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Sleep Number Announces Record Fourth-Quarter and Full-Year 2019 Results

  • 2019 full-year net sales up 11% to a record $1.7 billion
  • Full-year diluted EPS up 41% to $2.70
  • Operating cash flows increased 44% to $189 million; generated 17.8% ROIC for the year
  • Provides 2020 earnings outlook of $3.10 per diluted share, an increase of 15% versus 2019

MINNEAPOLIS--(BUSINESS WIRE)--Feb. 19, 2020-- Sleep Number Corporation (Nasdaq: SNBR) today reported record results for the year ended December 28, 2019.

“Consumer response to our revolutionary 360® smart beds has been exceptional, driving six consecutive quarters of double-digit demand growth, including acceleration in the fourth quarter,” stated Shelly Ibach, President and CEO. “Our differentiated, consumer innovation strategy drove record results again in 2019, including an 11% net sales increase to $1.7 billion and a 41% increase in diluted EPS to $2.70 per share. We begin the next chapter of our strategic journey as a purpose driven company in the health and wellness space. Executing our ambitious vision, while investing to ensure broad consumer relevance is delivering superior returns for our shareholders.”

Full Year Overview

  • Net sales increased 11% to $1.7 billion in 2019, including a 6% comparable sales gain and 5 percentage points of growth from new stores
  • Gross profit rate increased 130 basis points (bp) to 61.9% of net sales
  • Operating income increased 21% to $112 million, or 6.6% of net sales, up 60 bp versus prior year, while investing in our near- and long-term growth drivers
  • Earnings per diluted share increased 41% to $2.70

Fourth Quarter Overview

  • Net sales increased 7% (up 14% versus prior year adjusted) to $441 million
  • Prior year’s reported results were impacted by one week of deliveries ($24 million of net sales and 23 cents of EPS) which shifted from the third to the fourth quarter; refer to the Reconciliation of Non-GAAP Financial Measures tables on page 10 of our fourth quarter 2018 earnings press release
  • Earnings per diluted share of $0.82, compared with $0.81 for the prior year ($0.58 prior year adjusted)

2019 Full Year Cash Flows and Liquidity Review

  • Generated a record $189 million in net cash from operating activities, up 44% versus the prior year
  • Invested $59 million in capital expenditures, compared with $46 million for the prior year
  • Acquired $146 million of SNBR stock in 2019, bringing total cash returned to shareholders to $843 million over the past six years; $475 million remaining under our share repurchase authorization
  • Ended the year with a leverage ratio of 2.7x EBITDAR; continue to operate with a targeted range of 2.5x to 3.0x EBITDAR with seasonal fluctuations expected
  • Return on invested capital (ROIC) was 17.8% for the year, up 180 bp versus 2018

Financial Outlook
The company expects to generate full-year 2020 earnings per diluted share of $3.10, a 15% increase versus full-year 2019 earnings per diluted share of $2.70. The outlook assumes high-single digit net sales growth for 2020, including the benefit of an extra fiscal week. The outlook assumes an estimated effective income tax rate of approximately 22% (including an estimated $3 million of excess tax benefits related to stock-based compensation), compared to 18.6% for 2019. The company anticipates 2020 capital expenditures to be approximately $60 million.

Conference Call Information
Management will host its regularly scheduled conference call to discuss the company’s results at 5 p.m. EST (4 p.m. CST; 2 p.m. PST) today. To 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
As a purpose driven company, Sleep Number’s mission is to improve lives by individualizing sleep experiences. Our revolutionary Sleep Number 360® smart beds deliver proven, quality sleep through effortless, adjustable comfort. Our integrated SleepIQ® operating system captures over 10 billion biometric data points every night and offers actionable insights to improve your overall sleep health and wellness.

To experience proven quality sleep, visit SleepNumber.com or one of over 610 Sleep Number® stores. More information is available on our newsroom and investor relations site.

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; 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 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, pandemics, strikes, and the potential for shortages in supply; risks of disruption in the operation of our main manufacturing facilities or assembly distribution facilities; increasing government regulation; 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 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 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

December 28,

 

% of

 

December 29,

 

% of

2019

 

Net Sales

 

2018

 

Net Sales

 
Net sales

$

441,166

100.0

%

$

411,825

100.0

%

Cost of sales

 

165,052

37.4

%

 

160,746

39.0

%

Gross profit

 

276,114

62.6

%

 

251,079

61.0

%

Operating expenses:
Sales and marketing

 

198,123

44.9

%

 

175,899

42.7

%

General and administrative

 

35,490

8.0

%

 

29,431

7.1

%

Research and development

 

9,510

2.2

%

 

7,629

1.9

%

Total operating expenses

 

243,123

55.1

%

 

212,959

51.7

%

Operating income

 

32,991

7.5

%

 

38,120

9.3

%

Interest expense, net

 

2,619

0.6

%

 

2,093

0.5

%

Income before income taxes

 

30,372

6.9

%

 

36,027

8.7

%

Income tax expense

 

6,279

1.4

%

 

9,037

2.2

%

Net income

$

24,093

5.5

%

$

26,990

6.6

%

 
Net income per share – basic

$

0.85

$

0.83

 
Net income per share – diluted

$

0.82

$

0.81

 
 
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding

 

28,309

 

32,411

Dilutive effect of stock-based awards

 

1,047

 

1,018

Diluted weighted-average shares outstanding

 

29,356

 

33,429

 
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)
 

Twelve Months Ended

December 28,

 

% of

 

December 29,

 

% of

2019

 

Net Sales

 

2018

 

Net Sales

 
Net sales

$

1,698,352

100.0

%

$

1,531,575

100.0

%

Cost of sales

 

646,429

38.1

%

 

603,614

39.4

%

Gross profit

 

1,051,923

61.9

%

 

927,961

60.6

%

Operating expenses:
Sales and marketing

 

766,922

45.2

%

 

687,380

44.9

%

General and administrative

 

137,956

8.1

%

 

119,378

7.8

%

Research and development

 

34,950

2.1

%

 

28,775

1.9

%

Total operating expenses

 

939,828

55.3

%

 

835,533

54.6

%

Operating income

 

112,095

6.6

%

 

92,428

6.0

%

Interest expense, net

 

11,587

0.7

%

 

5,907

0.4

%

Income before income taxes

 

100,508

5.9

%

 

86,521

5.6

%

Income tax expense

 

18,663

1.1

%

 

16,982

1.1

%

Net income

$

81,845

4.8

%

$

69,539

4.5

%

 
Net income per share – basic

$

2.78

$

1.97

 
Net income per share – diluted

$

2.70

$

1.92

 
 
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding

 

29,472

 

35,256

Dilutive effect of stock-based awards

 

883

 

909

Diluted weighted-average shares outstanding

 

30,355

 

36,165

 
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited – in thousands, except per share amounts)
subject to reclassification
 

December 28,

 

December 29,

2019

 

2018

Assets
Current assets:
Cash and cash equivalents

$

1,593

 

$

1,612

 

Accounts receivable, net of allowance for doubtful accounts of $898 and $699, respectively

 

19,978

 

 

24,795

 

Inventories

 

87,065

 

 

84,882

 

Prepaid expenses

 

15,335

 

 

8,009

 

Other current assets

 

36,397

 

 

31,559

 

Total current assets

 

160,368

 

 

150,857

 

 
Non-current assets:
Property and equipment, net

 

197,421

 

 

205,631

 

Operating lease right-of-use assets 1

 

327,017

 

 

-

 

Goodwill and intangible assets, net

 

73,226

 

 

75,407

 

Other non-current assets

 

48,011

 

 

38,243

 

Total assets

$

806,043

 

$

470,138

 

 
Liabilities and Shareholders’ Deficit
Current liabilities:
Borrowings under revolving credit facility

$

231,000

 

$

199,600

 

Accounts payable

 

134,594

 

 

144,781

 

Customer prepayments

 

34,248

 

 

27,066

 

Accrued sales returns

 

19,809

 

 

19,907

 

Compensation and benefits

 

40,321

 

 

27,700

 

Taxes and withholding

 

22,171

 

 

18,380

 

Operating lease liabilities 1

 

59,561

 

 

-

 

Other current liabilities

 

53,070

 

 

51,234

 

Total current liabilities

 

594,774

 

 

488,668

 

 
Non-current liabilities:
Deferred income taxes

 

3,808

 

 

4,822

 

Operating lease liabilities 1

 

298,090

 

 

-

 

Other non-current liabilities

 

68,802

 

 

86,198

 

Total non-current liabilities

 

370,700

 

 

91,020

 

Total liabilities

 

965,474

 

 

579,688

 

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

 

-

 

 

-

 

Common stock, $0.01 par value; 142,500 shares authorized, 27,961 and 30,868 shares issued and outstanding, respectively

 

280

 

 

309

 

Additional paid-in capital

 

-

 

 

-

 

Accumulated deficit

 

(159,711

)

 

(109,859

)

Total shareholders’ deficit

 

(159,431

)

 

(109,550

)

Total liabilities and shareholders’ deficit

$

806,043

 

$

470,138

 

 

1

Effective December 30, 2018, we adopted the new lease accounting standard. We adopted the new guidance on a modified-retrospective basis and have not restated prior periods.

SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited - in thousands)
subject to reclassification
 

Twelve Months Ended

December 28,

 

December 29,

2019

 

2018

 
Cash flows from operating activities:
Net income

$

81,845

 

$

69,539

 

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization

 

61,866

 

 

61,966

 

Stock-based compensation

 

16,657

 

 

11,412

 

Net gain on disposals and impairments of assets

 

(430

)

 

(51

)

Deferred income taxes

 

(1,014

)

 

7,447

 

Changes in operating assets and liabilities:
Accounts receivable

 

4,817

 

 

(5,483

)

Inventories

 

(2,183

)

 

(584

)

Income taxes

 

3,066

 

 

(6,561

)

Prepaid expenses and other assets

 

(13,959

)

 

5,551

 

Accounts payable

 

10,661

 

 

(9,894

)

Customer prepayments

 

7,182

 

 

(701

)

Accrued compensation and benefits

 

12,920

 

 

(6,872

)

Other taxes and withholding

 

725

 

 

707

 

Other accruals and liabilities

 

7,007

 

 

5,064

 

Net cash provided by operating activities

 

189,160

 

 

131,540

 

 
Cash flows from investing activities:
Purchases of property and equipment

 

(59,239

)

 

(45,515

)

Proceeds from sales of property and equipment

 

2,615

 

 

272

 

Net cash used in investing activities

 

(56,624

)

 

(45,243

)

 
Cash flows from financing activities:
Net increase in short-term borrowings

 

26,357

 

 

182,336

 

Repurchases of common stock

 

(165,079

)

 

(272,446

)

Proceeds from issuance of common stock

 

7,190

 

 

2,788

 

Debt issuance costs

 

(1,023

)

 

(1,014

)

Net cash used in financing activities

 

(132,555

)

 

(88,336

)

 
Net decrease in cash and cash equivalents

 

(19

)

 

(2,039

)

Cash and cash equivalents, at beginning of period

 

1,612

 

 

3,651

 

Cash and cash equivalents, at end of period

$

1,593

 

$

1,612

 

 
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)
 
 

Three Months Ended

 

Twelve Months Ended

December 28,

 

December 29,

 

December 28,

 

December 29,

2019

 

2018

 

2019

 

2018

 
Percent of sales:
Retail

 

90.8

%

 

91.1

%

 

91.8

%

 

91.5

%

Online and phone

 

9.0

%

 

8.3

%

 

7.6

%

 

7.6

%

Wholesale/other

 

0.2

%

 

0.6

%

 

0.6

%

 

0.9

%

Total

 

100.0

%

 

100.0

%

 

100.0

%

 

100.0

%

 
Sales change rates:
Retail comparable-store sales

 

1

%

 

9

%

 

6

%

 

3

%

Online and phone

 

16

%

 

23

%

 

12

%

 

15

%

Company-Controlled comparable sales change

 

2

%

 

10

%

 

6

%

 

3

%

Net opened/closed stores

 

5

%

 

3

%

 

5

%

 

3

%

Total Company-Controlled Channel

 

7

%

 

13

%

 

11

%

 

6

%

Wholesale/other

 

(56

%)

 

11

%

 

(24

%)

 

(26

%)

Total

 

7

%

 

13

%

 

11

%

 

6

%

 
Stores open:
Beginning of period

 

602

 

 

569

 

 

579

 

 

556

 

Opened

 

12

 

 

20

 

 

59

 

 

53

 

Closed

 

(3

)

 

(10

)

 

(27

)

 

(30

)

End of period

 

611

 

 

579

 

 

611

 

 

579

 

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

$

2,877

 

$

2,707

 

Average sales per square foot 1

$

1,034

 

$

998

 

Stores > $2 million net sales 2

 

70

%

 

65

%

Stores > $3 million net sales 2

 

30

%

 

25

%

Average revenue per mattress unit 3

$

4,945

 

$

4,623

 

$

4,865

 

$

4,482

 

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 (excludes online and phone sales).

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 Ended

 

Trailing Twelve Months Ended

December 28,

 

December 29,

 

December 28,

 

December 29,

2019

 

2018

 

2019

 

2018

 
Net income

$

24,093

 

$

26,990

 

$

81,845

$

69,539

Income tax expense

 

6,279

 

 

9,037

 

 

18,663

 

16,982

Interest expense

 

2,621

 

 

2,094

 

 

11,591

 

5,911

Depreciation and amortization

 

15,482

 

 

15,227

 

 

61,410

 

61,648

Stock-based compensation

 

4,623

 

 

1,314

 

 

16,657

 

11,412

Asset impairments

 

16

 

 

(19

)

 

185

 

96

Adjusted EBITDA

$

53,114

 

$

54,643

 

$

190,351

$

165,588

 
Free Cash Flow
(in thousands)
 

Three Months Ended

 

Trailing Twelve Months Ended

December 28,

 

December 29,

 

December 28,

 

December 29,

2019

 

2018

 

2019

 

2018

 
Net cash (used in) provided by operating activities

$

(672

)

$

(2,910

)

$

189,160

$

131,540

Subtract: Purchases of property and equipment

 

12,482

 

 

11,503

 

 

59,239

 

45,515

Free cash flow

$

(13,154

)

$

(14,413

)

$

129,921

$

86,025

 
Calculation of Leverage Ratio under Revolving Credit Facility
(in thousands)
 

Trailing Twelve Months Ended

December 28,

 

December 29,

2019

 

2018

 
Borrowings under revolving credit facility

$

231,000

$

199,600

Outstanding letters of credit

 

3,497

 

3,497

Finance lease obligations

 

756

 

858

Consolidated funded indebtedness

$

235,253

$

203,955

Capitalized operating lease obligations1

 

527,008

 

476,341

Total debt including capitalized operating lease obligations (a)

$

762,261

$

680,296

 
Adjusted EBITDA (see above)

$

190,351

$

165,588

Consolidated rent expense

 

87,835

 

79,390

Consolidated EBITDAR (b)

$

278,186

$

244,978

 
Leverage Ratio per revolving credit facility (a divided by b)

2.7 to 1.0

2.8 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 revolving credit facility.

Note - Our Adjusted EBITDA and EBITDAR calculations, Free Cash Flow data and Calculation of 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:
 

Trailing Twelve Months Ended

December 28,

 

December 29,

2019

 

2018

Net operating profit after taxes (NOPAT)
Operating income

$

112,095

 

$

92,428

 

Add: Rent expense 1

 

87,835

 

 

79,390

 

Add: Interest income

 

3

 

 

4

 

Less: Depreciation on capitalized operating leases 2

 

(22,358

)

 

(20,392

)

Less: Income taxes 3

 

(42,592

)

 

(36,444

)

NOPAT

$

134,983

 

$

114,986

 

 
Average invested capital
Total deficit

$

(159,431

)

$

(109,550

)

Add: Long-term debt 4

 

231,756

 

 

200,458

 

Add: Capitalized operating lease obligations 5

 

702,680

 

 

635,120

 

Total invested capital at end of period

$

775,005

 

$

726,028

 

 
Average invested capital 6

$

757,361

 

$

719,055

 

 
Return on invested capital (ROIC) 7

 

17.8

%

 

16.0

%

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 24.1% for 2019 and 2018, 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.

 

Source: Sleep Number Corporation

Investor Contact: Dave Schwantes; (763) 551-7498; investorrelations@sleepnumber.com
Media Contact: Julie Elepano; (763) 551-7459; julie.elepano@sleepnumber.com


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