EX-99.1 2 a2018-q2ex991.htm EXHIBIT 99.1 Exhibit

Exhibit 99.1

sleepnumberlogonewa05.jpg
FOR IMMEDIATE RELEASE

Sleep Number Announces Second Quarter 2018 Results

•
Reported net sales increase of 11% to $316 million and EPS of $0.10, compared with a $0.02 loss for the prior year
•
Generated TTM ROIC of 14.3%, up 70 basis points versus the prior year
•
Reiterates full-year 2018 earnings outlook of $1.70 to $2.00 per diluted share

MINNEAPOLIS - (July 25, 2018) - Sleep Number Corporation (NASDAQ: SNBR) today reported second quarter 2018 results for the period ended June 30, 2018.
  
“We are excited to provide proven quality sleep to our customers with our Sleep Number 360® smart beds,” said Shelly Ibach, President and CEO of Sleep Number. “With our transition now complete, we expect performance acceleration from our new marketing campaign, differentiated retail experience and operating improvements.”
  
Second Quarter Overview
•
Net sales increased 11% to $316 million, with comparable sales up 9%; note: the prior year’s second quarter sales were impacted by an inventory shortage which shifted approximately $25 million to the third quarter
•
Operating income increased to $2 million, compared to a net operating loss of $3 million for the prior year’s second quarter. The current quarter included 230 basis points (bps) of gross margin pressure and
400 bps of operating expense leverage compared with the prior year
•
Earnings per diluted share were $0.10, including one-time tax planning benefit of $0.08 associated with the new Tax Cuts and Jobs Act
  
Capital Deployment Review
•
Generated $29 million in net cash from operating activities, invested $21 million in capital expenditures and returned $140 million to shareholders through share repurchases during the first six months of 2018
•
Ended the quarter with a $120 million liquidity cushion against our credit facility, compared with $138 million at the end of the prior year’s second quarter, excluding $3 million letters of credit in both years
•
Return on invested capital (ROIC) was 14.3% for the trailing-twelve month period, well above our cost of capital
  
Financial Outlook
The company reiterates its outlook for 2018 earnings per diluted share of $1.70 to $2.00. The outlook for the second half of 2018 assumes mid-single digit sales growth and an estimated effective income tax rate of 25%. The company anticipates 2018 capital expenditures to be approximately $50 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 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 the leader in sleep innovation, Sleep Number Corporation delivers the best quality sleep through effortless, adjustable comfort and biometric sleep tracking. Sleep Number’s proprietary SleepIQ® technology platform -- one of the most comprehensive databases of biometric consumer sleep data - is proving the connection between sleep and wellbeing. With breakthrough innovations such as the revolutionary Sleep Number 360® smart bed, Sleep Number is redefining the future of sleep and shaping the future of health and wellness. To experience better quality sleep, visit one of the over 560 Sleep Number® stores located in all 50 states or SleepNumber.com. For additional information, visit our newsroom and investor relations site.



Sleep Number Announces Second-quarter 2018 Results – Page 2 of 9

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; availability of attractive and cost-effective consumer credit options; pending and unforeseen litigation and the potential for adverse publicity associated with litigation; our “just-in-time” 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; risks of disruption in the operation of either of our two primary manufacturing facilities; increasing government regulations, which have added or may add cost pressures and process changes to ensure compliance; the adequacy of our management information systems to meet the evolving needs of our business and to protect sensitive data from potential cyber threats; the costs, distractions and potential disruptions to our business related to upgrading our management information systems; our ability to attract, retain and motivate qualified management, executive and other key employees, including qualified retail sales professionals and managers; and uncertainties arising from global events, such as terrorist attacks, political unrest or a pandemic outbreak, or the threat of such events. 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.
# # #

Investor Contact: Dave Schwantes; (763) 551-7498; investorrelations@sleepnumber.com
Media Contact: Sarah Reckard; (763) 551-6076; sarah.reckard@sleepnumber.com







Sleep Number Announces Second-quarter 2018 Results – Page 3 of 9

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

 
Three Months Ended
 
June 30,
2018
 
% of
Net Sales
 
July 1,
2017
 
% of
Net Sales
 
 
 
 
 
 
 
 
Net sales
$
316,338

 
100.0
%
 
$
284,673

 
100.0
%
Cost of sales
127,450

 
40.3
%
 
108,054

 
38.0
%
Gross profit
188,888

 
59.7
%
 
176,619

 
62.0
%
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 

 
 
Sales and marketing
151,106

 
47.8
%
 
144,498

 
50.8
%
General and administrative
28,828

 
9.1
%
 
28,819

 
10.1
%
Research and development
6,868

 
2.2
%
 
6,363

 
2.2
%
Total operating expenses
186,802

 
59.1
%
 
179,680

 
63.1
%
Operating income (loss)
2,086

 
0.7
%
 
(3,061
)
 
(1.1
%)
Other expense, net
1,453

 
0.5
%
 
282

 
0.1
%
Income (loss) before income taxes
633

 
0.2
%
 
(3,343
)
 
(1.2
%)
Income tax benefit
(3,111
)
 
(1.0
%)
 
(2,565
)
 
(0.9
%)
Net income (loss)
$
3,744

 
1.2
%
 
$
(778
)
 
(0.3
%)
 
 
 
 
 
 
 
 
Net income (loss) per share – basic
$
0.10

 
 
 
$
(0.02
)
 
 
 
 
 
 
 
 
 
 
Net income (loss) per share – diluted
$
0.10

 
 
 
$
(0.02
)
 
 
 
 
 
 
 
 
 
 
Reconciliation of weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
36,138

 
 
 
41,716

 
 
Dilutive effect of stock-based awards 1
706

 
 
 
—

 
 
Diluted weighted-average shares outstanding 1
36,844

 
 
 
41,716

 
 
  
1 For the three months ended July 1, 2017, potentially dilutive stock-based awards have been excluded from the calculation of diluted weighted-average shares outstanding, as their inclusion would have had an anti-dilutive effect on our net loss per diluted share.



Sleep Number Announces Second-quarter 2018 Results – Page 4 of 9

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

 
Six Months Ended
 
June 30,
2018
 
% of
Net Sales
 
July 1,
2017
 
% of
Net Sales
 
 
 
 
 
 
 
 
Net sales
$
704,971

 
100.0
%
 
$
678,572

 
100.0
%
Cost of sales
278,606

 
39.5
%
 
255,494

 
37.7
%
Gross profit
426,365

 
60.5
%
 
423,078

 
62.3
%
 
 
 
 
 
 
 
 
Operating expenses:
 

 
 
 
 

 
 
Sales and marketing
323,023

 
45.8
%
 
313,764

 
46.2
%
General and administrative
60,562

 
8.6
%
 
62,588

 
9.2
%
Research and development
13,793

 
2.0
%
 
13,959

 
2.1
%
Total operating expenses
397,378

 
56.4
%
 
390,311

 
57.5
%
Operating income
28,987

 
4.1
%
 
32,767

 
4.8
%
Other expense, net
1,978

 
0.3
%
 
420

 
0.1
%
Income before income taxes
27,009

 
3.8
%
 
32,347

 
4.8
%
Income tax expense
2,717

 
0.4
%
 
8,664

 
1.3
%
Net income
$
24,292

 
3.4
%
 
$
23,683

 
3.5
%
 
 
 
 
 
 
 
 
Net income per share – basic
$
0.65

 
 
 
$
0.56

 
 
 
 
 
 
 
 
 
 
Net income per share – diluted
$
0.64

 
 
 
$
0.55

 
 
 
 
 
 
 
 
 
 
Reconciliation of weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
37,191

 
 
 
42,233

 
 
Dilutive effect of stock-based awards
905

 
 
 
847

 
 
Diluted weighted-average shares outstanding
38,096

 
 
 
43,080

 
 




Sleep Number Announces Second-quarter 2018 Results – Page 5 of 9

SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited - in thousands, except per share amounts)
subject to reclassification
 
June 30,
2018
 
December 30,
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,407

 
$
3,651

Accounts receivable, net of allowance for doubtful accounts of $547 and $714, respectively
22,065

 
19,312

Inventories
90,241

 
84,298

Income taxes receivable
6,527

 
—

Prepaid expenses
10,580

 
17,565

Other current assets
26,399

 
27,665

Total current assets
158,219

 
152,491

 
 
 
 
Non-current assets:
 

 
 
Property and equipment, net
202,378

 
208,646

Goodwill and intangible assets, net
76,497

 
77,588

Deferred income taxes
—

 
2,625

Other non-current assets
33,256

 
30,484

Total assets
$
470,350

 
$
471,834

 
 
 
 
Liabilities and Shareholders’ (Deficit) Equity
 

 
 
Current liabilities:
 

 
 
Borrowings under revolving credit facility
$
182,500

 
$
24,500

Accounts payable
100,996

 
129,194

Customer prepayments
28,136

 
27,767

Accrued sales returns
16,527

 
19,270

Compensation and benefits
24,688

 
34,602

Taxes and withholding
9,078

 
24,234

Other current liabilities
48,065

 
46,822

Total current liabilities
409,990

 
306,389

 
 
 
 
Non-current liabilities:
 

 
 
Deferred income taxes
4,587

 
—

Other non-current liabilities
76,927

 
76,289

Total non-current liabilities
81,514

 
76,289

Total liabilities
491,504

 
382,678

 
 
 
 
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, 34,893 and 38,813 shares issued and outstanding, respectively
349

 
388

Additional paid-in capital
—

 
—

(Accumulated deficit) retained earnings
(21,503
)
 
88,768

Total shareholders’ (deficit) equity
(21,154
)
 
89,156

Total liabilities and shareholders’ (deficit) equity
$
470,350

 
$
471,834





Sleep Number Announces Second-quarter 2018 Results – Page 6 of 9

SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited – in thousands)
subject to reclassification
 
Six Months Ended
 
June 30,
2018
 
July 1,
2017
Cash flows from operating activities:
 
 
 
Net income
$
24,292

 
$
23,683

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
31,089

 
31,177

Stock-based compensation
6,742

 
7,876

Net loss on disposals and impairments of assets
15

 
2

Deferred income taxes
7,212

 
4,974

Changes in operating assets and liabilities:

 


Accounts receivable
(2,753
)
 
(4,781
)
Inventories
(5,943
)
 
5,170

Income taxes
(19,075
)
 
(14,532
)
Prepaid expenses and other assets
8,242

 
2,110

Accounts payable
(4,859
)
 
11,858

Customer prepayments
369

 
19,518

Accrued compensation and benefits
(9,944
)
 
9,834

Other taxes and withholding
(2,608
)
 
(6,032
)
Other accruals and liabilities
(3,648
)
 
(2,050
)
Net cash provided by operating activities
29,131

 
88,807

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(21,341
)
 
(27,132
)
Proceeds from sales of property and equipment
70

 
—

Net cash used in investing activities
(21,271
)
 
(27,132
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Net increase in short-term borrowings
133,253

 
3,098

Repurchases of common stock
(142,940
)
 
(80,094
)
Proceeds from issuance of common stock
1,596

 
2,654

Debt issuance costs
(1,013
)
 
(10
)
Net cash used in financing activities
(9,104
)
 
(74,352
)
Net decrease in cash, cash equivalents and restricted cash
(1,244
)
 
(12,677
)
Cash, cash equivalents and restricted cash, at beginning of period
3,651

 
14,759

Cash, cash equivalents and restricted cash, at end of period
$
2,407

 
$
2,082


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 Announces Second-quarter 2018 Results – Page 7 of 9

SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Percent of sales:
 
 
 
 
 
 
 
Retail
90.7
%
 
90.4
%
 
91.2
%
 
91.0
%
Online and phone
7.9
%
 
7.3
%
 
7.5
%
 
7.0
%
Wholesale/other
1.4
%
 
2.3
%
 
1.3
%
 
2.0
%
Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
 
 
 
 
 
 
 
Sales change rates:
 
 
 
 
 
 
 
Retail comparable-store sales
8
%
 
(6
%)
 
1
%
 
(1
%)
Online and phone
19
%
 
26
%
 
12
%
 
22
%
Company-Controlled comparable sales change
9
%
 
(4
%)
 
2
%
 
0
%
Net opened/closed stores
3
%
 
8
%
 
3
%
 
9
%
Total Company-Controlled Channel
12
%
 
4
%
 
5
%
 
9
%
Wholesale/other
(29
%)
 
(31
%)
 
(33
%)
 
(27
%)
Total
11
%
 
3
%
 
4
%
 
8
%
 
 
 
 
 
 
 
 
Stores open:
 
 
 
 
 
 
 
Beginning of period
558

 
546

 
556

 
540

Opened
11

 
8

 
24

 
24

Closed
(4
)
 
(5
)
 
(15
)
 
(15
)
End of period
565

 
549

 
565

 
549

 
 
 
 
 
 
 
 
Other metrics:
 
 
 
 
 
 
 
Average sales per store ($ in 000's) 1
$
2,645

 
$
2,535

 
 
 
 
Average sales per square foot 1
$
985

 
$
983

 
 
 
 
Stores > $1 million net sales 2
98
%
 
97
%
 
 
 
 
Stores > $2 million net sales 2
63
%
 
58
%
 
 
 
 
Average revenue per mattress unit 3
$
4,508

 
$
4,306

 
$
4,459

 
$
4,155

 
 
 
 
 
 
 
 
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 Announces Second-quarter 2018 Results – Page 8 of 9

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
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Net income (loss)
$
3,744

 
$
(778
)
 
$
65,686

 
$
60,715

Income tax (benefit) expense
(3,111
)
 
(2,565
)
 
20,014

 
25,597

Interest expense
1,454

 
288

 
2,486

 
924

Depreciation and amortization
15,326

 
14,918

 
60,945

 
60,170

Stock-based compensation
3,658

 
4,172

 
14,629

 
12,231

Asset impairments
85

 
2

 
327

 
47

Adjusted EBITDA
$
21,156

 
$
16,037

 
$
164,087

 
$
159,684




Free Cash Flow
(in thousands)
 
Three Months Ended
 
Trailing-Twelve Months Ended
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Net cash (used in) provided by operating activities
$
(20,125
)
 
$
1,938

 
$
112,931

 
$
193,332

Subtract: Purchases of property and equipment
12,536

 
13,921

 
54,038

 
61,220

Free cash flow
$
(32,661
)
 
$
(11,983
)
 
$
58,893

 
$
132,112



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 Announces Second-quarter 2018 Results – Page 9 of 9

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
 
 
June 30,
2018
 
July 1,
2017
Net operating profit after taxes (NOPAT)
 
 
 
 
Operating income
 
$
88,135

 
$
87,124

Add: Rent expense 1
 
76,215

 
70,815

Add: Interest income
 
50

 
112

Less: Depreciation on capitalized operating leases 2
 
(19,640
)
 
(17,956
)
Less: Income taxes 3
 
(43,934
)
 
(46,095
)
NOPAT
 
$
100,826

 
$
94,000

 
 
 
 
 
Average invested capital
 
 
 
 
Total (deficit) equity
 
$
(21,154
)
 
$
114,439

Less: Cash greater than target 4
 
—

 
—

Add: Long-term debt 5
 
183,405

 
—

Add: Capitalized operating lease obligations 6
 
609,720

 
566,520

Total invested capital at end of period
 
$
771,971

 
$
680,959

Average invested capital 7
 
$
705,575

 
$
690,524

Return on invested capital (ROIC) 8
 
14.3
%
 
13.6
%

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 30.3% and 32.9% for 2018 and 2017, respectively.

4 Cash greater than target is defined as cash, cash equivalents and marketable debt securities less customer prepayments in excess of $100 million.

5 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 borrowing under that agreement, including borrowings classified as short term.

6 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.

7 Average invested capital represents the average of the last five fiscal quarters' ending invested capital balances.

8 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.