Sleep Number Announces Record Fourth-Quarter and Full-Year 2018 Results

Sleep Number Corporation (NASDAQ: SNBR) today reported record results for the year ended December 29, 2018.

Fourth-quarter Statement of Operations Review

  • Net sales increased 13% (up 11% adjusted); net sales for the second half of 2018 increased 8% (up 12% adjusted); see Reconciliation of Non-GAAP Financial Measures tables on page 10
  • Operating income increased to $38 million, or 9.3% of net sales, a 380 basis-point rate improvement versus the prior years fourth quarter
  • Earnings per diluted share increased 108% to $0.81 (up 76% adjusted); earnings per diluted share for the second half of 2018 increased 31% (up 48% adjusted); see Reconciliation of Non-GAAP Financial Measures tables on page 10

Our purpose-driven brand and our revolutionary new 360 smart beds are driving enthusiastic consumer engagement and accelerated performance, including 12% adjusted net sales growth and 48% adjusted EPS growth for the second half of 2018, stated Shelly Ibach, President and CEO. We expect this trajectory to continue in 2019 as we advance our initiatives to drive demand, leverage our business model and deploy capital efficiently.

Full-year Statement of Operations Review

  • Net sales increased 6% to $1.53 billion in 2018, including a 3% comparable sales gain and 3 percentage points of growth from new stores
  • Operating income increased to $92 million, or 6.0% of net sales, while absorbing approximately $16 million of 360 smart bed transition impacts
  • Earnings per diluted share increased 24% to $1.92, compared with $1.55 for 2017

Cash Flows and Balance Sheet Review

  • Generated $132 million of operating cash flows in 2018
  • Invested $46 million in capital expenditures, with $481 million of capital invested in the business over the past six years, in addition to building essential infrastructure and growth driving capabilities
  • Increased share repurchases 86% to $279 million in 2018, bringing total cash returned to shareholders to $738 million over the past six years
  • As of December 29, 2018, the remaining authorization under our Board-approved share repurchase program was $186 million which is sufficient to support 2019 planned repurchases of $125 to $145 million
  • Return on invested capital (ROIC) was 16.0% for the year, which compares favorably to our high single-digit weighted average cost of capital
  • On February 11, 2019, we amended our revolving credit facility to increase our aggregate availability from $300 million to $450 million. The credit agreement matures in February 2024

Financial Outlook The company expects to generate full-year 2019 earnings per diluted share of between $2.25 and $2.75, a 17% to 43% increase versus full-year 2018 earnings per diluted share of $1.92. The outlook assumes 6% to 10% net sales growth for 2019. The outlook assumes an estimated effective income tax rate of 24.5%, compared to 19.6% for 2018. The company anticipates 2019 capital expenditures to be $50 to $60 million.

Conference Call Information Management will host its regularly scheduled conference call to discuss the companys results at 5 p.m. EST (4 p.m. CST; 2 p.m. PST) today. To listen to the call, please dial 800-593-9959 (international participants dial 517-308-9340) and reference the passcode Sleep. 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 The leader in sleep innovation, Sleep Number delivers proven, quality sleep through effortless, adjustable comfort and biometric sleep tracking. Sleep Numbers revolutionary 360 smart bed and proprietary SleepIQ technology platforms are proving the connection between sleep and well-being. With one of the most comprehensive databases of biometric consumer sleep data and ranked #1 in J.D. Powers 2018 Mattress Satisfaction Report*, Sleep Number is improving lives by individualizing sleep experiences. And with a commitment to improving the well-being of over one million youth by 2025, Sleep Number is redefining the future of health and wellness “ for everyone. To experience better quality sleep, visit SleepNumber.com or one of our over 580 Sleep Number stores located in all 50 states. For additional information, visit our newsroom and investor relations site.

*Sleep Number received the highest score in the J.D. Power 2015, 2017 and 2018 Mattress Satisfaction Reports of customers satisfaction with their mattress. Visit jdpower.com/awards.

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; 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; the potential for 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 our ability to maintain relationships with key suppliers, including several sole-source suppliers; the vulnerability of key suppliers to recessionary pressures, labor negotiations, liquidity concerns or other factors; rising commodity costs and other inflationary pressures; risks inherent in global sourcing activities, including tariffs and the potential for shortages in supply; risks of disruption in the operation of either of our two primary manufacturing facilities; increasing government regulations; 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, distractions 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 employees, including qualified retail sales professionals and managers. Additional information concerning these and other risks and uncertainties is contained in the companys 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
December 29,% ofDecember 30,% of
2018Net Sales2017Net Sales
Net sales$411,825100.0%$363,279100.0%
Cost of sales160,74639.0%142,47539.2%
Gross profit251,07961.0%220,80460.8%
Operating expenses:
Sales and marketing175,89942.7%161,79344.5%
General and administrative29,4317.1%32,0368.8%
Research and development7,6291.9%6,8561.9%
Total operating expenses212,95951.7%200,68555.2%
Operating income38,1209.3%20,1195.5%
Other expense, net2,0930.5%2090.1%
Income before income taxes36,0278.7%19,9105.5%
Income tax expense9,0372.2%4,1191.1%
Net income$26,9906.6%$15,7914.3%
Net income per share “ basic$0.83$0.40
Net income per share “ diluted$0.81$0.39

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding32,41139,627
Dilutive effect of stock-based awards1,0181,037
Diluted weighted-average shares outstanding33,42940,664
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited “ in thousands, except per share amounts)
Twelve Months Ended
December 29,% ofDecember 30,% of
2018Net Sales2017Net Sales
Net sales$1,531,575100.0%$1,444,497100.0%
Cost of sales603,61439.4%547,15037.9%
Gross profit927,96160.6%897,34762.1%
Operating expenses:
Sales and marketing687,38044.9%650,35745.0%
General and administrative119,3787.8%127,2698.8%
Research and development28,7751.9%27,8061.9%
Total operating expenses835,53354.6%805,43255.8%
Operating income92,4286.0%91,9156.4%
Other expense, net5,9070.4%8770.1%
Income before income taxes86,5215.6%91,0386.3%
Income tax expense16,9821.1%25,9611.8%
Net income$69,5394.5%$65,0774.5%
Net income per share “ basic$1.97$1.58
Net income per share “ diluted$1.92$1.55

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding35,25641,212
Dilutive effect of stock-based awards909873
Diluted weighted-average shares outstanding36,16542,085
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited “ in thousands, except per share amounts)
subject to reclassification
December 29,December 30,
20182017
Assets
Current assets:
Cash and cash equivalents$1,612$3,651

Accounts receivable, net of allowance for doubtful accounts of $699 and $714, respectively

24,79519,312
Inventories84,88284,298
Prepaid expenses8,00917,565
Other current assets31,55927,665
Total current assets150,857152,491
Non-current assets:
Property and equipment, net205,631208,646
Goodwill and intangible assets, net75,40777,588
Deferred income taxes2,625
Other non-current assets38,24330,484
Total assets$470,138$471,834
Liabilities and Shareholders (Deficit) Equity
Current liabilities:
Borrowings under revolving credit facility$199,600$24,500
Accounts payable144,781129,194
Customer prepayments27,06627,767
Accrued sales returns19,90719,270
Compensation and benefits27,70034,602
Taxes and withholding18,38024,234
Other current liabilities51,23446,822
Total current liabilities488,668306,389
Non-current liabilities:
Deferred income taxes4,822
Other non-current liabilities86,19876,289
Total non-current liabilities91,02076,289
Total liabilities579,688382,678
Shareholders (deficit) equity:

Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding

Common stock, $0.01 par value; 142,500 shares authorized, 30,868 and 38,813 shares issued and outstanding, respectively

309388
Additional paid-in capital
(Accumulated deficit) retained earnings(109,859)88,768
Total shareholders (deficit) equity(109,550)89,156
Total liabilities and shareholders (deficit) equity$470,138$471,834
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited – in thousands)
subject to reclassification
Twelve Months Ended
December 29,December 30,
20182017
Cash flows from operating activities:
Net income$69,539$65,077

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

Depreciation and amortization61,96661,291
Stock-based compensation11,41215,763
Net (gain) loss on disposals and impairments of assets(51)249
Deferred income taxes7,4472,042
Changes in operating assets and liabilities:
Accounts receivable(5,483)393
Inventories(584)(9,272)
Income taxes(6,561)1,697
Prepaid expenses and other assets5,551(12,405)
Accounts payable(9,894)21,779
Customer prepayments(701)1,560
Accrued compensation and benefits(6,872)15,398
Other taxes and withholding707(893)
Other accruals and liabilities5,0649,928
Net cash provided by operating activities131,540172,607
Cash flows from investing activities:
Purchases of property and equipment(45,515)(59,829)
Proceeds from sales of property and equipment27236
Net cash used in investing activities(45,243)(59,793)
Cash flows from financing activities:
Net increase in short-term borrowings182,33628,094
Repurchases of common stock(272,446)(155,245)
Proceeds from issuance of common stock2,7883,241
Debt issuance costs(1,014)(12)
Net cash used in financing activities(88,336)(123,922)
Net decrease in cash, cash equivalents and restricted cash(2,039)(11,108)
Cash, cash equivalents and restricted cash, at beginning of period3,65114,759
Cash, cash equivalents and restricted cash, at end of period$1,612$3,651

Note – Effective December 31, 2017, we adopted the provisions of Accounting Standards Update No. 2016-18, Restricted Cash, on a retrospective basis. Amounts for prior periods have been retrospectively adjusted to conform to the current period presentation.

SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)
Three Months EndedTwelve Months Ended
December 29,December 30,December 29,December 30,
2018201720182017
Percent of sales:
Retail91.1%91.7%91.5%91.7%
Online and phone8.3%7.7%7.6%7.0%
Wholesale/other0.6%0.6%0.9%1.3%
Total100.0%100.0%100.0%100.0%
Sales change rates:
Retail comparable-store sales9%12%3%3%
Online and phone23%13%15%16%
Company-Controlled comparable sales change10%12%3%4%
Net opened/closed stores3%4%3%7%
Total Company-Controlled Channel13%16%6%11%
Wholesale/other11%(35%)(26%)(38%)
Total13%16%6%10%
Stores open:
Beginning of period569553556540
Opened2065336
Closed(10)(3)(30)(20)
End of period579556579556
Other metrics:
Average sales per store ($ in 000’s) 1$2,707$2,618
Average sales per square foot 1$998$995
Stores > $1 million net sales 298%98%
Stores > $2 million net sales 265%61%
Average revenue per mattress unit 3$4,623$4,421$4,482$4,283

1 Trailing twelve months Company-Controlled comparable sales per store open at least one year.

2 Trailing twelve months for stores open at least one year.

3 Represents Company-Controlled Channel total net sales divided by Company-Controlled Channel mattress units.

SLEEP NUMBER CORPORATION AND SUBSIDIARIES
Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)
(in thousands)
We define earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation and asset impairments. Management believes Adjusted EBITDA is a useful indicator of our financial performance and our ability to generate cash from operating activities. Our definition of Adjusted EBITDA may not be comparable to similarly titled definitions used by other companies. The table below reconciles Adjusted EBITDA, which is a non-GAAP financial measure, to the comparable GAAP financial measure:
Three Months EndedTrailing-Twelve Months Ended
December 29,December 30,December 29,December 30,
2018201720182017
Net income$26,990$15,791$69,539$65,077
Income tax expense9,0374,11916,98225,961
Interest expense2,0942275,911975
Depreciation and amortization15,22715,23761,64861,077
Stock-based compensation1,3143,95411,41215,763
Asset impairments(19)2096244
Adjusted EBITDA$54,643$39,348$165,588$169,097
Free Cash Flow
(in thousands)
Three Months EndedTrailing-Twelve Months Ended
December 29,December 30,December 29,December 30,
2018201720182017
Net cash (used in) provided by operating activities$(2,910)$(3,447)$131,540$172,607
Subtract: Purchases of property and equipment11,50322,21645,51559,829
Free cash flow$(14,413)$(25,663)$86,025$112,778

Note – Our Adjusted EBITDA calculation and our “free cash flow” data 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:
Trailing-Twelve Months Ended

December 29, 2018

December 31, 2017

Net operating profit after taxes (NOPAT)

Operating income$92,428$91,915
Add: Rent expense 179,39074,019
Add: Interest income497
Less: Depreciation on capitalized operating leases 2(20,392)(18,865)
Less: Income taxes 3(36,444)(48,970)
NOPAT$114,986$98,196

Average invested capital

Total (deficit) equity$(109,550)$89,156
Add: Long-term debt 4200,458
Add: Capitalized operating lease obligations 5635,120592,152
Total invested capital at end of period$726,028$681,308
Average invested capital 6$719,055$686,436
Return on invested capital (ROIC) 716.0%14.3%

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 6) for the respective reporting periods with an assumed thirty-year useful life. 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 33.3% for 2018 and 2017, respectively.

4 Long-term debt includes existing capital lease obligations, if applicable. In conjunction with increasing our revolving credit facility to $300 million in the first quarter of 2018, we include borrowings under that agreement, including borrowings classified as short term.

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.
SLEEP NUMBER CORPORATION AND SUBSIDIARIES
Reconciliation of Non-GAAP Financial Measures
(unaudited “ in millions, except per share amounts)

Net sales

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Full-Year

First Half

Second Half

2018As Reported$389$316$415$412$1,532$705$827
Backlog shift124(24)
As-Adjusted$389$316$439$388$1,532$705$827

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Full-Year

First Half

Second Half

2017As Reported$394$285$403$363$1,444$679$766
Backlog shift225(25)25(25)
Hurricane impact313.5(13.5)
As-Adjusted$394$310$391$350$1,444$704$741

Earnings per diluted share

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Full-Year

First Half

Second Half

2018As Reported$0.52$0.10$0.52$0.81$1.92$0.64$1.32
Backlog shift1,40.23(0.23)
As-Adjusted$0.52$0.10$0.75$0.58$1.92$0.64$1.32

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Full-Year

First Half

Second Half

2017As Reported$0.56$(0.02)$0.62$0.39$1.55$0.55$1.01
Backlog shift2,50.12(0.12)0.12(0.12)

Hurricane impact3,5

0.06(0.06)
As-Adjusted$0.56$0.10$0.56$0.33$1.55$0.67$0.89

1

Midpoint of estimated net sales and earnings per share impact (21 to 25 cents) related to strong demand late in the quarter which shifted a week of deliveries from the third to fourth quarter of 2018; third-quarter 2018 ending order backlog was higher than forecasted, reflecting the additional week of deliveries shifted to the fourth quarter

2

Estimated net sales and earnings per share impact related to a temporary vendor related inventory shortage which shifted a week of deliveries from the second to third quarter of 2017

3

Midpoint of estimated net sales ($12 to $15 million) and earnings per share impact (5 to 8 cents) of Hurricanes Harvey and Irma, which negatively impacted third-quarter 2017 results and positively impacted fourth-quarter 2017 results as lost sales were recovered

4

Reflects annual effective income tax rate, before discrete adjustments, of 24.1% for 2018

5

Reflects annual effective income tax rate, before discrete adjustments, of 33.3% for 2017
Note: The information above provides reconciliations of the comparable financial measures in accordance with generally accepted accounting principles (GAAP financial measures) to the presented non-GAAP financial measures. The company believes that non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, can provide more information to assist investors and management in evaluating current period performance and in assessing future performance. The estimates above are based on historical experience, current trends and other factors that management believes to be relevant, and as such requires the use of judgment. These non-GAAP financial measures should be considered in addition to, and not preferable to or as a substitute for, the GAAP financial measures presented in this earnings release and the companys financial statements and other publicly filed reports. Non-GAAP measures as presented herein may not be comparable to similarly titled measures used by other companies.

Investor Contact:
Dave Schwantes; (763) 551-7498;
[email protected]
Media
Contact:

Susan Oguche; (763) 551-7059;
[email protected]