Business Wire | Feb 17, 2021 04:01PM EST

Sleep Number Announces Record Fourth-Quarter and Full-Year 2020 Results

Feb. 17, 2021

MINNEAPOLIS--(BUSINESS WIRE)--Feb. 17, 2021--Sleep Number Corporation (Nasdaq: SNBR) today reported results for the year ended January 2, 2021.

"In a year of challenge and change, our mission-driven team delivered exceptional results by leveraging the power of vertical integration, digitization and focusing on what matters most to our stakeholders," said Shelly Ibach, President and Chief Executive Officer. "We broadened our sleep leadership and brand relevance with our revolutionary 360(r) smart beds as consumers' increased their understanding of the link between proven quality sleep and wellbeing. With strong momentum in the first quarter and ongoing investments in sleep science-based innovations and digital technologies, we are well-positioned to generate sustainable profitable growth for years to come."

Full Year Overview

* Net sales increased 9% to $1.86 billion in 2020, including a 6% comparable sales gain, 1.5 percentage points (ppt.) of growth from new stores and 2.5 ppt. of growth from the extra week * Gross profit rate increased 40 basis points (bp) to 62.3% of net sales, despite significant disruption from COVID-19 in the second quarter * Operating income increased 65% to $185 million, or 10.0% of net sales; increased 55% excluding the 53rd week * Earnings per diluted share increased 81% to $4.90; increased 70% excluding the 53rd week * Fiscal 2020 included a 53rd week, which we estimate added approximately $41 million in sales, $11.2 million in operating income and $0.30 of diluted earnings per share

Fourth Quarter Overview

* Net sales increased 29% to $568 million, including a 19% comparable sales gain, one ppt. of growth from new stores and 9 ppt. of growth from the additional week in the fourth quarter * Operating income increased 126% to $75 million; increased 92% excluding the 53rd week * Earnings per diluted share increased 167% to $2.19; increased 129% excluding the 53rd week

Cash Flows and Liquidity Review

* Generated a record $280 million in net cash from operating activities, up 48% versus last year, with operating free cash flows of $243 million, up 87% versus prior year * Invested $37 million in capital expenditures and $228 million in SNBR share repurchases in 2020, including $190 million in the fourth quarter; more than $1 billion cash returned to shareholders over the past six years; $247 million remains under our share repurchase authorization * Return on invested capital (ROIC) of 25% for the year, up 720 bp versus 2019 and more than three times our weighted average cost of capital * Leverage ratio of 2.2x EBITDAR at the end of 2020, compared with 2.7x at the end of 2019; continue to operate with a targeted range of 2.5x to 3.0x EBITDAR

Financial Outlook

The company expects to generate full-year 2021 earnings per diluted share of at least $6.00, which is 30% higher than 2020 full-year results excluding the impact of the 53rd week. The outlook assumes an estimated effective income tax rate of approximately 23% (including an estimated $5 million of excess tax benefits related to stock-based compensation largely in Q1), compared to an effective tax rate of 20.9% for 2020. The company anticipates 2021 capital expenditures of $70 million to $75 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, 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 4,800 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 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(r) 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(r) score.

For life-changing sleep, visit SleepNumber.com or one of our more than 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 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 CORPORATIONAND SUBSIDIARIESConsolidated Statements of Operations(unaudited - in thousands, except per share amounts) Fourteen Thirteen

Weeks Weeks Ended Ended

January % of December % of 2, 28,

2021 Net 2019 Net Sales Sales

Net sales $ 567,896 100.0 % $ 441,166 100.0 %

Cost of sales 211,997 37.3 % 165,052 37.4 %

Gross profit 355,899 62.7 % 276,114 62.6 %

Operating expenses:Sales and marketing 221,712 39.0 % 198,123 44.9 %

General and administrative 47,084 8.3 % 35,490 8.0 %

Research and development 12,511 2.2 % 9,510 2.2 %

Total operating expenses 281,307 49.5 % 243,123 55.1 %

Operating income 74,592 13.1 % 32,991 7.5 %

Interest expense, net 813 0.1 % 2,619 0.6 %

Income before income taxes 73,779 13.0 % 30,372 6.9 %

Income tax expense 12,420 2.2 % 6,279 1.4 %

Net income $ 61,359 10.8 % $ 24,093 5.5 %

Net income per share - basic $ 2.28 $ 0.85

Net income per share - diluted $ 2.19 $ 0.82

Reconciliation of weighted-averageshares outstanding:Basic weighted-average shares 26,960 28,309outstandingDilutive effect of stock-based 1,100 1,047awardsDiluted weighted-average shares 28,060 29,356outstandingSLEEP NUMBER CORPORATIONAND SUBSIDIARIESConsolidated Statements of Operations(unaudited - in thousands, except per share amounts)Fifty-Three

Fifty-Two

Weeks Ended

Weeks Ended

January 2,

% of

December 28,

% of

2021

Net Sales

2019

Net Sales

Net sales$

1,856,555

100.0

%

$

1,698,352

100.0

%

Cost of sales700,555

37.7

%

646,429

38.1

%

Gross profit1,156,000

62.3

%

1,051,923

61.9

%

Operating expenses:Sales and marketing771,195

41.5

%

766,922

45.2

%

General and administrative158,999

8.6

%

137,956

8.1

%

Research and development40,910

2.2

%

34,950

2.1

%

Total operating expenses971,104

52.3

%

939,828

55.3

%

Operating income184,896

10.0

%

112,095

6.6

%

Interest expense, net8,924

0.5

%

11,587

0.7

%

Income before income taxes175,972

9.5

%

100,508

5.9

%

Income tax expense36,783

2.0

%

18,663

1.1

%

Net income$

139,189

7.5

%

$

81,845

4.8

%

Net income per share - basic$

5.03

$

2.78

Net income per share - diluted$

4.90

$

2.70

Reconciliation of weighted-averageshares outstanding:Basic weighted-average shares outstanding27,665

29,472

Dilutive effect of stock-based awards763

883

Diluted weighted-average shares outstanding28,428

30,355

SLEEP NUMBER CORPORATIONAND SUBSIDIARIESConsolidated Statements of Operations(unaudited - in thousands, except per share amounts) Fifty-Three Fifty-Two

Weeks Ended Weeks Ended

January 2, % of December % of 28,

2021 Net 2019 Net Sales Sales

Net sales $ 1,856,555 100.0 % $ 1,698,352 100.0 %

Cost of sales 700,555 37.7 % 646,429 38.1 %

Gross profit 1,156,000 62.3 % 1,051,923 61.9 %

Operating expenses:Sales and marketing 771,195 41.5 % 766,922 45.2 %

General and administrative 158,999 8.6 % 137,956 8.1 %

Research and development 40,910 2.2 % 34,950 2.1 %

Total operating expenses 971,104 52.3 % 939,828 55.3 %

Operating income 184,896 10.0 % 112,095 6.6 %

Interest expense, net 8,924 0.5 % 11,587 0.7 %

Income before income taxes 175,972 9.5 % 100,508 5.9 %

Income tax expense 36,783 2.0 % 18,663 1.1 %

Net income $ 139,189 7.5 % $ 81,845 4.8 %

Net income per share - basic $ 5.03 $ 2.78

Net income per share - diluted $ 4.90 $ 2.70

Reconciliation ofweighted-averageshares outstanding:Basic weighted-average shares 27,665 29,472outstandingDilutive effect of stock-based 763 883awardsDiluted weighted-average shares 28,428 30,355outstandingSLEEP NUMBER CORPORATIONAND SUBSIDIARIESConsolidated Balance Sheets(unaudited - in thousands, except per share amounts)subject to reclassificationJanuary 2,

December 28,

2021

2019

AssetsCurrent assets:Cash and cash equivalents$

4,243

$

1,593

Accounts receivable, net of allowance for doubtful accountsof $1,046 and $898, respectively31,871

19,978

Inventories81,362

87,065

Prepaid expenses20,839

15,335

Other current assets43,489

36,397

Total current assets181,804

160,368

Non-current assets:Property and equipment, net175,223

197,421

Operating lease right-of-use assets314,226

327,017

Goodwill and intangible assets, net72,871

73,226

Other non-current assets56,012

48,011

Total assets$

800,136

$

806,043

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

244,200

$

231,000

Accounts payable91,904

134,594

Customer prepayments72,017

34,248

Accrued sales returns24,765

19,809

Compensation and benefits76,786

40,321

Taxes and withholding23,339

22,171

Operating lease liabilities62,077

59,561

Other current liabilities60,856

53,070

Total current liabilities655,944

594,774

Non-current liabilities:Deferred income taxes242

3,808

Operating lease liabilities283,084

298,090

Other non-current liabilities84,844

68,802

Total non-current liabilities368,170

370,700

Total liabilities1,024,114

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,25,390 and 27,961 shares issued and outstanding, respectively254

280

Additional paid-in capital-

-

Accumulated deficit(224,232

)

(159,711

)

Total shareholders' deficit(223,978

)

(159,431

)

Total liabilities and shareholders' deficit$

800,136

$

806,043

SLEEP NUMBER CORPORATIONAND SUBSIDIARIESConsolidated Balance Sheets(unaudited - in thousands, except per share amounts)subject to reclassification January 2, December 28,

2021 2019

AssetsCurrent assets:Cash and cash equivalents $ 4,243 $ 1,593

Accounts receivable, net of allowance for doubtfulaccountsof $1,046 and $898, respectively 31,871 19,978

Inventories 81,362 87,065

Prepaid expenses 20,839 15,335

Other current assets 43,489 36,397

Total current assets 181,804 160,368

Non-current assets:Property and equipment, net 175,223 197,421

Operating lease right-of-use assets 314,226 327,017

Goodwill and intangible assets, net 72,871 73,226

Other non-current assets 56,012 48,011

Total assets $ 800,136 $ 806,043

Liabilities and Shareholders' DeficitCurrent liabilities:Borrowings under credit facility $ 244,200 $ 231,000

Accounts payable 91,904 134,594

Customer prepayments 72,017 34,248

Accrued sales returns 24,765 19,809

Compensation and benefits 76,786 40,321

Taxes and withholding 23,339 22,171

Operating lease liabilities 62,077 59,561

Other current liabilities 60,856 53,070

Total current liabilities 655,944 594,774

Non-current liabilities:Deferred income taxes 242 3,808

Operating lease liabilities 283,084 298,090

Other non-current liabilities 84,844 68,802

Total non-current liabilities 368,170 370,700

Total liabilities 1,024,114 965,474

Shareholders' deficit:Undesignated preferred stock; 5,000 sharesauthorized,no shares issued and outstanding - -

Common stock, $0.01 par value; 142,500 sharesauthorized,25,390 and 27,961 shares issued and outstanding, 254 280 respectivelyAdditional paid-in capital - -

Accumulated deficit (224,232 ) (159,711 )

Total shareholders' deficit (223,978 ) (159,431 )

Total liabilities and shareholders' deficit $ 800,136 $ 806,043

SLEEP NUMBER CORPORATIONAND SUBSIDIARIESConsolidated Statements of Cash Flows(unaudited - in thousands)subject to reclassificationFifty-Three

Fifty-Two

Weeks Ended

Weeks Ended

January 2,

December 28,

2021

2019

Cash flows from operating activities:Net income$

139,189

$

81,845

Adjustments to reconcile net income to net cash provided byoperating activities:Depreciation and amortization61,563

61,866

Stock-based compensation21,813

16,657

Net loss (gain) on disposals and impairments of assets247

(430

)

Deferred income taxes(3,566

)

(1,014

)

Changes in operating assets and liabilities:Accounts receivable(11,893

)

4,817

Inventories5,703

(2,183

)

Income taxes1,057

3,066

Prepaid expenses and other assets(13,717

)

(13,959

)

Accounts payable(16,755

)

10,661

Customer prepayments37,769

7,182

Accrued compensation and benefits36,825

12,920

Other taxes and withholding111

725

Other accruals and liabilities21,315

7,007

Net cash provided by operating activities279,661

189,160

Cash flows from investing activities:Purchases of property and equipment(37,100

)

(59,239

)

Proceeds from sales of property and equipment55

2,615

Purchase of intangible assets(1,973

)

-

Net cash used in investing activities(39,018

)

(56,624

)

Cash flows from financing activities:Net (decrease) increase in short-term borrowings(11,639

)

26,357

Repurchases of common stock(235,644

)

(165,079

)

Proceeds from issuance of common stock9,602

7,190

Debt issuance costs(312

)

(1,023

)

Net cash used in financing activities(237,993

)

(132,555

)

Net increase (decrease) in cash and cash equivalents2,650

(19

)

Cash and cash equivalents, at beginning of period1,593

1,612

Cash and cash equivalents, at end of period$

4,243

$

1,593

SLEEP NUMBER CORPORATIONAND SUBSIDIARIESConsolidated Statements of Cash Flows(unaudited - in thousands)subject to reclassification Fifty-Three Fifty-Two

Weeks Ended Weeks Ended

January 2, December 28,

2021 2019

Cash flows from operating activities:Net income $ 139,189 $ 81,845

Adjustments to reconcile net income to net cashprovided byoperating activities:Depreciation and amortization 61,563 61,866

Stock-based compensation 21,813 16,657

Net loss (gain) on disposals and impairments of 247 (430 )assetsDeferred income taxes (3,566 ) (1,014 )

Changes in operating assets and liabilities:Accounts receivable (11,893 ) 4,817

Inventories 5,703 (2,183 )

Income taxes 1,057 3,066

Prepaid expenses and other assets (13,717 ) (13,959 )

Accounts payable (16,755 ) 10,661

Customer prepayments 37,769 7,182

Accrued compensation and benefits 36,825 12,920

Other taxes and withholding 111 725

Other accruals and liabilities 21,315 7,007

Net cash provided by operating activities 279,661 189,160

Cash flows from investing activities:Purchases of property and equipment (37,100 ) (59,239 )

Proceeds from sales of property and equipment 55 2,615

Purchase of intangible assets (1,973 ) -

Net cash used in investing activities (39,018 ) (56,624 )

Cash flows from financing activities:Net (decrease) increase in short-term borrowings (11,639 ) 26,357

Repurchases of common stock (235,644 ) (165,079 )

Proceeds from issuance of common stock 9,602 7,190

Debt issuance costs (312 ) (1,023 )

Net cash used in financing activities (237,993 ) (132,555 )

Net increase (decrease) in cash and cash 2,650 (19 )equivalentsCash and cash equivalents, at beginning of period 1,593 1,612

Cash and cash equivalents, at end of period $ 4,243 $ 1,593

SLEEP NUMBER CORPORATIONAND SUBSIDIARIESSupplemental Financial Information(unaudited)Fourteen

Thirteen

Fifty-Three

Fifty-Two

Weeks Ended

Weeks Ended

Weeks Ended

Weeks Ended

January 2,

December 28,

January 2,

December 28,

2021

2019

2021

2019

Percent of sales:Retail85.3

%

90.8

%

85.2

%

91.8

%

Online and phone14.5

%

9.0

%

14.5

%

7.6

%

Wholesale/other0.2

%

0.2

%

0.3

%

0.6

%

Total Company100.0

%

100.0

%

100.0

%

100.0

%

Sales change rates:Retail comparable-store sales 412

%

1

%

(3

%)

6

%

Online and phone 493

%

16

%

104

%

12

%

Total Retail comparable sales change 419

%

2

%

6

%

6

%

Net opened/closed stores and 53rd week10

%

5

%

4

%

5

%

Total Retail29

%

7

%

10

%

11

%

Wholesale/other25

%

(56

%)

(52

%)

(24

%)

Total Company29

%

7

%

9

%

11

%

Stores open:Beginning of period596

602

611

579

Opened10

12

30

59

Closed(4

)

(3

)

(39

)

(27

)

End of period602

611

602

611

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

3,052

$

2,877

Average sales per square foot 1, 4$

1,051

$

1,034

Stores > $2 million net sales 2, 467

%

70

%

Stores > $3 million net sales 2, 429

%

30

%

Average revenue per mattress unit 3$

4,931

$

4,945

$

4,856

$

4,865

SLEEP NUMBER CORPORATIONAND SUBSIDIARIESSupplemental Financial Information(unaudited) Fourteen Thirteen Fifty-Three Fifty-Two

Weeks Weeks Weeks Ended Weeks Ended Ended Ended

January December January 2, December 2, 28, 28,

2021 2019 2021 2019

Percent of sales:Retail 85.3 % 90.8 % 85.2 % 91.8 %

Online and phone 14.5 % 9.0 % 14.5 % 7.6 %

Wholesale/other 0.2 % 0.2 % 0.3 % 0.6 %

Total Company 100.0 % 100.0 % 100.0 % 100.0 %

Sales change rates:Retail comparable-store sales ^ 12 % 1 % (3 %) 6 %4Online and phone ^4 93 % 16 % 104 % 12 %

Total Retail comparable sales 19 % 2 % 6 % 6 %change ^4Net opened/closed stores and 53 10 % 5 % 4 % 5 %^rd weekTotal Retail 29 % 7 % 10 % 11 %

Wholesale/other 25 % (56 %) (52 %) (24 %)

Total Company 29 % 7 % 9 % 11 %

Stores open:Beginning of period 596 602 611 579

Opened 10 12 30 59

Closed (4 ) (3 ) (39 ) (27 )

End of period 602 611 602 611

Other metrics:Average sales per store ($ in $ 3,052 $ 2,877 000's) ^1, 4Average sales per square foot ^ $ 1,051 $ 1,034 1, 4Stores > $2 million net sales ^ 67 % 70 %2, 4Stores > $3 million net sales ^ 29 % 30 %2, 4Average revenue per mattress $ 4,931 $ 4,945 $ 4,856 $ 4,865 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.4

Fiscal 2020 included 53 weeks, as compared to 52 weeks in fiscal 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 the three and twelve months ended January 2, 2021.^ Trailing twelve months Total Retail comparable sales per store open at least1 one year.

^ Trailing twelve months for stores open at least one year (excludes online and2 phone sales).

^3 Represents Total Retail net sales divided by Total Retail mattress units.

^ Fiscal 2020 included 53 weeks, as compared to 52 weeks in fiscal 2019. The4 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 the three and twelve months ended January 2, 2021.SLEEP NUMBER CORPORATION AND SUBSIDIARIESEarnings 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 SUBSIDIARIESEarnings 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:

Fourteen

Thirteen

Fifty-Three

Fifty-Two

Weeks Ended

Weeks Ended

Weeks Ended

Weeks Ended

January 2,

December 28,

January 2,

December 28,

2021

2019

2021

2019

Net income$

61,359

$

24,093

$

139,189

$

81,845

Income tax expense12,420

6,279

36,783

18,663

Interest expense813

2,621

9,021

11,591

Depreciation and amortization15,194

15,482

60,783

61,410

Stock-based compensation6,259

4,623

21,813

16,657

Asset impairments42

16

302

185

Adjusted EBITDA$

96,087

$

53,114

$

267,891

$

190,351

Free Cash Flow(in thousands)Fourteen

Thirteen

Fifty-Three

Fifty-Two

Weeks Ended

Weeks Ended

Weeks Ended

Weeks Ended

January 2,

December 28,

January 2,

December 28,

2021

2019

2021

2019

Net cash (used in) provided by operating activities$

(7,621

)

$

(672

)

$

279,661

$

189,160

Subtract: Purchases of property and equipment9,026

12,482

37,100

59,239

Free cash flow$

(16,647

)

$

(13,154

)

$

242,561

$

129,921

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

Fifty-Two

Weeks Ended

Weeks Ended

January 2,

December 28,

2021

2019

Borrowings under credit facility$

244,200

$

231,000

Outstanding letters of credit3,997

3,497

Finance lease obligations650

756

Consolidated funded indebtedness$

248,847

$

235,253

Capitalized operating lease obligations1548,749

527,008

Total debt including capitalized operating lease obligations (a)$

797,596

$

762,261

Adjusted EBITDA (see above)$

267,891

$

190,351

Consolidated rent expense91,458

87,835

Consolidated EBITDAR (b)$

359,349

$

278,186

Net Leverage Ratio under credit facility (a divided by b)2.2 to 1.02.7 to 1.0 Fourteen Thirteen Fifty-Three Fifty-Two

Weeks Ended Weeks Ended Weeks Ended Weeks Ended

January 2, December January 2, December 28, 28,

2021 2019 2021 2019

Net income $ 61,359 $ 24,093 $ 139,189 $ 81,845

Income tax expense 12,420 6,279 36,783 18,663

Interest expense 813 2,621 9,021 11,591

Depreciation and 15,194 15,482 60,783 61,410amortizationStock-based compensation 6,259 4,623 21,813 16,657

Asset impairments 42 16 302 185

Adjusted EBITDA $ 96,087 $ 53,114 $ 267,891 $ 190,351

Free Cash Flow(in thousands) Fourteen Thirteen Fifty-Three Fifty-Two

Weeks Ended Weeks Ended Weeks Ended Weeks Ended

January 2, December January 2, December 28, 28,

2021 2019 2021 2019

Net cash (used in) $ (7,621 ) $ (672 ) $ 279,661 $ 189,160provided by operatingactivitiesSubtract: Purchases of 9,026 12,482 37,100 59,239property and equipment Free cash flow $ (16,647 ) $ (13,154 ) $ 242,561 $ 129,921

Calculation of Net Leverage Ratio under Credit Facility(in thousands) Fifty-Three Fifty-Two

Weeks Ended Weeks Ended

January 2, December 28,

2021 2019

Borrowings under credit $ 244,200 $ 231,000facilityOutstanding letters of 3,997 3,497creditFinance lease obligations 650 756

Consolidated funded $ 248,847 $ 235,253indebtednessCapitalized operating 548,749 527,008lease obligations^1Total debt including capitalized $ 797,596 $ 762,261operating lease obligations (a) Adjusted EBITDA (see $ 267,891 $ 190,351above)Consolidated rent expense 91,458 87,835

Consolidated EBITDAR (b) $ 359,349 $ 278,186

Net Leverage Ratio under credit 2.2 to 1.0 2.7 tofacility (a divided by b) 1.01 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 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 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:

Fifty-ThreeFifty-TwoWeeks EndedWeeks EndedJanuary 2,2021December 28,2019Net operating profit after taxes (NOPAT)Operating income$

184,896

$

112,095

Add: Rent expense 191,458

87,835

Add: Interest income97

3

Less: Depreciation on capitalized operating leases 2(24,001

)

(22,358

)

Less: Income taxes 3(59,387

)

(42,592

)

NOPAT$

193,063

$

134,983

Average invested capitalTotal deficit$

(223,978

)

$

(159,431

)

Add: Long-term debt 4244,849

231,756

Add: Capitalized operating lease obligations 5731,664

702,680

Total invested capital at end of period$

752,535

$

775,005

Average invested capital 6$

773,413

$

757,361

Return on invested capital (ROIC) 725.0

%

17.8

%

Fifty-Three Fifty-Two Weeks Ended Weeks Ended January 2, December 28, 2021 2019Net operating profit after taxes (NOPAT)Operating income $ 184,896 $ 112,095

Add: Rent expense ^1 91,458 87,835

Add: Interest income 97 3

Less: Depreciation on capitalized operating leases (24,001 ) (22,358 )^2Less: Income taxes ^3 (59,387 ) (42,592 )

NOPAT $ 193,063 $ 134,983

Average invested capitalTotal deficit $ (223,978 ) $ (159,431 )

Add: Long-term debt^ 4 244,849 231,756

Add: Capitalized operating lease obligations ^5 731,664 702,680

Total invested capital at end of period $ 752,535 $ 775,005

Average invested capital ^6 $ 773,413 $ 757,361

Return on invested capital (ROIC) ^7 25.0 % 17.8 %

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 23.5% and 24.0% 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. View source version on businesswire.com: https://www.businesswire.com/news/home/20210217005889/en/

CONTACT: Investor Contact: Dave Schwantes; (763) 551-7498; investorrelations@sleepnumber.com

CONTACT: Media Contact: Julie Elepano; (414) 732-9840; julie.elepano@sleepnumber.com