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Sleep Number Announces Record Third Quarter 2019 Results and Raises Earnings Outlook

  • Third quarter net sales grew 14%, with a 10% comp gain and diluted EPS growth of 81%
  • Year-to-date net sales increased 12%, operating income grew 46% and diluted EPS increased 63%
  • Generated a 41% increase in year-to-date operating cash flows and a trailing twelve month ROIC of 18.4%
  • Full-year outlook raised to a range of $2.45 to $2.75 per diluted share, $2.60 at the midpoint

 

MINNEAPOLIS--(BUSINESS WIRE)--Oct. 15, 2019-- Sleep Number Corporation (Nasdaq: SNBR) today reported record results for the third quarter and year-to-date period ended September 28, 2019.

“Our revolutionary Sleep Number 360® smart beds are delivering life-changing sleep and drove double-digit demand growth on top of double-digit demand growth the prior year. Our multi-year initiatives are resulting in the sales and profit growth we anticipated,” stated Shelly Ibach, President and CEO. “We are creating a future where our 360® smart bed will be the hub for consumers’ health and wellness with individualized digital health as core to our business.”

Third Quarter Overview

  • Net sales increased 14% to a record $475 million, including a 10% comparable sales gain
  • 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
  • Gross profit rate increased 200 basis points to 62.4% of net sales compared with 60.4% for the same period last year
  • Operating income increased 55% to $39 million, or 8.2% of net sales, up 210 basis points versus the prior year’s third quarter
  • Earnings per diluted share increased 81% to $0.94, compared with $0.52 for the prior year

Cash Flows and Liquidity Review

  • Generated $190 million in net cash from operating activities year to date, up 41% versus the same period last year
  • Invested $47 million in capital expenditures year to date of the $60 million expected for 2019
  • Returned $121 million to shareholders year to date through share repurchases, out of approximately $145 million expected for 2019
  • Announced replenishment of $500 million share repurchase authorization effective the beginning of the fiscal fourth quarter
  • Ended the third quarter with a leverage ratio of 2.6x EBITDAR; continue to operate with a targeted range of 2.5x to 3.0x EBITDAR with seasonal fluctuations expected
  • Return on invested capital increased 470 basis points year over year to 18.4% for the trailing twelve month period

Financial Outlook
The company raised its 2019 earnings per diluted share outlook to a range of $2.45 to $2.75. The outlook includes up to 10% net sales growth for the full-year and a 25% effective income tax rate for the fourth quarter.

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 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 nine billion biometric data points every night and delivers actionable insights to improve your overall sleep health and wellness. Sleep Number ranked #1 in J.D. Power’s 2018 Mattress Satisfaction Report*.

To experience proven quality sleep, visit SleepNumber.com or one of over 600 Sleep Number® stores. More information is available on our newsroom and investor relations site.

*Sleep Number received the highest score in the J.D. Power 2015, 2016 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 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

 

September 28,

 

% of

 

September 29,

 

% of

 

2019

 

Net Sales

 

2018

 

Net Sales

 
Net sales

$

474,778

100.0

%

$

414,779

100.0

%

Cost of sales

 

178,388

37.6

%

 

164,262

39.6

%

Gross profit

 

296,390

62.4

%

 

250,517

60.4

%

 
Operating expenses:
Sales and marketing

 

213,133

44.9

%

 

188,458

45.4

%

General and administrative

 

35,098

7.4

%

 

29,385

7.1

%

Research and development

 

9,007

1.9

%

 

7,353

1.8

%

Total operating expenses

 

257,238

54.2

%

 

225,196

54.3

%

Operating income

 

39,152

8.2

%

 

25,321

6.1

%

Interest expense, net

 

3,131

0.7

%

 

1,836

0.4

%

Income before income taxes

 

36,021

7.6

%

 

23,485

5.7

%

Income tax expense

 

7,967

1.7

%

 

5,228

1.3

%

Net income

$

28,054

5.9

%

$

18,257

4.4

%

 
Net income per share – basic

$

0.96

$

0.53

 
Net income per share – diluted

$

0.94

$

0.52

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

 

29,085

 

34,231

Dilutive effect of stock-based awards

 

711

 

808

Diluted weighted-average shares outstanding

 

29,796

 

35,039

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited – in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 28,

 

% of

 

September 29,

 

% of

 

2019

 

Net Sales

 

2018

 

Net Sales

 
Net sales

$

1,257,186

100.0

%

$

1,119,750

100.0

%

Cost of sales

 

481,377

38.3

%

 

442,868

39.6

%

Gross profit

 

775,809

61.7

%

 

676,882

60.4

%

 
Operating expenses:
Sales and marketing

 

568,799

45.2

%

 

511,481

45.7

%

General and administrative

 

102,466

8.2

%

 

89,947

8.0

%

Research and development

 

25,440

2.0

%

 

21,146

1.9

%

Total operating expenses

 

696,705

55.4

%

 

622,574

55.6

%

Operating income

 

79,104

6.3

%

 

54,308

4.9

%

Interest expense, net

 

8,968

0.7

%

 

3,814

0.3

%

Income before income taxes

 

70,136

5.6

%

 

50,494

4.5

%

Income tax expense

 

12,384

1.0

%

 

7,945

0.7

%

Net income

$

57,752

4.6

%

$

42,549

3.8

%

 
Net income per share – basic

$

1.93

$

1.18

 
Net income per share – diluted

$

1.88

$

1.15

 
 

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding

 

29,859

 

36,204

Dilutive effect of stock-based awards

 

829

 

873

Diluted weighted-average shares outstanding

 

30,688

 

37,077

 

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Consolidated Balance Sheets

(unaudited – in thousands, except per share amounts)

subject to reclassification

 

 

 

 

 

September 28,

 

December 29,

 

2019

 

2018

Assets
Current assets:
Cash and cash equivalents

$

1,545

 

$

1,612

 

Accounts receivable, net of allowance for doubtful accounts of $753 and $699, respectively

 

25,541

 

 

24,795

 

Inventories

 

86,508

 

 

84,882

 

Prepaid expenses

 

10,997

 

 

8,009

 

Other current assets

 

35,002

 

 

31,559

 

Total current assets

 

159,593

 

 

150,857

 

 
Non-current assets:
Property and equipment, net

 

201,755

 

 

205,631

 

Operating lease right-of-use assets 1

 

321,048

 

 

-

 

Goodwill and intangible assets, net

 

73,772

 

 

75,407

 

Other non-current assets

 

46,154

 

 

38,243

 

Total assets

$

802,322

 

$

470,138

 

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

$

213,700

 

$

199,600

 

Accounts payable

 

151,357

 

 

144,781

 

Customer prepayments

 

39,824

 

 

27,066

 

Accrued sales returns

 

23,833

 

 

19,907

 

Compensation and benefits

 

39,383

 

 

27,700

 

Taxes and withholding

 

24,699

 

 

18,380

 

Operating lease liabilities 1

 

57,912

 

 

-

 

Other current liabilities

 

52,361

 

 

51,234

 

Total current liabilities

 

603,069

 

 

488,668

 

 
Non-current liabilities:
Deferred income taxes

 

3,927

 

 

4,822

 

Operating lease liabilities 1

 

293,333

 

 

-

 

Other non-current liabilities

 

66,480

 

 

86,198

 

Total non-current liabilities

 

363,740

 

 

91,020

 

Total liabilities

 

966,809

 

 

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, 28,427 and 30,868 shares issued and outstanding, respectively

 

284

 

 

309

 

Additional paid-in capital

 

-

 

 

-

 

Accumulated deficit

 

(164,771

)

 

(109,859

)

Total shareholders’ deficit

 

(164,487

)

 

(109,550

)

Total liabilities and shareholders’ deficit

$

802,322

 

$

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
 
Nine Months Ended
September 28, September 29,

2019

2018

 
Cash flows from operating activities:
Net income

$

57,752

 

$

42,549

 

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

 

Depreciation and amortization

 

46,267

 

 

46,655

 

Stock-based compensation

 

12,034

 

 

10,098

 

Net gain on disposals and impairments of assets

 

(409

)

 

(17

)

Deferred income taxes

 

(895

)

 

7,263

 

Changes in operating assets and liabilities:

 

Accounts receivable

 

(746

)

 

(4,816

)

Inventories

 

(1,626

)

 

(6,682

)

Income taxes

 

535

 

 

(13,777

)

Prepaid expenses and other assets

 

(8,065

)

 

5,195

 

Accounts payable

 

45,051

 

 

26,007

 

Customer prepayments

 

12,758

 

 

18,351

 

Accrued compensation and benefits

 

11,763

 

 

(2,685

)

Other taxes and withholding

 

5,784

 

 

4,265

 

Other accruals and liabilities

 

9,629

 

 

2,044

 

Net cash provided by operating activities

 

189,832

 

 

134,450

 

 
Cash flows from investing activities:

 

Purchases of property and equipment

 

(46,757

)

 

(34,012

)

Proceeds from sales of property and equipment

 

2,577

 

 

174

 

Net cash used in investing activities

 

(44,180

)

 

(33,838

)

 
Cash flows from financing activities:

 

Net (decrease) increase in short-term borrowings

 

(11,270

)

 

94,147

 

Repurchases of common stock

 

(139,178

)

 

(198,239

)

Proceeds from issuance of common stock

 

5,752

 

 

2,084

 

Debt issuance costs

 

(1,023

)

 

(1,014

)

Net cash used in financing activities

 

(145,719

)

 

(103,022

)

 
Net decrease in cash and cash equivalents

 

(67

)

 

(2,410

)

Cash and cash equivalents, at beginning of period

 

1,612

 

 

3,651

 

Cash and cash equivalents, at end of period

$

1,545

 

$

1,241

 

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Supplemental Financial Information

(unaudited)

 
 

Three Months Ended

Nine Months Ended

September 28,

September 29,

September 28,

September 29,

2019

2018

2019

2018

 
Percent of sales:
Retail

 

92.2

%

 

92.6

%

 

92.1

%

 

91.7

%

Online and phone

 

7.3

%

 

6.9

%

 

7.2

%

 

7.3

%

Wholesale/other

 

0.5

%

 

0.5

%

 

0.7

%

 

1.0

%

Total

 

100.0

%

 

100.0

%

 

100.0

%

 

100.0

%

 
Sales change rates:
Retail comparable-store sales

 

9

%

 

(1

%)

 

7

%

 

0

%

Online and phone

 

20

%

 

10

%

 

10

%

 

11

%

Company-Controlled comparable sales change

 

10

%

 

0

%

 

8

%

 

1

%

Net opened/closed stores

 

5

%

 

3

%

 

5

%

 

3

%

Total Company-Controlled Channel

 

15

%

 

3

%

 

13

%

 

4

%

Wholesale/other

 

8

%

 

(21

%)

 

(17

%)

 

(31

%)

Total

 

14

%

 

3

%

 

12

%

 

4

%

 
Stores open:
Beginning of period

 

594

 

 

565

 

 

579

 

 

556

 

Opened

 

15

 

 

9

 

 

47

 

 

33

 

Closed

 

(7

)

 

(5

)

 

(24

)

 

(20

)

End of period

 

602

 

 

569

 

 

602

 

 

569

 

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

$

2,858

 

$

2,635

 

Average sales per square foot 1

$

1,029

 

$

977

 

Stores > $2 million net sales 2

 

70

%

 

62

%

Stores > $3 million net sales 2

 

28

%

 

23

%

Average revenue per mattress unit 3

$

4,788

 

$

4,387

 

$

4,837

 

$

4,432

 

 
 
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

 

September 28,

 

September 29,

 

September 28,

 

September 29,

 

2019

 

2018

 

2019

 

2018

Net income

$

28,054

$

18,257

$

84,742

$

58,340

Income tax expense

7,967

5,228

21,421

12,064

Interest expense

3,131

1,836

11,064

4,044

Depreciation and amortization

14,963

15,483

61,155

61,658

Stock-based compensation

4,146

3,356

13,348

14,052

Asset impairments

29

30

150

135

Adjusted EBITDA

$

58,290

 

$

44,190

 

$

191,880

 

$

150,293

 
 
 

Free Cash Flow

(in thousands)

 
Three Months Ended Trailing Twelve Months Ended

September 28,

September 29,

September 28,

September 29,

2019

2018

2019

2018

Net cash provided by operating activities

$

119,485

$

105,319

$

186,922

$

131,003

Subtract: Purchases of property and equipment

 

12,861

 

12,671

 

58,260

 

56,228

Free cash flow

$

106,624

$

92,648

$

128,662

$

74,775

 
 

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

September 28,
2019

September 29,
2018

Net operating profit after taxes (NOPAT)
Operating income

$

117,224

 

$

74,427

 

Add: Rent expense 1

 

85,807

 

 

77,797

 

Add: Interest income

 

4

 

 

21

 

Less: Depreciation on capitalized operating leases 2

 

(21,821

)

 

(20,012

)

Less: Income taxes 3

 

(44,298

)

 

(34,751

)

NOPAT

$

136,916

 

$

97,482

 

 
Average invested capital
Total deficit

$

(164,487

)

$

(54,352

)

Add: Long-term debt 4

 

214,482

 

 

136,683

Add: Capitalized operating lease obligations 5

 

686,456

 

 

622,376

 

Total invested capital at end of period

$

736,451

 

$

704,707

 

 
Average invested capital 6

$

743,271

 

$

710,325

 

 
Return on invested capital (ROIC) 7

 

18.4

%

 

13.7

%

 

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 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 24.4% and 26.3% 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: Susan Oguche; (763) 551-7059; susan.oguche@sleepnumber.com


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