Business Wire | Jul 20, 2021 04:01PM EDT

Sleep Number Announces Record Second Quarter 2021 Results

Jul. 20, 2021

MINNEAPOLIS--(BUSINESS WIRE)--Jul. 20, 2021--Sleep Number Corporation (Nasdaq: SNBR) today reported results for the quarter ended July 3, 2021.

"Our differentiated sleep solutions have driven 18% average demand growth over the last twelve quarters including further acceleration in the second quarter," said Shelly Ibach, President and CEO. "Robust consumer demand for Sleep Number 360(r) smart beds exceeded our expectations, while near-term supply constraints limited delivered net sales in June and July. We have made substantial progress in addressing temporary component shortages and expect strong delivery volumes the balance of the year. Sleep Number teams are driving higher than expected operational efficiencies, including operating profit margin expansion of 500 basis points versus the first half of 2019. We are raising our guidance for 2021 EPS to at least $7.25."

Financial Overview

* Net sales year to date increased 39% compared with last year to $1.05 billion and were up 35% versus the first half of 2019; average trailing twelve-months (ttm) sales per store were more than $3.5 million; supply constraints limited second-quarter deliveries * Gross profit year to date increased 39% to $649 million, or 61.6% of net sales, compared with 61.4% in 2020, and 61.3% in 2019 comparable periods * Operating income year to date increased 161% to $106 million, or 10.1% of net sales, compared with 5.4% in 2020, and 5.1% in 2019 comparable periods * Earnings per diluted share year to date increased 270% to a record $3.44 compared with $0.93 in 2020, and $0.95 in 2019 comparable periods

Cash Flows and Liquidity Review

* Generated $161 million in net cash from operating activities for the first six months of 2021, up 86% versus last year and 129% greater than the first six months of 2019 * Invested $32 million in capital expenditures and $267 million in Sleep Number stock during the first six months of 2021 * Leverage ratio of 2.2x EBITDAR at the end of the second quarter, compared with 2.8x a year ago and our 2.5x-3.0x longer-term target * Increased return on invested capital (ROIC) to more than 33% for the ttm period, compared with 17.2% for the prior-year comparable period

Financial OutlookThe company raised its 2021 earnings per diluted share outlook to at least $7.25, which is at least 58% greater than 2020 full-year results excluding the impact of the 53rd week and nearly three times 2019 EPS. The outlook assumes an estimated effective income tax rate of 25% for the balance of the year. The company expects to generate more than $300 million of operating cash flows in 2021 with capital expenditures of approximately $75 million.

Conference Call InformationManagement 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 CorporationIndividuality is the foundation of Sleep Number. Our purpose driven company is comprised of over 5,000 passionate team members who are dedicated to our mission of improving lives by individualizing sleep experiences. We have improved over 13 million lives and are positively impacting society's wellbeing through higher-quality sleep.

Our award-winning 360(r) smart beds are informed by science. They learn from over one billion sleep sessions of highly-accurate, real-world sleep data - the cumulation of nearly 11 billion hours' worth - to automatically adjust to each sleeper and provide effortless comfort and proven quality sleep. Our 360 smart beds deliver individualized sleep health reports and insights, including a daily SleepIQ(r) score, and are helping to advance meaningful sleep health solutions by applying sleep science and research.

For life-changing sleep, visit SleepNumber.com or one of our approximately 620 Sleep Number(r) stores. More information is available on our newsroom and investor relations sites.

Forward-looking StatementsStatements used in this news release relating to future plans, events, financial results or performance, such as the company's expectations for generating certain operating cash flows in 2021, 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) Three Months Ended July 3, % of June 27, % of 2021 Net 2020 Net Sales Sales Net sales $ 484,316 100.0 % $ 284,938 100.0 %

Cost of sales 191,465 39.5 % 121,928 42.8 %

Gross profit 292,851 60.5 % 163,010 57.2 %

Operating expenses:Sales and marketing 205,994 42.5 % 130,165 45.7 %

General and administrative 41,220 8.5 % 36,716 12.9 %

Research and development 15,916 3.3 % 8,254 2.9 %

Total operating expenses 263,130 54.3 % 175,135 61.5 %

Operating income (loss) 29,721 6.1 % (12,125 ) (4.3 %)

Interest expense, net 1,607 0.3 % 3,940 1.4 %

Income (loss) before income taxes 28,114 5.8 % (16,065 ) (5.6 %)

Income tax expense (benefit) 5,864 1.2 % (3,435 ) (1.2 %)

Net income (loss) $ 22,250 4.6 % $ (12,630 ) (4.4 %)

Net income (loss) per share - basic $ 0.91 $ (0.45 )

Net income (loss) per share - diluted $ 0.88 $ (0.45 )

Reconciliation of weighted-averageshares outstanding:Basic weighted-average shares 24,371 27,923 outstandingDilutive effect of stock-based awards 823 - ^1Diluted weighted-average shares 25,194 27,923 outstanding ^1 1

For the three months ended June 27, 2020, 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.

For the three months ended June 27, 2020, potentially dilutive stock-based^ awards have been excluded from the calculation of diluted weighted-average1 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 EndedJuly 3,% ofJune 27,% of2021

Net Sales2020

Net SalesNet sales$

1,052,572

100.0

%

$

757,504

100.0

%

Cost of sales403,803

38.4

%

292,363

38.6

%

Gross profit648,769

61.6

%

465,141

61.4

%

Operating expenses:Sales and marketing429,611

40.8

%

337,909

44.6

%

General and administrative83,812

8.0

%

67,788

8.9

%

Research and development29,202

2.8

%

18,755

2.5

%

Total operating expenses542,625

51.6

%

424,452

56.0

%

Operating income106,144

10.1

%

40,689

5.4

%

Interest expense, net2,584

0.2

%

6,284

0.8

%

Income before income taxes103,560

9.8

%

34,405

4.5

%

Income tax expense14,676

1.4

%

7,895

1.0

%

Net income$

88,884

8.4

%

$

26,510

3.5

%

Net income per share - basic$

3.57

$

0.95

Net income per share - diluted$

3.44

$

0.93

Reconciliation of weighted-averageshares outstanding:Basic weighted-average shares outstanding24,874

27,890

Dilutive effect of stock-based awards995

633

Diluted weighted-average shares outstanding25,869

28,523

SLEEP NUMBER CORPORATIONAND SUBSIDIARIESConsolidated Statements of Operations(unaudited - in thousands, except per share amounts) Six Months Ended July 3, % of June 27, % of 2021 Net 2020 Net Sales Sales Net sales $ 1,052,572 100.0 % $ 757,504 100.0 %

Cost of sales 403,803 38.4 % 292,363 38.6 %

Gross profit 648,769 61.6 % 465,141 61.4 %

Operating expenses:Sales and marketing 429,611 40.8 % 337,909 44.6 %

General and administrative 83,812 8.0 % 67,788 8.9 %

Research and development 29,202 2.8 % 18,755 2.5 %

Total operating expenses 542,625 51.6 % 424,452 56.0 %

Operating income 106,144 10.1 % 40,689 5.4 %

Interest expense, net 2,584 0.2 % 6,284 0.8 %

Income before income taxes 103,560 9.8 % 34,405 4.5 %

Income tax expense 14,676 1.4 % 7,895 1.0 %

Net income $ 88,884 8.4 % $ 26,510 3.5 %

Net income per share - basic $ 3.57 $ 0.95

Net income per share - diluted $ 3.44 $ 0.93

Reconciliation of weighted-averageshares outstanding:Basic weighted-average shares 24,874 27,890outstandingDilutive effect of stock-based 995 633awardsDiluted weighted-average shares 25,869 28,523outstanding SLEEP NUMBER CORPORATIONAND SUBSIDIARIESConsolidated Balance Sheets(unaudited - in thousands, except per share amounts)subject to reclassificationJuly 3,January 2,2021

2021

AssetsCurrent assets:Cash and cash equivalents$

2,173

$

4,243

Accounts receivable, net of allowances of $1,098 and $1,046, respectively23,205

31,871

Inventories88,577

81,362

Income taxes receivable1,578

-

Prepaid expenses28,900

20,839

Other current assets42,564

43,489

Total current assets186,997

181,804

Non-current assets:Property and equipment, net182,398

175,223

Operating lease right-of-use assets344,423

314,226

Goodwill and intangible assets, net71,669

72,871

Other non-current assets69,009

56,012

Total assets$

854,496

$

800,136

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

382,200

$

244,200

Accounts payable129,922

91,904

Customer prepayments119,435

72,017

Accrued sales returns21,217

24,765

Compensation and benefits54,219

76,786

Taxes and withholding13,779

23,339

Operating lease liabilities67,648

62,077

Other current liabilities57,708

60,856

Total current liabilities846,128

655,944

Non-current liabilities:Deferred income taxes663

242

Operating lease liabilities311,672

283,084

Other non-current liabilities99,691

84,844

Total non-current liabilities412,026

368,170

Total liabilities1,258,154

1,024,114

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

-

Common stock, $0.01 par value; 142,500 shares authorized, 23,622 and 25,390 shares issued and outstanding, respectively236

254

Additional paid-in capital-

-

Accumulated deficit(403,894

)

(224,232

)

Total shareholders' deficit(403,658

)

(223,978

)

Total liabilities and shareholders' deficit$

854,496

$

800,136

SLEEP NUMBER CORPORATIONAND SUBSIDIARIESConsolidated Balance Sheets(unaudited - in thousands, except per share amounts)subject to reclassification July 3, January 2, 2021 2021

AssetsCurrent assets:Cash and cash equivalents $ 2,173 $ 4,243

Accounts receivable, net of allowances of $1,098 23,205 31,871 and $1,046, respectivelyInventories 88,577 81,362

Income taxes receivable 1,578 -

Prepaid expenses 28,900 20,839

Other current assets 42,564 43,489

Total current assets 186,997 181,804

Non-current assets:Property and equipment, net 182,398 175,223

Operating lease right-of-use assets 344,423 314,226

Goodwill and intangible assets, net 71,669 72,871

Other non-current assets 69,009 56,012

Total assets $ 854,496 $ 800,136

Liabilities and Shareholders' DeficitCurrent liabilities:Borrowings under revolving credit facility $ 382,200 $ 244,200

Accounts payable 129,922 91,904

Customer prepayments 119,435 72,017

Accrued sales returns 21,217 24,765

Compensation and benefits 54,219 76,786

Taxes and withholding 13,779 23,339

Operating lease liabilities 67,648 62,077

Other current liabilities 57,708 60,856

Total current liabilities 846,128 655,944

Non-current liabilities:Deferred income taxes 663 242

Operating lease liabilities 311,672 283,084

Other non-current liabilities 99,691 84,844

Total non-current liabilities 412,026 368,170

Total liabilities 1,258,154 1,024,114

Shareholders' deficit:Undesignated preferred stock; 5,000 shares - - authorized, no shares issued and outstandingCommon stock, $0.01 par value; 142,500 shares 236 254 authorized, 23,622 and 25,390 shares issued andoutstanding, respectivelyAdditional paid-in capital - -

Accumulated deficit (403,894 ) (224,232 )

Total shareholders' deficit (403,658 ) (223,978 )

Total liabilities and shareholders' deficit $ 854,496 $ 800,136

SLEEP NUMBER CORPORATIONAND SUBSIDIARIESConsolidated Statements of Cash Flows(unaudited - in thousands)subject to reclassificationSix Months EndedJuly 3,June 27,2021

2020

Cash flows from operating activities:Net income$

88,884

$

26,510

Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization29,800

30,811

Stock-based compensation12,385

7,084

Net loss on disposals and impairments of assets78

224

Deferred income taxes421

4,383

Changes in operating assets and liabilities:Accounts receivable8,666

4,224

Inventories(7,215

)

5,391

Income taxes(11,625

)

2,508

Prepaid expenses and other assets(13,407

)

7,018

Accounts payable23,232

(14,804

)

Customer prepayments47,418

16,987

Accrued compensation and benefits(22,387

)

(7,405

)

Other taxes and withholding487

(3,594

)

Other accruals and liabilities4,683

7,664

Net cash provided by operating activities161,420

87,001

Cash flows from investing activities:Purchases of property and equipment(32,012

)

(21,695

)

Proceeds from sales of property and equipment12

25

Purchase of intangible assets-

(945

)

Net cash used in investing activities(32,000

)

(22,615

)

Cash flows from financing activities:Net increase (decrease) in short-term borrowings146,447

(26,364

)

Repurchases of common stock(280,915

)

(41,774

)

Proceeds from issuance of common stock3,535

4,100

Debt issuance costs(557

)

(290

)

Net cash used in financing activities(131,490

)

(64,328

)

Net (decrease) increase in cash and cash equivalents(2,070

)

58

Cash and cash equivalents, at beginning of period4,243

1,593

Cash and cash equivalents, at end of period$

2,173

$

1,651

SLEEP NUMBER CORPORATIONAND SUBSIDIARIESConsolidated Statements of Cash Flows(unaudited - in thousands)subject to reclassification Six Months Ended July 3, June 27, 2021 2020

Cash flows from operating activities:Net income $ 88,884 $ 26,510

Adjustments to reconcile net income to net cashprovided by operating activities:Depreciation and amortization 29,800 30,811

Stock-based compensation 12,385 7,084

Net loss on disposals and impairments of assets 78 224

Deferred income taxes 421 4,383

Changes in operating assets and liabilities:Accounts receivable 8,666 4,224

Inventories (7,215 ) 5,391

Income taxes (11,625 ) 2,508

Prepaid expenses and other assets (13,407 ) 7,018

Accounts payable 23,232 (14,804 )

Customer prepayments 47,418 16,987

Accrued compensation and benefits (22,387 ) (7,405 )

Other taxes and withholding 487 (3,594 )

Other accruals and liabilities 4,683 7,664

Net cash provided by operating activities 161,420 87,001

Cash flows from investing activities:Purchases of property and equipment (32,012 ) (21,695 )

Proceeds from sales of property and equipment 12 25

Purchase of intangible assets - (945 )

Net cash used in investing activities (32,000 ) (22,615 )

Cash flows from financing activities:Net increase (decrease) in short-term borrowings 146,447 (26,364 )

Repurchases of common stock (280,915 ) (41,774 )

Proceeds from issuance of common stock 3,535 4,100

Debt issuance costs (557 ) (290 )

Net cash used in financing activities (131,490 ) (64,328 )

Net (decrease) increase in cash and cash equivalents (2,070 ) 58

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

Cash and cash equivalents, at end of period $ 2,173 $ 1,651

SLEEP NUMBER CORPORATIONAND SUBSIDIARIESSupplemental Financial Information(unaudited)Three Months EndedSix Months EndedJuly 3,June 27,July 3,June 27,2021

2020

2021

2020

Percent of sales:Retail stores88.1

%

72.2

%

87.0

%

84.6

%

Online, phone, chat and other11.9

%

27.8

%

13.0

%

15.4

%

Total Company100.0

%

100.0

%

100.0

%

100.0

%

Sales change rates:Retail comparable-store sales102

%

(40

%)

41

%

(14

%)

Online, phone and chat(28

%)

209

%

17

%

107

%

Total Retail comparable sales change65

%

(21

%)

37

%

(5

%)

Net opened/closed stores and other5

%

1

%

2

%

2

%

Total Company70

%

(20

%)

39

%

(3

%)

Stores open:Beginning of period607

611

602

611

Opened26

6

37

14

Closed(12

)

(19

)

(18

)

(27

)

End of period621

598

621

598

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

3,542

$

2,830

Average sales per square foot 1, 4$

1,203

$

988

Stores > $2 million net sales 2, 482

%

63

%

Stores > $3 million net sales 2, 447

%

25

%

Average revenue per mattress unit 3$

5,094

$

4,767

$

5,059

$

4,839

SLEEP NUMBER CORPORATIONAND SUBSIDIARIESSupplemental Financial Information(unaudited) Three Months Ended Six Months Ended July 3, June 27, July 3, June 27, 2021 2020 2021 2020

Percent of sales:Retail stores 88.1 % 72.2 % 87.0 % 84.6 %

Online, phone, chat and other 11.9 % 27.8 % 13.0 % 15.4 %

Total Company 100.0 % 100.0 % 100.0 % 100.0 %

Sales change rates:Retail comparable-store sales^ 102 % (40 %) 41 % (14 %)

Online, phone and chat (28 %) 209 % 17 % 107 %

Total Retail comparable sales 65 % (21 %) 37 % (5 %)changeNet opened/closed stores and other 5 % 1 % 2 % 2 %

Total Company 70 % (20 %) 39 % (3 %)

Stores open:Beginning of period 607 611 602 611

Opened 26 6 37 14

Closed (12 ) (19 ) (18 ) (27 )

End of period 621 598 621 598

Other metrics:Average sales per store ($ in $ 3,542 $ 2,830 000's) ^1, 4Average sales per square foot ^1, 4 $ 1,203 $ 988

Stores > $2 million net sales ^2, 4 82 % 63 %

Stores > $3 million net sales ^2, 4 47 % 25 %

Average revenue per mattress unit ^ $ 5,094 $ 4,767 $ 5,059 $ 4,839 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, phone and chat sales).

3

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

4

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

^ 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,2 phone and chat sales).



^ Represents Total Retail (stores, online, phone and chat) net sales divided by3 Total Retail mattress units.



Fiscal 2020 included 53 weeks, as compared to 52 weeks in fiscal 2021 and^ 2019. The additional week in 2020 was in the fiscal fourth quarter. Total4 Retail comparable sales have been adjusted to remove the estimated impact of the additional week on those metrics.

SLEEP NUMBER CORPORATION AND SUBSIDIARIES

Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) (in thousands)

We define earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation and asset impairments. Management believes Adjusted EBITDA is a useful indicator of our financial performance and our ability to generate cash from operating activities. Our definition of Adjusted EBITDA may not be comparable to similarly titled definitions used by other companies. The table below reconciles Adjusted EBITDA, which is a non-GAAP financial measure, to the comparable GAAP financial measure:Fifty-ThreeFifty-TwoThree Months EndedWeeks EndedWeeks EndedJuly 3,June 27,July 3,June 27,2021

2020

2021

2020

Net income (loss)$

22,250

$

(12,630

)

$

201,563

$

78,657

Income tax expense (benefit)5,864

(3,435

)

43,564

22,141

Interest expense1,607

4,022

5,227

12,131

Depreciation and amortization15,006

15,253

59,802

60,951

Stock-based compensation5,968

5,033

27,114

15,853

Asset impairments-

246

142

294

Adjusted EBITDA$

50,695

$

8,489

$

337,412

$

190,027

Free Cash Flow(in thousands)Fifty-ThreeFifty-TwoThree Months EndedWeeks EndedWeeks EndedJuly 3,June 27,July 3,June 27,2021

2020

2021

2020

Net cash provided by operating activities$

49,822

$

2,060

$

354,080

$

205,814

Subtract: Purchases of property and equipment20,466

11,344

47,417

47,038

Free cash flow$

29,356

$

(9,284

)

$

306,663

$

158,776

Calculation of Net Leverage Ratio under Revolving Credit Facility(in thousands)Fifty-ThreeFifty-TwoWeeks EndedWeeks EndedJuly 3,June 27,2021

2020

Borrowings under revolving credit facility$

382,200

$

227,240

Outstanding letters of credit3,997

3,997

Finance lease obligations594

704

Consolidated funded indebtedness$

386,791

$

231,941

Capitalized operating lease obligations1571,358

542,095

Total debt including capitalized operating lease obligations (a)$

958,149

$

774,036

Adjusted EBITDA (see above)$

337,412

$

190,027

Consolidated rent expense95,226

90,349

Consolidated EBITDAR (b)$

432,638

$

280,376

Net Leverage Ratio under revolving credit facility (a divided by b)2.2 to 1.02.8 to 1.0SLEEP 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: Fifty-Three Fifty-Two Three Months Ended Weeks Ended Weeks Ended July 3, June 27, July 3, June 27, 2021 2020 2021 2020

Net income (loss) $ 22,250 $ (12,630 ) $ 201,563 $ 78,657

Income tax expense (benefit) 5,864 (3,435 ) 43,564 22,141

Interest expense 1,607 4,022 5,227 12,131

Depreciation and amortization 15,006 15,253 59,802 60,951

Stock-based compensation 5,968 5,033 27,114 15,853

Asset impairments - 246 142 294

Adjusted EBITDA $ 50,695 $ 8,489 $ 337,412 $ 190,027

Free Cash Flow(in thousands) Fifty-Three Fifty-Two Three Months Ended Weeks Ended Weeks Ended July 3, June 27, July 3, June 27, 2021 2020 2021 2020

Net cash provided by $ 49,822 $ 2,060 $ 354,080 $ 205,814operating activitiesSubtract: Purchases of 20,466 11,344 47,417 47,038property and equipment Free cash flow $ 29,356 $ (9,284 ) $ 306,663 $ 158,776

Calculation of Net Leverage Ratio under Revolving Credit Facility(in thousands) Fifty-Three Fifty-Two Weeks Ended Weeks Ended July 3, June 27, 2021 2020

Borrowings under revolving $ 382,200 $ 227,240credit facilityOutstanding letters of credit 3,997 3,997

Finance lease obligations 594 704

Consolidated funded $ 386,791 $ 231,941indebtednessCapitalized operating lease 571,358 542,095obligations^1Total debt including capitalized $ 958,149 $ 774,036operating lease obligations (a) Adjusted EBITDA (see above) $ 337,412 $ 190,027

Consolidated rent expense 95,226 90,349

Consolidated EBITDAR (b) $ 432,638 $ 280,376

Net Leverage Ratio under revolving 2.2 to 1.0 2.8 to 1.0credit facility (a divided by b) 1

A multiple of six times annual rent expense is used as an estimate for capitalizing our operating lease obligations in accordance with our credit facility.

Note - Our Adjusted EBITDA and EBITDAR calculations, Free Cash Flow data and Calculation of Net Leverage Ratio under Revolving Credit Facility are considered non-GAAP financial measures and are not in accordance with, or preferable to, "as reported," or GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts.

GAAP - generally accepted accounting principles in the U.S.

A multiple of six times annual rent expense is used as an estimate for^1 capitalizing our operating lease obligations in accordance with our credit facility.



Note - Our Adjusted EBITDA and EBITDAR calculations, Free Cash Flow data andCalculation of Net Leverage Ratio under Revolving Credit Facility areconsidered non-GAAP financial measures and are not in accordance with, orpreferable to, "as reported," or GAAP financial data. However, we are providingthis information as we believe it facilitates analysis of the Company'sfinancial performance by investors and financial analysts.



GAAP - generally accepted accounting principles in the U.S.

SLEEP NUMBER CORPORATION AND SUBSIDIARIES

Calculation of Return on Invested Capital (ROIC)

(in thousands)

ROIC is a financial measure we use to determine how efficiently we deploy our capital. It quantifies the return we earn on our invested capital. Management believes ROIC is also a useful metric for investors and financial analysts. We compute ROIC as outlined below. Our definition and calculation of ROIC may not be comparable to similarly titled definitions and calculations used by other companies. The tables below reconcile net operating profit after taxes (NOPAT) and total invested capital, which are non-GAAP financial measures, to the comparable GAAP financial measures:Fifty-ThreeFifty-TwoWeeks EndedWeeks EndedJuly 3,2021June 27,2020Net operating profit after taxes (NOPAT)Operating income$

250,352

$

112,831

Add: Rent expense 195,226

90,349

Add: Interest income2

97

Less: Depreciation on capitalized operating leases 2(24,577

)

(23,331

)

Less: Income taxes 3(76,939

)

(42,735

)

NOPAT$

244,064

$

137,211

Average invested capitalTotal deficit$

(403,658

)

$

(163,018

)

Add: Long-term debt 4382,794

227,944

Add: Capitalized operating lease obligations 5761,808

722,792

Total invested capital at end of period$

740,944

$

787,718

Average invested capital 6$

733,151

$

797,862

Return on invested capital (ROIC) 733.3

%

17.2

%

SLEEP NUMBER CORPORATION AND SUBSIDIARIES

Calculation of Return on Invested Capital (ROIC)

(in thousands)

ROIC is a financial measure we use to determine how efficiently we deploy 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-Three Fifty-Two Weeks Ended Weeks Ended July 3, June 27, 2021 2020Net operating profit after taxes (NOPAT)Operating income $ 250,352 $ 112,831

Add: Rent expense ^1 95,226 90,349

Add: Interest income 2 97

Less: Depreciation on capitalized operating (24,577 ) (23,331 )leases ^2Less: Income taxes ^3 (76,939 ) (42,735 )

NOPAT $ 244,064 $ 137,211

Average invested capitalTotal deficit $ (403,658 ) $ (163,018 )

Add: Long-term debt^ 4 382,794 227,944

Add: Capitalized operating lease obligations 761,808 722,792 ^5Total invested capital at end of period $ 740,944 $ 787,718

Average invested capital ^6 $ 733,151 $ 797,862

Return on invested capital (ROIC) ^7 33.3 % 17.2 %

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 23.7% for 2021 and 2020, 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.

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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