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Sleep Number Announces Record Third Quarter 2021 Results

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·17-min read
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  • Third-quarter net sales grew 21% to a record $640 million (+35% versus 2019); generated double-digit demand growth for fourth consecutive third quarter

  • Third-quarter operating income increased 4% to a record $73 million (+86% versus 2019), while absorbing significant input cost increases; year-to-date operating income increased 62% versus prior year

  • Third-quarter diluted EPS grew 24% to $2.22; year-to-date EPS of $5.63 increased 106% versus last year (+199% versus 2019)

  • Generated $293 million in year-to-date operating cash flows and a trailing twelve-month (ttm) ROIC greater than 34%

MINNEAPOLIS, October 27, 2021--(BUSINESS WIRE)--Sleep Number Corporation (Nasdaq: SNBR) today reported results for the quarter ended October 2, 2021.

"Our record third quarter financial results exceeded our expectations and demonstrate the power of our advantaged business model and our teams’ stellar execution. We are driving sustainable demand and market share gains with our life-changing 360 smart beds by advancing proven initiatives," said Shelly Ibach, President and CEO. "Given our unique competitive leadership at the intersection of wellbeing and technology, the worldwide shortage of semiconductors and other electronic components are a major challenge, elongating the timing of some customer deliveries. I could not be prouder of how our teams are aggressively pursuing solutions for these shortages to ensure we fulfill our mission of improving lives by individualizing sleep experiences."

Financial Overview

  • Net sales for the third quarter grew 21% versus last year (+35% versus 2019) with a 16% comp gain; year-to-date net sales increased 31% versus last year (+35% versus 2019) including a 28% comp gain

  • Gross profit increased 17% to $390 million, or 61.0% of net sales, while offsetting significant input cost increases with pricing actions and efficiency gains

  • Operating income increased 4% to $73 million, or 11.4% of net sales; year-to-date operating income increased 62% versus last year and was up 200 basis points on a rate basis versus 2020

  • Earnings per diluted share increased 24% to $2.22; year-to-date EPS grew 106% to a record $5.63, significantly exceeding 2020 full-year EPS of $4.90 ($4.60 adjusted for 53rd week) and 2019 EPS of $2.70

Cash Flows and Liquidity Review

  • Generated $293 million in net cash from operating activities for the first nine months of 2021 compared with $287 million for the same period last year and 54% greater than the first nine months of 2019

  • Invested $49 million in capital expenditures and repurchased $364 million in Sleep Number stock during the first nine months of 2021

  • Leverage ratio of 2.2x EBITDAR at the end of the third quarter, compared with 1.9x a year ago and our 2.5x-3.0x longer-term target

  • Increased return on invested capital (ROIC) to more than 34% for the ttm period, compared with nearly 21% for the prior-year comparable period

Financial Outlook

The company is targeting 2021 earnings per diluted share of $7.25, compared with $4.60 for 2020 (excluding the impact of the 53rd week), and nearly three times 2019 EPS. The timing of receiving electronic components could elongate some of our customer deliveries into the first quarter of 2022. The outlook assumes an estimated effective income tax rate of 25% for the balance of the year with full-year capital expenditures of approximately $70 million.

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 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® 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 12 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® 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 more than 625 Sleep Number® 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, 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 CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited – in thousands, except per share amounts)

Three Months Ended

October 2,

% of

September 26,

% of

2021

Net Sales

2020

Net Sales

Net sales

$

640,393

100.0%

$

531,155

100.0%

Cost of sales

250,039

39.0%

196,195

36.9%

Gross profit

390,354

61.0%

334,960

63.1%

Operating expenses:

Sales and marketing

255,512

39.9%

211,574

39.8%

General and administrative

47,676

7.4%

44,127

8.3%

Research and development

14,431

2.3%

9,644

1.8%

Total operating expenses

317,619

49.6%

265,345

50.0%

Operating income

72,735

11.4%

69,615

13.1%

Interest expense, net

1,816

0.3%

1,827

0.3%

Income before income taxes

70,919

11.1%

67,788

12.8%

Income tax expense

17,198

2.7%

16,468

3.1%

Net income

$

53,721

8.4%

$

51,320

9.7%

Net income per share – basic

$

2.29

$

1.83

Net income per share – diluted

$

2.22

$

1.79

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding

23,464

27,973

Dilutive effect of stock-based awards

769

661

Diluted weighted-average shares outstanding

24,233

28,634

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited – in thousands, except per share amounts)

Nine Months Ended

October 2,

% of

September 26,

% of

2021

Net Sales

2020

Net Sales

Net sales

$

1,692,965

100.0%

$

1,288,659

100.0%

Cost of sales

653,842

38.6%

488,558

37.9%

Gross profit

1,039,123

61.4%

800,101

62.1%

Operating expenses:

Sales and marketing

685,123

40.5%

549,483

42.6%

General and administrative

131,488

7.8%

111,915

8.7%

Research and development

43,633

2.6%

28,399

2.2%

Total operating expenses

860,244

50.8%

689,797

53.5%

Operating income

178,879

10.6%

110,304

8.6%

Interest expense, net

4,400

0.3%

8,111

0.6%

Income before income taxes

174,479

10.3%

102,193

7.9%

Income tax expense

31,874

1.9%

24,363

1.9%

Net income

$

142,605

8.4%

$

77,830

6.0%

Net income per share – basic

$

5.84

$

2.79

Net income per share – diluted

$

5.63

$

2.73

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding

24,404

27,918

Dilutive effect of stock-based awards

920

642

Diluted weighted-average shares outstanding

25,324

28,560

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Consolidated Balance Sheets

(unaudited – in thousands, except per share amounts)

subject to reclassification

October 2,

January 2,

2021

2021

Assets

Current assets:

Cash and cash equivalents

$

1,830

$

4,243

Accounts receivable, net of allowances of $1,116 and $1,046, respectively

33,388

31,871

Inventories

86,129

81,362

Prepaid expenses

24,346

20,839

Other current assets

49,634

43,489

Total current assets

195,327

181,804

Non-current assets:

Property and equipment, net

184,697

175,223

Operating lease right-of-use assets

360,269

314,226

Goodwill and intangible assets, net

71,069

72,871

Other non-current assets

72,258

56,012

Total assets

$

883,620

$

800,136

Liabilities and Shareholders’ Deficit

Current liabilities:

Borrowings under revolving credit facility

$

359,100

$

244,200

Accounts payable

163,894

91,904

Customer prepayments

107,802

72,017

Accrued sales returns

28,518

24,765

Compensation and benefits

63,896

76,786

Taxes and withholding

36,590

23,339

Operating lease liabilities

69,316

62,077

Other current liabilities

61,767

60,856

Total current liabilities

890,883

655,944

Non-current liabilities:

Deferred income taxes

533

242

Operating lease liabilities

327,521

283,084

Other non-current liabilities

104,749

84,844

Total non-current liabilities

432,803

368,170

Total liabilities

1,323,686

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, 22,647 and 25,390 shares issued and outstanding, respectively

226

254

Additional paid-in capital

-

-

Accumulated deficit

(440,292

)

(224,232

)

Total shareholders’ deficit

(440,066

)

(223,978

)

Total liabilities and shareholders’ deficit

$

883,620

$

800,136

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited - in thousands)

subject to reclassification

Nine Months Ended

October 2,

September 26,

2021

2020

Cash flows from operating activities:

Net income

$

142,605

$

77,830

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

44,786

46,244

Stock-based compensation

19,701

15,554

Net (gain) loss on disposals and impairments of assets

(20

)

208

Deferred income taxes

291

3,229

Changes in operating assets and liabilities:

Accounts receivable

(1,517

)

(12,710

)

Inventories

(4,767

)

3,807

Income taxes

5,615

5,103

Prepaid expenses and other assets

(13,879

)

3,666

Accounts payable

51,543

58,547

Customer prepayments

35,785

40,795

Accrued compensation and benefits

(12,725

)

21,376

Other taxes and withholding

7,636

4,756

Other accruals and liabilities

17,630

18,877

Net cash provided by operating activities

292,684

287,282

Cash flows from investing activities:

Purchases of property and equipment

(49,370

)

(28,074

)

Proceeds from sales of property and equipment

257

53

Purchase of intangible assets

-

(945

)

Net cash used in investing activities

(49,113

)

(28,966

)

Cash flows from financing activities:

Net increase (decrease) in short-term borrowings

132,222

(220,968

)

Repurchases of common stock

(381,496

)

(41,923

)

Proceeds from issuance of common stock

3,847

4,650

Debt issuance costs

(557

)

(303

)

Net cash used in financing activities

(245,984

)

(258,544

)

Net decrease in cash and cash equivalents

(2,413

)

(228

)

Cash and cash equivalents, at beginning of period

4,243

1,593

Cash and cash equivalents, at end of period

$

1,830

$

1,365

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Supplemental Financial Information

(unaudited)

Three Months Ended

Nine Months Ended

October 2,

September 26,

October 2,

September 26,

2021

2020

2021

2020

Percent of sales:

Retail stores

88.4%

86.0%

87.5%

85.2%

Online, phone, chat and other

11.6%

14.0%

12.5%

14.8%

Total Company

100.0%

100.0%

100.0%

100.0%

Sales change rates:

Retail comparable-store sales

19%

2%

32%

(8%)

Online, phone and chat

0%

111%

11%

109%

Total Retail comparable sales change

16%

11%

28%

1%

Net opened/closed stores and other

5%

1%

3%

2%

Total Company

21%

12%

31%

3%

Stores open:

Beginning of period

621

598

602

611

Opened

18

6

55

20

Closed

(7)

(8)

(25)

(35)

End of period

632

596

632

596

Other metrics:

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

$

3,689

$

2,920

Average sales per square foot 1, 4

$

1,249

$

1,012

Stores > $2 million net sales 2, 4

85%

64%

Stores > $3 million net sales 2, 4

50%

26%

Average revenue per mattress unit 3

$

5,021

$

4,802

$

5,045

$

4,824

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.

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-Three

Fifty-Two

Three Months Ended

Weeks Ended

Weeks Ended

October 2,

September 26,

October 2,

September 26,

2021

2020

2021

2020

Net income

$

53,721

$

51,320

$

203,964

$

101,923

Income tax expense

17,198

16,468

44,294

30,642

Interest expense

1,816

1,829

5,214

10,829

Depreciation and amortization

14,820

15,083

59,539

61,071

Stock-based compensation

7,317

8,470

25,961

20,177

Asset impairments

23

11

154

276

Adjusted EBITDA

$

94,895

$

93,181

$

339,126

$

224,918

Free Cash Flow

(in thousands)

Fifty-Three

Fifty-Two

Three Months Ended

Weeks Ended

Weeks Ended

October 2,

September 26,

October 2,

September 26,

2021

2020

2021

2020

Net cash provided by operating activities

$

131,264

$

200,281

$

285,063

$

286,610

Subtract: Purchases of property and equipment

17,358

6,379

58,396

40,556

Free cash flow

$

113,906

$

193,902

$

226,667

$

246,054

Calculation of Net Leverage Ratio under Revolving Credit Facility

(in thousands)

Fifty-Three

Fifty-Two

Weeks Ended

Weeks Ended

October 2,

September 26,

2021

2020

Borrowings under revolving credit facility

$

359,100

$

33,500

Outstanding letters of credit

3,997

3,997

Finance lease obligations

566

677

Consolidated funded indebtedness

$

363,663

$

38,174

Capitalized operating lease obligations1

593,034

546,850

Total debt including capitalized operating lease obligations (a)

$

956,697

$

585,024

Adjusted EBITDA (see above)

$

339,126

$

224,918

Consolidated rent expense

98,839

91,142

Consolidated EBITDAR (b)

$

437,965

$

316,060

Net Leverage Ratio under revolving credit facility (a divided by b)

2.2 to 1.0

1.9 to 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 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.

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-Three

Fifty-Two

Weeks Ended

Weeks Ended

October 2,
2021

September 26,
2020

Net operating profit after taxes (NOPAT)

Operating income

$

253,472

$

143,295

Add: Rent expense 1

98,839

91,142

Add: Interest income

-

97

Less: Depreciation on capitalized operating leases 2

(25,030

)

(23,700

)

Less: Income taxes 3

(78,975

)

(50,584

)

NOPAT

$

248,306

$

160,250

Average invested capital

Total deficit

$

(440,066

)

$

(102,827

)

Add: Long-term debt 4

359,666

34,177

Add: Capitalized operating lease obligations 5

790,712

729,136

Total invested capital at end of period

$

710,312

$

660,486

Average invested capital 6

$

717,670

$

770,197

Return on invested capital (ROIC) 7

34.6

%

20.8

%

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 24.1% and 24.0% 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.

View source version on businesswire.com: https://www.businesswire.com/news/home/20211027005966/en/

Contacts

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

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