adjusted EBITDA (see above)$

224,918

$

191,880

Consolidated rent expense91,142

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

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

Net cash provided by operating $ 200,281 $ 119,485 $ 286,610 $ 186,922activitiesSubtract: Purchases of property and 6,379 12,861 40,556 58,260equipment 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 September 26, 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 546,850 514,921obligations^1Total debt including capitalized operating $ 585,024 $ 732,901lease obligations (a) 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 1.9 to 2.6 todivided by b) 1.0 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.^1 A multiple of six times annual rent expense is used as an estimate forcapitalizing our operating lease obligations in accordance with our creditfacility.



Note - Our Adjusted EBITDA and EBITDAR calculations, Free Cash Flow data andCalculation of Net Leverage Ratio under Credit Facility are considerednon-GAAP financial measures and are not in accordance with, or preferableto, "as reported," or GAAP financial data. However, we are providing thisinformation as we believe it facilitates analysis of the Company's financialperformance by investors and financial analysts.

GAAP - generally accepted accounting principles in the U.S.SLEEP NUMBER CORPORATION AND SUBSIDIARIESCalculation 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:SLEEP NUMBER CORPORATION AND SUBSIDIARIESCalculation of Return on Invested Capital (ROIC)(in thousands)

ROIC is a financial measure we use to determine how efficiently we deploy ourcapital. It quantifies the return we earn on our invested capital. Managementbelieves ROIC is also a useful metric for investors and financial analysts. Wecompute ROIC as outlined below. Our definition and calculation of ROIC may notbe comparable to similarly titled definitions and calculations used by othercompanies. The tables below reconcile net operating profit after taxes (NOPAT)and total invested capital, which are non-GAAP financial measures, to thecomparable GAAP financial measures:

Trailing Twelve Months EndedSeptember 26,2020September 28,2019Net operating profit after taxes (NOPAT)Operating income$

143,295

$

117,224

Add: Rent expense 191,142

85,807

Add: Interest income97

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 capitalTotal deficit$

(102,827

)

$

(164,487

)

Add: Long-term debt 434,177

214,482

Add: Capitalized operating lease obligations 5729,136

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) 720.8

%

18.4

%

Trailing Twelve Months Ended September 26, September 28, 2020 2019Net 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 (23,700 ) (21,821 )^2Less: Income taxes ^3 (50,584 ) (44,298 )

NOPAT $ 160,250 $ 136,916

Average invested capitalTotal deficit $ (102,827 ) $ (164,487 )

Add: Long-term debt^ 4 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 %

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 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.

^ Rent expense is added back to operating income to show the impact of1 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.2 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,3 of 24.0% and 24.4% for 2020 and 2019, respectively.



^ Long-term debt includes existing finance lease liabilities.4



A multiple of eight times annual rent expense is used as an estimate for^ capitalizing our operating lease obligations. The methodology utilized5 aligns with the methodology of a nationally recognized credit rating agency.



^ Average invested capital represents the average of the last five fiscal6 quarters' ending invested capital balances.



^ ROIC equals NOPAT divided by average invested capital.7

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.

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