Business Wire | Jul 15, 2020 04:01PM EDT

Sleep Number Announces Second Quarter 2020 Results

Jul. 15, 2020

MINNEAPOLIS--(BUSINESS WIRE)--Jul. 15, 2020--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(r) 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(r) smart beds deliver proven, quality sleep through effortless, adjustable comfort. Our integrated SleepIQ(r) 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(r) 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 CORPORATIONAND SUBSIDIARIESConsolidated Statements of Operations(unaudited - in thousands, except per share amounts) Three Months Ended June 27, % of June 29, % of

2020 Net 2019 Net Sales 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 27,923 29,873 outstanding Dilutive effect of stock-based - 658 awards ^1Diluted weighted-average shares 27,923 30,531 outstanding ^1

^ For the three months ended June 27, 2020, potentially dilutive stock-based1 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 CORPORATIONAND SUBSIDIARIESConsolidated Statements of Operations(unaudited - in thousands, except per share amounts) Six Months Ended

June 27, % of June 29, % of

2020 Net 2019 Net Sales 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 27,890 30,247outstanding Dilutive effect of stock-based awards 633 887

Diluted weighted-average shares 28,523 31,134outstanding

SLEEP NUMBER CORPORATIONAND SUBSIDIARIESConsolidated Balance Sheets(unaudited - in thousands, except per share amounts)subject to reclassification June 27, December 28,

2020 2019

AssetsCurrent assets:Cash and cash equivalents $ 1,651 $ 1,593

Accounts receivable, net of allowance for doubtful 15,754 19,978 accounts of $957 and $898, respectivelyInventories 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' DeficitCurrent 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 outstandingCommon stock, $0.01 par value; 142,500 shares 277 280 authorized, 27,725 and 27,961 shares issued andoutstanding, respectivelyAdditional 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 CORPORATIONAND SUBSIDIARIESConsolidated 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 cashprovided 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 CORPORATIONAND SUBSIDIARIESSupplemental 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 (21 %) 8 % (5 %) 7 %changeNet 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 $ 2,830 $ 2,800 000's) ^1Average 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 $ 4,767 $ 4,945 $ 4,839 $ 4,868 ^3

^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 (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 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 $ 2,060 $ 2,211 $ 205,814 $ 172,756activitiesSubtract: Purchases of property 11,344 14,153 47,038 58,070and equipment 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 $ 227,240 $ 281,500facilityOutstanding letters of credit 3,997 3,497

Finance lease obligations 704 809

Consolidated funded $ 231,941 $ 285,806indebtednessCapitalized operating lease 542,095 505,260obligations^1Total debt including capitalized operating $ 774,036 $ 791,066lease obligations (a) 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 2.8 to 3.0 todivided by b) 1.0 1.0

^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 considered non-GAAPfinancial measures and are not in accordance with, or preferable to, "asreported," or GAAP financial data. However, we are providing this informationas we believe it facilitates analysis of the Company's financial performance byinvestors 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 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 Ended June 27, June 29, 2020 2019Net 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 (23,331 ) (21,310 )^2Less: Income taxes ^3 (42,735 ) (40,319 )

NOPAT $ 137,211 $ 125,978

Average invested capitalTotal 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 %

^ Rent expense is added back to operating income to show the impact of owning1 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. This2 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, of3 23.7% and 24.2% for 2020 and 2019, respectively.

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

^ A multiple of eight times annual rent expense is used as an estimate for5 capitalizing our operating lease obligations. The methodology utilized 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.

^7 ROIC equals NOPAT divided by average invested capital.

Our ROIC calculation and data are considered non-GAAP financial measuresNote 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; (763) 551-7459; julie.elepano@sleepnumber.com