Sleep Number Announces Record Third Quarter 2021 Results

Rhea-AI Summary

Sleep Number Corporation (SNBR) reported strong third-quarter results, with net sales rising 21% to a record $640 million, reflecting a 35% increase compared to 2019. Operating income also saw a 4% rise to $73 million, while year-to-date EPS surged 106% year-over-year to $5.63. The company generated $293 million in operating cash flows and boasts a trailing twelve-month ROIC of over 34%. However, challenges remain due to global semiconductor shortages affecting customer deliveries. SNBR aims for an EPS of $7.25 for 2021, nearly triple that of 2019.

Positive

• Net sales increased by 21% year-over-year to $640 million.
• Operating income grew by 4% to $73 million, a significant rise of 62% year-to-date.
• Earnings per diluted share (EPS) rose by 24% to $2.22, with a year-to-date increase of 106%.

Negative

• Global semiconductor shortages may delay customer deliveries into 2022.
• Leverage ratio increased to 2.2x EBITDAR, compared to 1.9x a year ago.

• 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--(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 53^rd 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/

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

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

Source: Sleep Number Corporation

FAQ

What were Sleep Number's Q3 2021 net sales figures?

Sleep Number's net sales for Q3 2021 reached $640 million, a 21% increase year-over-year.

How much did Sleep Number's operating income grow in Q3 2021?

Operating income grew by 4% to $73 million in Q3 2021.

What was Sleep Number's EPS for Q3 2021?

The diluted EPS for Sleep Number in Q3 2021 increased to $2.22, a 24% rise compared to the previous year.

What is the EPS outlook for Sleep Number in 2021?

Sleep Number is targeting an EPS of $7.25 for the full year 2021.

How is Sleep Number addressing semiconductor shortages?

Sleep Number is actively pursuing solutions to mitigate the impact of semiconductor shortages on customer deliveries.