10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 3, 2021

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-25121

_______________________________________________________________________

SLEEP NUMBER CORPORATION

(Exact name of registrant as specified in its charter)

Minnesota	41-1597886
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1001 Third Avenue South
Minneapolis,	Minnesota	55404
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (763) 551-7000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	SNBR	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x NO ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  x NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  ☐ NO x

As of July 3, 2021, 23,622,000 shares of the registrant’s Common Stock were outstanding.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

INDEX

		Page
PART I: FINANCIAL INFORMATION		1
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Shareholders' Deficit	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
PART II: OTHER INFORMATION		24
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	25
SIGNATURES		26

i

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited - in thousands, except per share amounts)

	July 3, 2021		January 2, 2021
Assets
Current assets:
Cash and cash equivalents	$	2,173	$	4,243
Accounts receivable, net of allowances of $1,098 and $1,046, respectively	23,205		31,871
Inventories	88,577		81,362
Income taxes receivable	1,578		—
Prepaid expenses	28,900		20,839
Other current assets	42,564		43,489
Total current assets	186,997		181,804
Non-current assets:
Property and equipment, net	182,398		175,223
Operating lease right-of-use assets	344,423		314,226
Goodwill and intangible assets, net	71,669		72,871
Other non-current assets	69,009		56,012
Total assets	$	854,496	$	800,136
Liabilities and Shareholders’ Deficit
Current liabilities:
Borrowings under credit facility	$	382,200	$	244,200
Accounts payable	129,922		91,904
Customer prepayments	119,435		72,017
Accrued sales returns	21,217		24,765
Compensation and benefits	54,219		76,786
Taxes and withholding	13,779		23,339
Operating lease liabilities	67,648		62,077
Other current liabilities	57,708		60,856
Total current liabilities	846,128		655,944
Non-current liabilities:
Deferred income taxes	663		242
Operating lease liabilities	311,672		283,084
Other non-current liabilities	99,691		84,844
Total liabilities	1,258,154		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, 23,622 and 25,390 shares issued and outstanding, respectively	236		254
Additional paid-in capital	—		—
Accumulated deficit	(403,894)		(224,232)
Total shareholders’ deficit	(403,658)		(223,978)
Total liabilities and shareholders’ deficit	$	854,496	$	800,136

See accompanying notes to condensed consolidated financial statements.

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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited - in thousands, except per share amounts)

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Net sales	$	484,316	$	284,938	$	1,052,572	$	757,504
Cost of sales	191,465		121,928		403,803		292,363
Gross profit	292,851		163,010		648,769		465,141
Operating expenses:
Sales and marketing	205,994		130,165		429,611		337,909
General and administrative	41,220		36,716		83,812		67,788
Research and development	15,916		8,254		29,202		18,755
Total operating expenses	263,130		175,135		542,625		424,452
Operating income (loss)	29,721		(12,125)		106,144		40,689
Interest expense, net	1,607		3,940		2,584		6,284
Income (loss) before income taxes	28,114		(16,065)		103,560		34,405
Income tax expense (benefit)	5,864		(3,435)		14,676		7,895
Net income (loss)	$	22,250	$	(12,630)	$	88,884	$	26,510
Basic net income (loss) per share:
Net income (loss) per share – basic	$	0.91	$	(0.45)	$	3.57	$	0.95
Weighted-average shares – basic	24,371		27,923		24,874		27,890
Diluted net income (loss) per share:
Net income (loss) per share – diluted	$	0.88	$	(0.45)	$	3.44	$	0.93
Weighted-average shares – diluted	25,194		27,923		25,869		28,523

See accompanying notes to condensed consolidated financial statements.

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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Deficit

(unaudited - in thousands)

	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total
	Shares	Amount
Balance at January 2, 2021	25,390	$	254	$	—	$	(224,232)	$	(223,978)
Net income	—	—		—		66,634		66,634
Exercise of common stock options	106	1		2,459		—		2,460
Stock-based compensation	314	3		6,413		—		6,416
Repurchases of common stock	(1,346)	(13)		(8,872)		(175,297)		(184,182)
Balance at April 3, 2021	24,464	$	245	$	—	$	(332,895)	$	(332,650)
Net income	—	—		—		22,250		22,250
Exercise of common stock options	35	—		1,075		—		1,075
Stock-based compensation	22	—		5,969		—		5,969
Repurchases of common stock	(899)	(9)		(7,044)		(93,249)		(100,302)
Balance at July 3, 2021	23,622	$	236	$	—	$	(403,894)	$	(403,658)

	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total
	Shares	Amount
Balance at December 28, 2019	27,961	$	280	$	—	$	(159,711)	$	(159,431)
Net income	—	—		—		39,140		39,140
Exercise of common stock options	167	1		3,282		—		3,283
Stock-based compensation	396	4		2,047		—		2,051
Repurchases of common stock	(888)	(9)		(5,329)		(35,614)		(40,952)
Balance at March 28, 2020	27,636	$	276	$	—	$	(156,185)	$	(155,909)
Net loss	—	—		—		(12,630)		(12,630)
Exercise of common stock options	33	—		817		—		817
Stock-based compensation	71	1		5,032		—		5,033
Repurchases of common stock	(15)	—		(330)		1		(329)
Balance at June 27, 2020	27,725	$	277	$	5,519	$	(168,814)	$	(163,018)

See accompanying notes to condensed consolidated financial statements.

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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited - in thousands)

	Six Months Ended
	July 3, 2021		June 27, 2020
Cash flows from operating activities:
Net income	$	88,884	$	26,510
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	29,800		30,811
Stock-based compensation	12,385		7,084
Net loss on disposals and impairments of assets	78		224
Deferred income taxes	421		4,383
Changes in operating assets and liabilities:
Accounts receivable	8,666		4,224
Inventories	(7,215)		5,391
Income taxes	(11,625)		2,508
Prepaid expenses and other assets	(13,407)		7,018
Accounts payable	23,232		(14,804)
Customer prepayments	47,418		16,987
Accrued compensation and benefits	(22,387)		(7,405)
Other taxes and withholding	487		(3,594)
Other accruals and liabilities	4,683		7,664
Net cash provided by operating activities	161,420		87,001
Cash flows from investing activities:
Purchases of property and equipment	(32,012)		(21,695)
Proceeds from sales of property and equipment	12		25
Purchase of intangible assets	—		(945)
Net cash used in investing activities	(32,000)		(22,615)
Cash flows from financing activities:
Repurchases of common stock	(280,915)		(41,774)
Net increase (decrease) in short-term borrowings	146,447		(26,364)
Proceeds from issuance of common stock	3,535		4,100
Debt issuance costs	(557)		(290)
Net cash used in financing activities	(131,490)		(64,328)
Net (decrease) increase in cash and cash equivalents	(2,070)		58
Cash and cash equivalents, at beginning of period	4,243		1,593
Cash and cash equivalents, at end of period	$	2,173	$	1,651

See accompanying notes to condensed consolidated financial statements.

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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Business and Summary of Significant Accounting Policies

Business & Basis of Presentation

We prepared the condensed consolidated financial statements as of and for the three and six months ended July 3, 2021 of Sleep Number Corporation and our 100%-owned subsidiaries (Sleep Number or the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and they reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position as of July 3, 2021 and January 2, 2021, and the consolidated results of operations and cash flows for the periods presented. Our historical and quarterly consolidated results of operations may not be indicative of the results that may be achieved for the full year or any future period. Additionally, based on the duration and severity of the current global situation involving the novel coronavirus (COVID-19) pandemic, including but not limited to general economic conditions, consumer confidence, store restrictions mandated by federal, state or local authorities and possible supply chain disruptions, the extent to which COVID-19 will impact our business and our consolidated financial results will depend on future developments, which are highly uncertain and cannot be predicted.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with our most recent audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021 and other recent filings with the SEC.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of sales, expenses and income taxes during the reporting period. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. In addition, during the current environment involving COVID-19, predicting future events will be especially challenging for management. Changes in these estimates will be reflected in the consolidated financial statements in future periods and could be material. Our critical accounting policies consist of stock-based compensation, warranty liabilities and revenue recognition.

The condensed consolidated financial statements include the accounts of Sleep Number Corporation and our 100%-owned subsidiaries. All significant intra-entity balances and transactions have been eliminated in consolidation.

2. Fair Value Measurements

At July 3, 2021 and January 2, 2021, we had $17 million and $12 million, respectively, of debt and equity securities that fund our deferred compensation plan and are classified in other non-current assets. We also had corresponding deferred compensation plan liabilities of $17 million and $12 million at July 3, 2021 and January 2, 2021, respectively, which are included in other non-current liabilities. The majority of the debt and equity securities are Level 1 as they trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis. Unrealized gains/(losses) on the debt and equity securities offset those associated with the corresponding deferred compensation plan liabilities.

3. Inventories

Inventories consisted of the following (in thousands):

	July 3, 2021		January 2, 2021
Raw materials	$	7,730	$	12,599
Work in progress	98		103
Finished goods	80,749		68,660
	$	88,577	$	81,362

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AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

4. Goodwill and Intangible Assets, Net

Goodwill and Indefinite-lived Intangible Assets

Goodwill was $64 million at July 3, 2021 and January 2, 2021. Indefinite-lived trade name/trademarks totaled $1.4 million at July 3, 2021 and January 2, 2021.

Definite-lived Intangible Assets

The gross carrying amount of our developed technologies was $19 million at July 3, 2021 and January 2, 2021. Accumulated amortization was $14 million and $13 million at July 3, 2021 and January 2, 2021, respectively. Amortization expense for both the three months ended July 3, 2021 and June 27, 2020, was $0.5 million. Amortization expense for both the six months ended July 3, 2021 and June 27, 2020, was $1.1 million.

The gross carrying amount of our patents, which were acquired in June 2020, was $2.0 million at July 3, 2021 and January 2, 2021, respectively. Accumulated amortization was $0.2 million and $0.1 million at July 3, 2021 and January 2, 2021, respectively. Amortization expense for the three and six months ended July 3, 2021 was $55 thousand and $0.1 million, respectively. Amortization expense for the three and six months ended June 27, 2020 was not significant.

Annual amortization for definite-lived intangible assets for subsequent years are as follows (in thousands):

2021 (excluding the six months ended July 3, 2021)	$	1,201
2022	2,403
2023	1,431
2024	222
2025	226
2026	222
Thereafter	522
Total future amortization for definite-lived intangible assets	$	6,227

5. Credit Agreement

Our credit facility as of July 3, 2021, has a net aggregate commitment amount of $600 million. The credit facility is for general corporate purposes, to meet our seasonal working capital requirements and to repurchase our stock. The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio (4.5x) and a minimum interest coverage ratio (3.0x). The credit agreement includes an accordion feature which allows us to increase the amount of the credit facility from $600 million to $800 million, subject to lenders' approval. Under the terms of the credit agreement, we pay a variable rate of interest and a commitment fee based on our leverage ratio. We were in compliance with all financial covenants as of July 3, 2021. The credit facility matures in February 2024.

The following table summarizes our borrowings under the credit facility ($ in thousands):

	July 3, 2021			January 2, 2021
Outstanding borrowings	$	382,200		$	244,200
Outstanding letters of credit	$	3,997		$	3,997
Additional borrowing capacity	$	213,803		$	201,803
Weighted-average interest rate	1.6		%	1.5		%

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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

6. Leases

We lease our retail, office and manufacturing space under operating leases which, in addition to the minimum lease payments, may require payment of a proportionate share of the real estate taxes and certain building operating expenses. While our local market development approach generally results in long-term participation in given markets, our retail store leases generally provide for an initial lease term of five to 10 years. Our office and manufacturing leases provide for an initial lease term of up to 15 years. In addition, our mall-based retail store leases may require payment of variable rent based on net sales in excess of certain thresholds. Certain leases may contain options to extend the term of the original lease. The exercise of lease renewal options is at our sole discretion. Lease options are included in the lease term only if exercise is reasonably certain at lease commencement. Our lease agreements do not contain any material residual value guarantees. We also lease vehicles and certain equipment under operating leases with an initial lease term of three to five years.

Our operating lease costs include facility, vehicle and equipment lease costs, but exclude variable lease costs. Operating lease costs are recognized on a straight-line basis over the lease term, after consideration of rent escalations and rent holidays. The lease term for purposes of the calculation begins on the earlier of the lease commencement date or the date we take possession of the property. During lease renewal negotiations that extend beyond the original lease term, we estimate straight-line rent expense based on current market conditions. Variable lease costs are recorded when it is probable the cost has been incurred and the amount can be reasonably estimated. Future payments for real estate taxes and certain building operating expenses for which we are obligated are not included in operating lease costs.

At July 3, 2021, our finance right-of-use assets and lease liabilities were not significant.

Lease costs were as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Operating lease costs(1)	$	24,352	$	22,357	$	47,991	$	45,303
Variable lease costs	$	840	$	263	$	1,355	$	275

___________________________

(1)Includes short-term lease costs which are not significant.

The maturities of operating lease liabilities as of July 3, 2021, were as follows(1) (in thousands):

2021 (excluding the six months ended July 3, 2021)	$	45,819
2022	85,828
2023	75,838
2024	64,013
2025	54,458
2026	43,974
Thereafter	92,392
Total operating lease payments(2)	462,322
Less: Interest	82,942
Present value of operating lease liabilities(3)	$	379,380

___________________________

(1)During 2020, we deferred certain cash lease payments to future periods. At July 3, 2021, we had deferred cash rent payments of $1.6 million which are excluded from this table and are included in Other current liabilities and Other non-current liabilities.

(2)Total operating lease payments exclude $78 million of legally binding minimum lease payments for leases signed but not yet commenced.

(3)Includes the current portion of $68 million for operating lease liabilities.

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AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

Other information related to operating leases was as follows:

	July 3, 2021		January 2, 2021
Weighted-average remaining lease term (years)	6.4		6.3
Weighted-average discount rate	6.5	%	6.9	%

	Six Months Ended
(in thousands)	July 3, 2021		June 27, 2020
Cash paid for amounts included in present value of operating lease liabilities	$	43,414	$	42,773
Right-of-use assets obtained in exchange for operating lease liabilities	$	50,667	$	17,670

7. Repurchases of Common Stock

Repurchases of our common stock were as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Amount repurchased under Board-approved share repurchase program	$	100,015	$	—	$	267,433	$	38,111
Amount repurchased in connection with the vesting of employee restricted stock grants	287		329		17,051		3,170
Total amount repurchased (based on trade dates)	$	100,302	$	329	$	284,484	$	41,281

As of July 3, 2021, the remaining authorization under the $600 million share repurchase program was $500 million.

8. Revenue Recognition

Deferred contract assets and deferred contract liabilities are included in our condensed consolidated balance sheets as follows (in thousands):

	July 3, 2021		January 2, 2021
Deferred Contract Assets included in:
Other current assets	$	25,293	$	26,593
Other non-current assets	45,998		37,976
	$	71,291	$	64,569

	July 3, 2021		January 2, 2021
Deferred Contract Liabilities included in:
Other current liabilities	$	33,228	$	35,288
Other non-current liabilities	59,813		49,689
	$	93,041	$	84,977

The deferred revenue and costs related to SleepIQ technology are recognized on a straight-line basis over the product's estimated life of 4.5 years because our inputs are generally expended evenly throughout the performance period. During the three months ended July 3, 2021 and June 27, 2020, we recognized revenue of $8 million and $10 million, respectively, that were included in the deferred contract liability balances at the beginning of the respective periods. During the six months ended July 3, 2021 and June 27, 2020, we recognized revenue of $15 million and $18 million, respectively, that were included in the deferred contract liability balances at the beginning of the respective periods.

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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

Revenue from goods and services transferred to customers at a point in time accounted for approximately 98% of our revenues for the three and six months ended July 3, 2021 and 97% of our revenues for the three and six months ended June 27, 2020.

Net sales were as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Retail stores	$	426,653	$	206,476	$	915,841	$	643,125
Online, phone, chat and other	57,663		78,462		136,731		114,379
Total Company	$	484,316	$	284,938	$	1,052,572	$	757,504

Obligation for Sales Returns

The activity in the sales returns liability account was as follows (in thousands):

	Six Months Ended
	July 3, 2021		June 27, 2020
Balance at beginning of year	$	24,765	$	19,809
Additions that reduce net sales	42,272		30,901
Deductions from reserves	(45,820)		(33,514)
Balance at end of period	$	21,217	$	17,196

9. Stock-based Compensation Expense

Total stock-based compensation expense was as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Stock awards	$	5,218	$	4,440	11,027		$	5,846
Stock options	750		593		1,358		1,238
Total stock-based compensation expense (1)	5,968		5,033		12,385		7,084
Income tax benefit	1,473		1,218		3,071		1,714
Total stock-based compensation expense, net of tax	$	4,495	$	3,815	$	9,314	$	5,370

___________________________

(1) Changes in stock-based compensation expense reflect the cumulative impact of the change in the expected achievements of certain performance targets.

10. Profit Sharing and 401(k) Plan

Under our profit sharing and 401(k) plan, eligible employees may defer up to 50% of their compensation on a pre-tax basis, subject to Internal Revenue Service limitations. Each pay period, we may make a discretionary contribution equal to a percentage of the employee’s contribution. During the three months ended July 3, 2021 and June 27, 2020, our contributions, net of forfeitures, were $1.8 million and $0.5 million, respectively. During the six months ended July 3, 2021 and June 27, 2020, our contributions, net of forfeitures, were $3.7 million and $2.1 million, respectively.

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AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

11. Net Income (Loss) per Common Share

The components of basic and diluted net income (loss) per share were as follows (in thousands, except per share amounts):

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Net income (loss)	$	22,250	$	(12,630)	$	88,884	$	26,510
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	24,371		27,923		24,874		27,890
Dilutive effect of stock-based awards	823		—		995		633
Diluted weighted-average shares outstanding	25,194		27,923		25,869		28,523
Net income (loss) per share – basic	$	0.91	$	(0.45)	$	3.57	$	0.95
Net income (loss) per share – diluted	$	0.88	$	(0.45)	$	3.44	$	0.93

For the three and six months ended July 3, 2021 and the six months ended June 27, 2020, anti-dilutive stock-based awards excluded from the diluted net income per share calculations were immaterial. For the three months ended June 27, 2020, 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.

12. Commitments and Contingencies

Warranty Liabilities

The activity in the accrued warranty liabilities account was as follows (in thousands):

	Six Months Ended
	July 3, 2021		June 27, 2020
Balance at beginning of year	$	12,152	$	11,345
Additions charged to costs and expenses for current-year sales	7,863		4,965
Deductions from reserves	(9,235)		(4,789)
Changes in liability for pre-existing warranties during the current year, including expirations	(237)		(89)
Balance at end of period	$	10,543	$	11,432

Legal Proceedings

We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with U.S. generally accepted accounting principles, we record a liability in our consolidated financial statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. If a material loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. With respect to currently pending legal proceedings, we have not established an estimated range of reasonably possible material losses either because we believe that we have valid defenses to claims asserted against us, the proceeding has not advanced to a stage of discovery that would enable us to establish an estimate, or the potential loss is not material. We currently do not expect the outcome of pending legal proceedings to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against us could adversely impact our consolidated results of operations, financial position or cash flows. We expense legal costs as incurred.

On March 27, 2018, Level Sleep, LLC (Level Sleep) filed a patent infringement lawsuit against Sleep Number in the Federal District Court for the Eastern District of Texas. In its Complaint, Level Sleep claims that Sleep Number infringed two patents owned by Level Sleep, U.S. Patent Nos. 6,807,698 and 7,036,172 (the Patents), by, among other things, making, using, offering for sale, or selling within the United States, and/or importing into the United States, beds with sleep surfaces having foam with multiple zones in the longitudinal direction. Level Sleep has asserted that five non-360® beds no longer sold and two current non-360 beds infringe the

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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

Patents. Level Sleep seeks damages in the form of a reasonable royalty. Sleep Number has asserted that the Patents are invalid and that our products do not infringe the Patents. On January 14, 2020, the Court granted summary judgment in favor of Sleep Number, finding that Sleep Number’s products do not infringe the Patents. Level Sleep filed an appeal of the Court’s summary judgment order to the Federal Circuit Court of Appeals which issued a decision on July 13, 2021, affirming the Court's summary judgment order and dismissal of Level Sleep's claims.

13. COVID-19 Pandemic

At the onset of the COVID-19 pandemic in mid-March 2020, government restrictions resulted in the temporary closure of most of our retail stores, with 47% of our stores closed on average during the second quarter of 2020. While prioritizing the safety of our team, serving our customers and ensuring business continuity, we swiftly took decisive actions to strengthen our liquidity, cash flows and financial position, and mitigate the future impact on our operations and financial performance.

The COVID-19 pandemic mainly impacted our second quarter of 2020 financial performance, as we generated strong financial performance during the full-year of 2020 and the first six months of 2021. However, the pandemic's future effect on consumer demand and our ongoing financial performance remains uncertain. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q and Part I: Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, for additional discussion on the COVID-19 pandemic and the impact on our business.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of our condensed consolidated financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in eight sections:

•Forward-Looking Statements and Risk Factors

•Business Overview

•COVID-19 Pandemic - Impact on our Business

•Results of Operations

•Liquidity and Capital Resources

•Non-GAAP Data Reconciliations

•Off-Balance-Sheet Arrangements and Contractual Obligations

•Critical Accounting Policies

Forward-Looking Statements and Risk Factors

The discussion in this Quarterly Report contains certain forward-looking statements that relate to future plans, events, financial results or performance. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “predict,” “intend,” “potential,” “continue” or the negative of these or similar terms. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, among others:

•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;

•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;

•Availability of attractive and cost-effective consumer credit options;

•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, outbreaks of pandemics or contagious diseases, strikes and the potential for shortages in supply;

•Risks of disruption in the operation of any of our main manufacturing facilities or assembly 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 security;

•The costs and potential disruptions to our business related to 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 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 under the caption “Risk Factors” below in Part II: Item 1A of this Quarterly Report on Form 10-Q and under the same caption in our Annual Report on Form 10-K.

We have no obligation to publicly update or revise any of the forward-looking statements contained in this Quarterly Report on Form 10-Q.

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Business Overview

Individuality is core to 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. Our award-winning 360 smart beds provide each sleeper with effortlessly adjustable, individualized comfort for proven-quality sleep. With a purpose of improving the health and wellbeing of society through higher-quality sleep, we have already improved over 13 million lives.

Sleep science and data are the foundation of our innovations. Our 360 smart beds benefit from our proprietary SleepIQ technology, which leverages and learns from nearly 11 billion hours' worth of highly-accurate sleep data. This enables our 360 smart beds to provide effortless comfort and sleep health insights for each sleeper, including their daily SleepIQ score.

Sleep Number is a leader in sleep innovation. By pairing our data and innovations with meaningful collaborations including world-leading partners in sleep, we are leveraging the potential of our research and technology to advance sleep health and sleep science, develop new products, services and synergistic interactions. Our vertically integrated business model and role as the exclusive designer, manufacturer, marketer, retailer and servicer of Sleep Number beds allows us to offer consumers high-quality, individualized sleep solutions and services.

We generate revenue by marketing our innovations directly to new and existing customers, and selling products through our Stores, Online, Phone and Chat (Total Retail).

We are committed to delivering superior shareholder value by: (1) increasing consumer demand; (2) leveraging our business model; and (3) deploying capital efficiently.

COVID-19 Pandemic - Impact on our Business

At the onset of the COVID-19 pandemic in mid-March 2020, government restrictions resulted in the temporary closure of most of our retail stores, with 47% of our stores closed on average during the second quarter of 2020. While prioritizing the safety of our team, serving our customers and ensuring business continuity, we swiftly took decisive actions to strengthen our liquidity, cash flows and financial position, and mitigate the future impact on our operations and financial performance.

The COVID-19 pandemic mainly impacted our second quarter of 2020 financial performance, as we generated strong financial performance during the full-year of 2020 and the first six months of 2021. However, the pandemic's future effects on consumer demand and our ongoing financial performance remains uncertain. See Part I: Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q and Part I: Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, for additional discussion on the COVID-19 pandemic and the impact on our business.

Results of Operations

Quarterly and Year-to-Date Results

Quarterly and year-to-date operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in sales, timing, amount and effectiveness of advertising expenditures, changes in sales return rates or warranty experience, timing of investments in growth initiatives and infrastructure, timing of store openings/closings and related expenses, changes in net sales resulting from changes in our store base, timing of new product introductions and related expenses, timing of promotional offerings, competitive factors, changes in commodity costs, disruptions in supplies or third-party service providers, seasonality of retail and bedding industry sales, consumer confidence and general economic conditions. In addition, based on the duration and severity of the current global situation involving the COVID-19 pandemic, the extent to which our business and our condensed consolidated financial results are impacted will depend on future developments, which are highly uncertain and cannot be predicted. Therefore, our historical results of operations may not be indicative of the results that may be achieved for any future period.

Highlights

Financial highlights for the three months ended July 3, 2021 were as follows:

•Net sales for the three months ended July 3, 2021 increased 70% to $484 million, compared with $285 million for the COVID-19 affected period in 2020. Net sales for the current quarter increased 36% compared with $356 million for the three months ended June 29, 2019. Supply constraints late in the second quarter limited 2021 delivered net sales for the three months ended July 3, 2021.

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•The 70% net sales increase consisted of a 65% comparable sales increase in Total Retail and sales from 23 net new stores opened in the past 12 months that added 5 percentage points (ppt.) of growth. For additional details, see the components of total net sales change on page 15.

•Sales per store (sales for stores open at least one year, Total Retail, including online, phone and chat) on a trailing twelve-months basis for the period ended July 3, 2021 totaled $3.5 million, 25% higher than the same period last year.

•Operating income for the three months ended July 3, 2021 was $30 million, an increase of $42 million, compared with the $12 million operating loss in the prior-year period. The $42 million increase in operating income was driven by the 70% increase in net sales, a 3.3 ppt. improvement in the gross profit rate and a 7.2 ppt. reduction in our operating expenses rate. Operating income for the current quarter increased 310% compared with $7 million for the same period of 2019.

•The 3.3 ppt. gross profit rate improvement primarily resulted from the leveraging impact of the 70% net sales increase and a more favorable sales mix of higher-margin products, partially offset by $13 million of incremental costs from labor and material inflation, and expediting costs. See the Gross profit discussion on page 17 for additional details.

•The 7.2 ppt. reduction in our operating expenses rate was mainly due to the leveraging impact of the 70% net sales increase and digitally-led operating efficiencies. During the three months ended July 3, 2021, we continued to prioritize investments in near- and long-term growth drivers, including $16 million of R&D expenses, 93% more than the same period one year ago.

•Net income for the three months ended July 3, 2021 increased to $22 million, compared with a net loss of $13 million for the same period one year ago. Net income per diluted share was $0.88, compared with a net loss per diluted share of $0.45 last year.

•We achieved a return on invested capital (ROIC) of 33% on a trailing twelve-month basis for the period ended July 3, 2021, compared with 17% for the comparable period one year ago.

•Cash provided by operating activities for the six months ended July 3, 2021 increased by $74 million, or 86%, to $161 million, compared with $87 million for the same period one year ago.

•At July 3, 2021, we had $382 million of borrowings under our revolving credit facility. Net liquidity available under our revolving credit facility was $214 million at July 3, 2021.

•On April 21, 2021, we amended our revolving credit facility to expand the aggregate availability from $450 million to $600 million. We also replenished our outstanding share repurchase authorization to $600 million effective at the beginning of the fiscal second quarter, April 4, 2021. We remain committed to our capital deployment priorities focused on performance drivers.

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The following table sets forth our results of operations expressed as dollars and percentages of net sales. Figures are in millions, except percentages and per share amounts. Amounts may not add due to rounding differences.

	Three Months Ended								Six Months Ended
	July 3, 2021				June 27, 2020				July 3, 2021				June 27, 2020
Net sales	$	484.3	100.0	%	$	284.9	100.0	%	$	1,052.6	100.0	%	$	757.5	100.0	%
Cost of sales	191.5		39.5	%	121.9		42.8	%	403.8		38.4	%	292.4		38.6	%
Gross profit	292.9		60.5	%	163.0		57.2	%	648.8		61.6	%	465.1		61.4	%
Operating expenses:
Sales and marketing	206.0		42.5	%	130.2		45.7	%	429.6		40.8	%	337.9		44.6	%
General and administrative	41.2		8.5	%	36.7		12.9	%	83.8		8.0	%	67.8		8.9	%
Research and development	15.9		3.3	%	8.3		2.9	%	29.2		2.8	%	18.8		2.5	%
Total operating expenses	263.1		54.3	%	175.1		61.5	%	542.6		51.6	%	424.5		56.0	%
Operating income (loss)	29.7		6.1	%	(12.1)		(4.3	%)	106.1		10.1	%	40.7		5.4	%
Interest expense, net	1.6		0.3	%	3.9		1.4	%	2.6		0.2	%	6.3		0.8	%
Income (loss) before income taxes	28.1		5.8	%	(16.1)		(5.6	%)	103.6		9.8	%	34.4		4.5	%
Income tax expense (benefit)	5.9		1.2	%	(3.4)		(1.2	%)	14.7		1.4	%	7.9		1.0	%
Net income (loss)	$	22.3	4.6	%	$	(12.6)	(4.4	%)	$	88.9	8.4	%	$	26.5	3.5	%
Net income (loss) per share:
Basic	$	0.91			$	(0.45)			$	3.57			$	0.95
Diluted	$	0.88			$	(0.45)			$	3.44			$	0.93
Weighted-average number of common shares:
Basic	24.4				27.9				24.9				27.9
Diluted	25.2				27.9				25.9				28.5

The percentage of our total net sales, by dollar volume, was as follows:

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Retail stores	88.1	%	72.2	%	87.0	%	84.6	%
Online, phone, chat and other	11.9	%	27.8	%	13.0	%	15.4	%
Total Company	100.0	%	100.0	%	100.0	%	100.0	%

The components of total net sales change, including comparable net sales changes, were as follows:

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Sales change rates:
Retail comparable-store sales (1)	102	%	(40	%)	41	%	(14	%)
Online, phone and chat	(28	%)	209	%	17	%	107	%
Total Retail comparable sales change (1)	65	%	(21	%)	37	%	(5	%)
Net opened/closed stores and other	5	%	1	%	2	%	2	%
Total Company	70	%	(20	%)	39	%	(3	%)

___________________________

(1)Stores are included in the comparable-store calculations in the 13th full month of operations. Stores that have been remodeled or repositioned within the same shopping center remain in the comparable-store base.

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Other sales metrics were as follows:

	Three Months Ended						Six Months Ended
	July 3, 2021			June 27, 2020			July 3, 2021		June 27, 2020
Average sales per store (1)(4) ($ in thousands)	$	3,542		$	2,830
Average sales per square foot (1)(4)	$	1,203		$	988
Stores > $2 million in net sales (2)(4)	82		%	63		%
Stores > $3 million in net sales (2)(4)	47		%	25		%
Average revenue per mattress unit (3)	$	5,094		$	4,767		$	5,059	$	4,839

___________________________

(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.

The number of retail stores operating was as follows:

	Three Months Ended		Six Months Ended
	July 3, 2021	June 27, 2020	July 3, 2021	June 27, 2020
Beginning of period	607	611	602	611
Opened	26	6	37	14
Closed	(12)	(19)	(18)	(27)
End of period	621	598	621	598

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Comparison of Three Months Ended July 3, 2021 with Three Months Ended June 27, 2020

Net sales

Net sales for the three months ended July 3, 2021 increased by $199 million, or 70%, to $484 million, compared with $285 million for the same period one year ago, which was impacted by the COVID-19 pandemic, ensuing government restrictions and temporary closure of 47% of our retail stores on average. Net sales for the current quarter increased 36% compared with $356 million for the three months ended June 29, 2019. Supply constraints late in the second quarter limited 2021 delivered net sales for the three months ended July 3, 2021.

The 70% net sales increase consisted primarily of a 65% comparable sales increase in Total Retail and sales from 23 net new stores opened in the past 12 months that added 5 percentage points (ppt.) of growth. For additional details, see the components of total net sales change on page 15.

The $199 million net sales increase compared with the same period one year ago was comprised of the following: (i) a $178 million increase in our Total Retail comparable net sales; and (ii) a $21 million increase from net store openings. Total Retail mattress unit sales increased 59% compared with the prior year. Total Retail average revenue per mattress unit increased by 7% to $5,094, compared with $4,767 in the prior-year period.

Gross profit

Gross profit of $293 million increased by $130 million, or 80%, compared with $163 million for the same period one year ago. The gross profit rate improved to 60.5% of net sales for the three months ended July 3, 2021, compared with 57.2% for the prior-year comparable period.

The current-year gross profit rate improvement of 3.3 ppt. was mainly due to: (i) leverage from the 70% net sales increase, combined with a more favorable sales mix of higher-margin products (3.8 ppt.), partially offset by $13 million of incremental costs from labor and material inflation, and expediting costs. The prior-year's gross profit rate was impacted by COVID-19 related inefficiencies, including the lower sales volumes. Our prior-year's sales mix was negatively impacted by temporary store closures due to the pandemic; partially offset by (ii) inflationary cost pressures and higher supply chain costs associated with current-year temporary supply constraints (0.7 ppt.). In addition, our gross profit rate will fluctuate from quarter to quarter due to a variety of other factors, including return and exchange costs, and changes in performance-based incentive compensation.

Sales and marketing expenses

Sales and marketing expenses for the three months ended July 3, 2021 were $206 million, or 42.5% of net sales, compared with $130 million, or 45.7% of net sales, for the same period one year ago. The current-year sales and marketing expenses rate decrease of 3.2 ppt. was primarily due to: (i) the leveraging impact of the 70% net sales increase; and (ii) efficiency gains through our digital ecosystem and operating initiatives. Efficiency gains and operating initiatives included improved store operating productivity.

General and administrative expenses

General and administrative (G&A) expenses totaled $41 million, or 8.5% of net sales, for the three months ended July 3, 2021, compared with $37 million, or 12.9% of net sales, in the prior-year period. The $4.5 million increase in G&A expenses consisted primarily of: (i) a $2.2 million increase in employee compensation primarily resulting from the growth of our business (prior year included the temporary and permanent elimination of certain roles due to changing business needs based on the COVID-19 pandemic); (ii) a $1.8 million increase in professional and consulting expenses; and (iii) a $0.5 million net increase in other miscellaneous expenses. The G&A expenses rate decreased by 4.4 ppt. in the current-year period, compared with the same period one year ago due to leveraging impact of the 70% net sales increase, partially offset by the items discussed above.

Research and development expenses

Research and development (R&D) expenses increased by 93% to $16 million for the three months ended July 3, 2021, compared with $8 million for the same period last year as we continued to prioritize our long-term innovation initiatives.

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Interest expense, net

Interest expense, net decreased to $1.6 million for the three months ended July 3, 2021, compared with $3.9 million for the same period one year ago. The $2.3 million decrease was mainly driven by a reduction in the weighted-average interest rate on borrowings and a lower level of outstanding borrowings during the three months ended July 3, 2021, compared with the same period one year ago. In March 2020, we fully drew down our credit line and secured a $75 million term loan to increase liquidity and preserve financial flexibility during the COVID-19 disruption.

Income tax expense

Income tax expense totaled $5.9 million for the three months ended July 3, 2021, compared with a $3.4 million tax benefit last year. The effective income tax rate for the three months ended July 3, 2021 decreased to 20.9%, compared with 21.4% for the comparable period last year, reflecting greater stock-based compensation excess tax benefits in the current-year three-month period.

Comparison of Six Months Ended July 3, 2021 with Six Months Ended June 27, 2020

Net sales

Net sales for the six months ended July 3, 2021 increased by $295 million, or 39%, to $1.1 billion, compared with $758 million for the same period one year ago, which were impacted by the COVID-19 pandemic, ensuing government restrictions and temporary closure of 47% of our retail stores on average. Net sales for the current year-to-date period increased 35% compared with $782 million for the same period of 2019. Supply constraints late in the second quarter limited 2021 delivered net sales for the six months ended July 3, 2021.

The 39% net sales increase consisted of a 37% comparable sales increase in Total Retail in addition to 2 percentage points (ppt.) of sales growth from net new stores opened in the past 12 months. For additional details, see the components of total net sales change on page 15.

The $295 million net sales increase compared with the same period one year ago was comprised of the following: (i) a $249 million increase in our Total Retail comparable net sales; (ii) a $26 million increase resulting from net store openings; and (iii) a $20 million increase in phone, online, chat and other sales. Total Retail mattress unit sales increased 33%, compared with the prior year. Average revenue per mattress unit in Total Retail increased by 5% to $5,059, compared with $4,839 in the prior-year period.

Gross profit

Gross profit of $649 million increased by $184 million, or 39%, compared with $465 million for the same period one year ago. The gross profit rate improved to 61.6% of net sales for the six months ended July 3, 2021, compared with 61.4% for the prior-year comparable period. The current-year gross profit rate improvement of 0.2 ppt. was mainly due to: (i) leverage from the 39% net sales increase combined with a more favorable sales mix of higher-margin products (1.1 ppt.), partially offset by $13 million of incremental costs from labor and material inflation, and expediting costs in the second quarter. Our prior-year's sales mix was negatively impacted by temporary store closures due to the pandemic; partially offset by (ii) inflationary cost pressures and higher supply chain costs associated with current-year temporary supply constraints (0.7 ppt.). In addition, our gross profit rate will fluctuate from quarter to quarter due to a variety of other factors, including return and exchange costs, and changes in performance-based incentive compensation.

Sales and marketing expenses

Sales and marketing expenses for the six months ended July 3, 2021 were $430 million, or 40.8% of net sales, compared with $338 million, or 44.6% of net sales, for the same period one year ago. The current-year sales and marketing expenses rate decrease of 3.8 ppt. was primarily due to: (i) the leveraging impact of the 39% net sales increase; and (ii) efficiency gains through our digital ecosystem and operating initiatives. Efficiency gains and operating initiatives included improved store operating productivity.

General and administrative expenses

General and administrative (G&A) expenses totaled $84 million, or 8.0% of net sales, for the six months ended July 3, 2021, compared with $68 million, or 8.9% of net sales, in the prior-year period. The $16 million increase in G&A expenses consisted of: (i) a $9 million year-over-year increase in company-wide performance-based incentive compensation; (ii) a $7 million increase in employee compensation resulting from the growth of our business (prior year included the temporary and permanent elimination of certain roles due to changing business needs based on the COVID-19 pandemic); and (iii) $2 million of higher professional and consulting fees; partially offset by (iv) a $2 million reduction in travel expenses and other miscellaneous expenses. The G&A expenses

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rate decreased by 0.9 ppt. in the current-year period, compared with the same period one year ago due to the leveraging impact of the 39% net sales increase, partially offset by the items discussed above.

Research and development expenses

Research and development (R&D) expenses increased by 56% to $29 million for the six months ended July 3, 2021, compared with $19 million for the same period one year ago. The R&D expense rate for the six months ended July 3, 2021 increased to 2.8% of net sales, compared with 2.5% of net sales for the prior year. The spending level increase supports our ongoing consumer innovation strategy.

Interest expense, net

Interest expense, net decreased to $2.6 million for the six months ended July 3, 2021, compared with $6.3 million for the same period one year ago. The $3.7 million decrease was mainly driven by a reduction in the weighted-average interest rate on borrowings and a lower level of outstanding borrowings during the six months ended July 3, 2021, compared with the same period one year ago. In March 2020, we fully drew down our credit line and secured a $75 million term loan to increase liquidity and preserve financial flexibility during the COVID-19 disruption.

Income tax expense

Income tax expense totaled $15 million for the six months ended July 3, 2021, compared with $8 million last year. The effective income tax rate for the six months ended July 3, 2021 decreased to 14.2%, compared with 22.9% for the comparable period last year, reflecting higher stock-based compensation excess tax benefits in the current-year six-month period.

Liquidity and Capital Resources

Managing our liquidity and capital resources is an important part of our commitment to deliver superior shareholder value over time. Our primary sources of liquidity are cash flows provided by operating activities and cash available under our $600 million revolving credit facility (increased from $450 million to $600 million as of April 21, 2021). The cash generated from ongoing operations and cash available under our revolving credit facility are expected to be adequate to maintain operations, and fund anticipated expansion and strategic initiatives for the foreseeable future.

Changes in cash and cash equivalents during the six months ended July 3, 2021 primarily consisted of $161 million of cash provided by operating activities and a $146 million net increase in short-term borrowings, offset by $32 million of cash used to purchase property and equipment, and $281 million of cash used to repurchase our common stock (based on settlement, $264 million under our Board-approved share repurchase program and $17 million in connection with the vesting of employee restricted stock grants).

The following table summarizes our cash flows ($ in millions). Amounts may not add due to rounding differences:

	Six Months Ended
	July 3, 2021		June 27, 2020
Total cash provided by (used in):
Operating activities	$	161.4	$	87.0
Investing activities	(32.0)		(22.6)
Financing activities	(131.5)		(64.3)
Net (decrease) increase in cash and cash equivalents	$	(2.1)	$	0.1

Cash provided by operating activities for the six months ended July 3, 2021 was $161 million, compared with $87 million for the six months ended June 27, 2020. Significant components of the year-over-year change in cash provided by operating activities included: (i) a $62 million increase in net income for the six months ended July 3, 2021, compared with the same period one year ago; (ii) a $38 million change in accounts payable due to higher business activity in the current-year period and timing of vendor payments; (iii) a $30 million fluctuation in customer prepayments due to strong customer demand and temporary supply constraints which extended customer delivery timelines during the current-year period; (iv) a $20 million fluctuation in prepaid expenses and other assets due to both periods being impacted by the timing of rent payments and prior-year's reduction in business activities due to the pandemic; and (v) a $15 million fluctuation in the amount of compensation and benefits accrued and timing of the related payments resulting from year-over-year changes in Company-wide performance-based incentive compensation.

19

Net cash used in investing activities to purchase property and equipment was $32 million for the six months ended July 3, 2021, compared with $22 million for the same period one year ago. The year-over-year increase was due to higher property and equipment purchases for new and remodeled stores. Prior-year property and equipment purchases reflect actions taken to temporarily reduce capital spending based on the economic uncertainties associated with the pandemic.

Net cash used in financing activities was $131 million for the six months ended July 3, 2021, compared with $64 million for the same period last year. During the six months ended July 3, 2021, we repurchased $281 million of our stock (based on settlement dates, $264 million under our Board-approved share repurchase program and $17 million in connection with the vesting of employee restricted stock awards), compared with $42 million during the same period one year ago. Based on the uncertainty surrounding the impact of COVID-19, in March 2020 we temporarily suspended share repurchases. Short-term borrowings increased by $146 million during the current-year period due to a $138 million increase in borrowings under our revolving credit facility to $382 million and a $8 million increase in book overdrafts which are included in the net change in short-term borrowings. Short-term borrowings decreased by $26 million during the prior-year period due to a $4 million decrease in borrowings under our credit facility to $227 million and a decrease in book overdrafts which are included in the net change in short-term borrowings.

Under our Board-approved share repurchase program, we repurchased 2.1 million shares at a cost of $267 million (based on trade dates, an average of $125.86 per share) during the six months ended July 3, 2021. During the six months ended June 27, 2020, we repurchased 0.8 million shares at a cost of $38 million (based on trade dates, an average of $49.42 per share). There is no expiration date governing the period over which we can repurchase shares. Effective as of April 4, 2021, our Board approved an increase in our total remaining share repurchase authorization to $600 million.

As of July 3, 2021, we had $382 million of borrowings under our revolving credit facility. We also had $4 million in outstanding letters of credit. Net liquidity available under our credit facility was $214 million at July 3, 2021. The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio (4.5x) and a minimum interest coverage ratio (3.0x). Our leverage ratio as defined in our credit agreement was 2.2x as of July 3, 2021. Under the terms of the credit agreement, we pay a variable rate of interest and a commitment fee based on our leverage ratio. The credit agreement is for general corporate purposes, to meet our seasonal working capital requirements and to repurchase our stock. As of July 3, 2021, the weighted-average interest rate on borrowings under the credit facility was 1.6% and we were in compliance with all financial covenants.

On April 21, 2021, we amended our revolving credit facility to increase our net aggregate availability from $450 million to $600 million. We maintain the accordion feature which allows us to increase the amount of the credit facility from $600 million to $800 million, subject to lenders’ approval. The amended credit facility matures in February 2024. There were no other significant changes to the credit facility’s terms and conditions.

We have an agreement with Synchrony Bank to offer qualified customers revolving credit arrangements to finance purchases from us (Synchrony Agreement). The Synchrony Agreement contains financial covenants consistent with our credit facility, including a maximum leverage ratio and a minimum interest coverage ratio consistent with our credit agreement. As of July 3, 2021, we were in compliance with all financial covenants.

Under the terms of the Synchrony Agreement, Synchrony Bank sets the minimum acceptable credit ratings, the interest rates, fees and all other terms and conditions of the customer accounts, including collection policies and procedures, and is the owner of the accounts. As the accounts are owned by Synchrony Bank, at no time are the accounts purchased or acquired from us. We are not liable to Synchrony Bank for our customers’ credit defaults.

20

Non-GAAP Data Reconciliations

Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)

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.

Our Adjusted EBITDA calculations are as follows (in thousands):

	Three Months Ended				Fifty-Three Weeks Ended		Fifty-Two Weeks Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Net income (loss)	$	22,250	$	(12,630)	$	201,563	$	78,657
Income tax expense (benefit)	5,864		(3,435)		43,564		22,141
Interest expense	1,607		4,022		5,227		12,131
Depreciation and amortization	15,006		15,253		59,802		60,951
Stock-based compensation	5,968		5,033		27,114		15,853
Asset impairments	—		246		142		294
Adjusted EBITDA	$	50,695	$	8,489	$	337,412	$	190,027

Free Cash Flow

Our “free cash flow” data is considered a non-GAAP financial measure and is not in accordance with, or preferable to, “net cash provided by operating activities,” or GAAP financial data. However, we are providing this information as we believe it facilitates analysis for investors and financial analysts.

The following table summarizes our free cash flow calculations (in thousands):

	Six Months Ended				Fifty-Three Weeks Ended		Fifty-Two Weeks Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Net cash provided by operating activities	$	161,420	$	87,001	$	354,080	$	205,814
Subtract: Purchases of property and equipment	32,012		21,695		47,417		47,038
Free cash flow	$	129,408	$	65,306	$	306,663	$	158,776

21

Non-GAAP Data Reconciliations (continued)

Return on Invested Capital (ROIC)

(dollars 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 Weeks Ended			Fifty-Two Weeks Ended
	July 3, 2021			June 27, 2020
Net operating profit after taxes (NOPAT)
Operating income	$	250,352		$	112,831
Add: Rent expense (1)	95,226			90,349
Add: Interest income	2			97
Less: Depreciation on capitalized operating leases (2)	(24,577)			(23,331)
Less: Income taxes (3)	(76,939)			(42,735)
NOPAT	$	244,064		$	137,211
Average invested capital
Total deficit	$	(403,658)		$	(163,018)
Add: Long-term debt (4)	382,794			227,944
Add: Capitalized operating lease obligations (5)	761,808			722,792
Total invested capital at end of period	$	740,944		$	787,718
Average invested capital (6)	$	733,151		$	797,862
Return on invested capital (ROIC) (7)	33.3		%	17.2		%

___________________________

(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 23.7% 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.

22

Off-Balance-Sheet Arrangements and Contractual Obligations

As of July 3, 2021, we were not involved in any unconsolidated special purpose entity transactions. Other than our $4 million in outstanding letters of credit, we do not have any off-balance-sheet financing.

There have been no material changes in our contractual obligations, other than the amendments to our credit agreement, since the end of fiscal 2020. See Note 5, Credit Agreement, of the Notes to our Condensed Consolidated Financial Statements for information regarding our credit agreement. See our Annual Report on Form 10-K for the fiscal year ended January 2, 2021 for additional information regarding our other contractual obligations.

Critical Accounting Policies

We discuss our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021. There were no significant changes in our critical accounting policies since the end of fiscal 2020.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to changes in market-based short-term interest rates that will impact our net interest expense. If overall interest rates were one percentage point higher than current rates, our annual net income would decrease by $2.9 million based on the $382 million of borrowings under our credit facility at July 3, 2021. We do not manage the interest-rate volatility risk of borrowings under our credit facility through the use of derivative instruments.

ITEM 4. CONTROLS AND PROCEDURES

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in Internal Control

There were no changes in our internal control over financial reporting during the fiscal quarter ended July 3, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

23

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Our legal proceedings are discussed in Note 12, Commitments and Contingencies, Legal Proceedings, in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

ITEM 1A. RISK FACTORS

Our business, financial condition and operating results are subject to a number of risks and uncertainties, including both those that are specific to our business and others that affect all businesses operating in a global environment. Investors should carefully consider the information in this report under the heading, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and also the information under the heading, Risk Factors, in our most recent Annual Report on Form 10-K. The risk factors discussed in the Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q do not identify all risks that we face because our business operations could also be affected by additional risk factors that are not presently known to us or that we currently consider to be immaterial to our operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) – (b) Not applicable.

(c) Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased(1)(2)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(3)
April 4, 2021 through May 1, 2021	182,833	$	118.52	181,923	$	578,438,000
May 2, 2021 through May 29, 2021	329,735	$	108.23	329,468	$	542,779,000
May 30, 2021 through July 3, 2021	386,128	$	111.20	384,840	$	499,985,000
Total	898,696	$	111.59	896,231	$	499,985,000

___________________________

(1)Under our Board-approved $600 million share repurchase program (effective April 4, 2021), we repurchased 0.9 million shares of our common stock at a cost of $100 million (based on trade dates) during the three months ended July 3, 2021.

(2)In connection with the vesting of employee restricted stock grants, we repurchased 2,465 shares of our common stock at a cost of $0.3 million during the three months ended July 3, 2021.

(3)There is no expiration date governing the period over which we can repurchase shares under our Board-approved share repurchase program. Any repurchased shares are constructively retired and returned to an unissued status.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

24

ITEM 6. EXHIBITS

Exhibit Number	Description
31.1*	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
32.2*	Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
101.INS*	Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH*	Inline XBRL Taxonomy Extension Schema Document
101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

* Filed Herewith

25

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		SLEEP NUMBER CORPORATION
		(Registrant)
Dated:	July 30, 2021	By:	/s/ Shelly R. Ibach
			Shelly R. Ibach
			Chief Executive Officer
			(principal executive officer)
		By:	/s/ Robert J. Poirier
			Robert J. Poirier
			Chief Accounting Officer
			(principal accounting officer)

26

EX-31.1

Exhibit 31.1

Certification by Chief Executive Officer

I, Shelly R. Ibach, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Sleep Number Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:    July 30, 2021
	/s/ Shelly R. Ibach
	Shelly R. Ibach
	Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification by Chief Financial Officer

I, David R. Callen, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Sleep Number Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:    July 30, 2021
	/s/ David R. Callen
	David R. Callen
	Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sleep Number Corporation (the “Company”) on Form 10-Q for the period ended July 3, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Shelly R. Ibach, Chief Executive Officer of the Company, solely for the purposes of 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, does hereby certify, to her knowledge, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:    July 30, 2021
	/s/ Shelly R. Ibach
	Shelly R. Ibach
	Chief Executive Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sleep Number Corporation (the “Company”) on Form 10-Q for the period ended July 3, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, David R. Callen, Executive Vice President and Chief Financial Officer of the Company, solely for the purposes of 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, does hereby certify, to his knowledge, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:    July 30, 2021
	/s/ David R. Callen
	David R. Callen
	Executive Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

XML

Cover Page shares in Thousands	6 Months Ended
	Jul. 03, 2021 shares
Cover [Abstract]
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Jul. 03, 2021
Document Transition Report	false
Entity File Number	000-25121
Entity Registrant Name	SLEEP NUMBER CORPORATION
Entity Incorporation, State or Country Code	MN
Entity Tax Identification Number	41-1597886
Entity Address, Address Line One	1001 Third Avenue South
Entity Address, City or Town	Minneapolis,
Entity Address, State or Province	MN
Entity Address, Postal Zip Code	55404
City Area Code	763
Local Phone Number	551-7000
Title of 12(b) Security	Common Stock, par value $0.01 per share
Trading Symbol	SNBR
Security Exchange Name	NASDAQ
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Large Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding	23,622
Amendment Flag	false
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2021
Current Fiscal Year End Date	--01-01
Entity Central Index Key	0000827187

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Jul. 03, 2021	Jan. 02, 2021
Current assets:
Cash and cash equivalents	$ 2,173	$ 4,243
Accounts receivable, net of allowances of $1,098 and $1,046, respectively	23,205	31,871
Inventories	88,577	81,362
Income taxes receivable	1,578	0
Prepaid expenses	28,900	20,839
Other current assets	42,564	43,489
Total current assets	186,997	181,804
Non-current assets:
Property and equipment, net	182,398	175,223
Operating lease right-of-use assets	344,423	314,226
Goodwill and intangible assets, net	71,669	72,871
Other non-current assets	69,009	56,012
Total assets	854,496	800,136
Current liabilities:
Borrowings under credit facility	382,200	244,200
Accounts payable	129,922	91,904
Customer prepayments	119,435	72,017
Accrued sales returns	21,217	24,765
Compensation and benefits	54,219	76,786
Taxes and withholding	13,779	23,339
Operating lease liabilities	67,648	62,077
Other current liabilities	57,708	60,856
Total current liabilities	846,128	655,944
Non-current liabilities:
Deferred income taxes	663	242
Operating lease liabilities	311,672	283,084
Other non-current liabilities	99,691	84,844
Total liabilities	1,258,154	1,024,114
Shareholders’ deficit:
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding	0	0
Common stock, $0.01 par value; 142,500 shares authorized, 23,622 and 25,390 shares issued and outstanding, respectively	236	254
Additional paid-in capital	0	0
Accumulated deficit	(403,894)	(224,232)
Total shareholders’ deficit	(403,658)	(223,978)
Total liabilities and shareholders’ deficit	$ 854,496	$ 800,136

XML

Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Jul. 03, 2021	Jan. 02, 2021
Current assets:
Allowances	$ 1,098	$ 1,046
Shareholders’ deficit:
Undesignated preferred stock, shares authorized (in shares)	5,000	5,000
Undesignated preferred stock, shares issued (in shares)	0	0
Undesignated preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	142,500,000	142,500,000
Common stock, shares issued (in shares)	23,622,000	25,390,000
Common stock, shares outstanding (in shares)	23,622,000	25,390,000

XML

Condensed Consolidated Statements of Operations - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 03, 2021	Jun. 27, 2020	Jul. 03, 2021	Jun. 27, 2020
Income Statement [Abstract]
Net sales	$ 484,316	$ 284,938	$ 1,052,572	$ 757,504
Cost of sales	191,465	121,928	403,803	292,363
Gross profit	292,851	163,010	648,769	465,141
Operating expenses:
Sales and marketing	205,994	130,165	429,611	337,909
General and administrative	41,220	36,716	83,812	67,788
Research and development	15,916	8,254	29,202	18,755
Total operating expenses	263,130	175,135	542,625	424,452
Operating income (loss)	29,721	(12,125)	106,144	40,689
Interest expense, net	1,607	3,940	2,584	6,284
Income (loss) before income taxes	28,114	(16,065)	103,560	34,405
Income tax expense (benefit)	5,864	(3,435)	14,676	7,895
Net income (loss)	$ 22,250	$ (12,630)	$ 88,884	$ 26,510
Basic net income (loss) per share:
Net income (loss) per share – basic (in dollars per share)	$ 0.91	$ (0.45)	$ 3.57	$ 0.95
Weighted-average shares – basic (in shares)	24,371,000	27,923,000	24,874,000	27,890,000
Diluted net income (loss) per share:
Net income (loss) per share – diluted (in dollars per share)	$ 0.88	$ (0.45)	$ 3.44	$ 0.93
Weighted-average shares – diluted (in shares)	25,194,000	27,923,000	25,869,000	28,523,000

XML

Condensed Consolidated Statements of Shareholders' (Deficit) - USD ($) shares in Thousands, $ in Thousands	Total	Common Stock	Additional Paid-in Capital	Accumulated Deficit
Beginning balance (in shares) at Dec. 28, 2019		27,961
Beginning balance at Dec. 28, 2019	$ (159,431)	$ 280	$ 0	$ (159,711)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income (loss)	39,140			39,140
Exercise of common stock options (in shares)		167
Exercise of common stock options	3,283	$ 1	3,282
Stock-based compensation (in shares)		396
Stock-based compensation	2,051	$ 4	2,047
Repurchases of common stock (in shares)		(888)
Repurchases of common stock	(40,952)	$ (9)	(5,329)	(35,614)
Ending balance (in shares) at Mar. 28, 2020		27,636
Ending balance at Mar. 28, 2020	(155,909)	$ 276	0	(156,185)
Beginning balance (in shares) at Dec. 28, 2019		27,961
Beginning balance at Dec. 28, 2019	(159,431)	$ 280	0	(159,711)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income (loss)	26,510
Ending balance (in shares) at Jun. 27, 2020		27,725
Ending balance at Jun. 27, 2020	(163,018)	$ 277	5,519	(168,814)
Beginning balance (in shares) at Mar. 28, 2020		27,636
Beginning balance at Mar. 28, 2020	(155,909)	$ 276	0	(156,185)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income (loss)	(12,630)			(12,630)
Exercise of common stock options (in shares)		33
Exercise of common stock options	817		817
Stock-based compensation (in shares)		71
Stock-based compensation	5,033	$ 1	5,032
Repurchases of common stock (in shares)		(15)
Repurchases of common stock	(329)		(330)	1
Ending balance (in shares) at Jun. 27, 2020		27,725
Ending balance at Jun. 27, 2020	$ (163,018)	$ 277	5,519	(168,814)
Beginning balance (in shares) at Jan. 02, 2021	25,390	25,390
Beginning balance at Jan. 02, 2021	$ (223,978)	$ 254	0	(224,232)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income (loss)	66,634			66,634
Exercise of common stock options (in shares)		106
Exercise of common stock options	2,460	$ 1	2,459
Stock-based compensation (in shares)		314
Stock-based compensation	6,416	$ 3	6,413
Repurchases of common stock (in shares)		(1,346)
Repurchases of common stock	(184,182)	$ (13)	(8,872)	(175,297)
Ending balance (in shares) at Apr. 03, 2021		24,464
Ending balance at Apr. 03, 2021	$ (332,650)	$ 245	0	(332,895)
Beginning balance (in shares) at Jan. 02, 2021	25,390	25,390
Beginning balance at Jan. 02, 2021	$ (223,978)	$ 254	0	(224,232)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income (loss)	$ 88,884
Ending balance (in shares) at Jul. 03, 2021	23,622	23,622
Ending balance at Jul. 03, 2021	$ (403,658)	$ 236	0	(403,894)
Beginning balance (in shares) at Apr. 03, 2021		24,464
Beginning balance at Apr. 03, 2021	(332,650)	$ 245	0	(332,895)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income (loss)	22,250			22,250
Exercise of common stock options (in shares)		35
Exercise of common stock options	1,075		1,075
Stock-based compensation (in shares)		22
Stock-based compensation	5,969	$ 0	5,969
Repurchases of common stock (in shares)		(899)
Repurchases of common stock	$ (100,302)		(7,044)	(93,249)
Ending balance (in shares) at Jul. 03, 2021	23,622	23,622
Ending balance at Jul. 03, 2021	$ (403,658)	$ 236	$ 0	$ (403,894)

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Condensed Consolidated Statement of Cash Flows - USD ($) $ in Thousands	6 Months Ended
	Jul. 03, 2021	Jun. 27, 2020
Cash flows from operating activities:
Net income	$ 88,884	$ 26,510
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	29,800	30,811
Stock-based compensation	12,385	7,084
Net loss on disposals and impairments of assets	78	224
Deferred income taxes	421	4,383
Changes in operating assets and liabilities:
Accounts receivable	8,666	4,224
Inventories	(7,215)	5,391
Income taxes	(11,625)	2,508
Prepaid expenses and other assets	(13,407)	7,018
Accounts payable	23,232	(14,804)
Customer prepayments	47,418	16,987
Accrued compensation and benefits	(22,387)	(7,405)
Other taxes and withholding	487	(3,594)
Other accruals and liabilities	4,683	7,664
Net cash provided by operating activities	161,420	87,001
Cash flows from investing activities:
Purchases of property and equipment	(32,012)	(21,695)
Proceeds from sales of property and equipment	12	25
Purchase of intangible assets	0	(945)
Net cash used in investing activities	(32,000)	(22,615)
Cash flows from financing activities:
Repurchases of common stock	(280,915)	(41,774)
Net increase (decrease) in short-term borrowings	146,447	(26,364)
Proceeds from issuance of common stock	3,535	4,100
Debt issuance costs	(557)	(290)
Net cash used in financing activities	(131,490)	(64,328)
Net (decrease) increase in cash and cash equivalents	(2,070)	58
Cash and cash equivalents, at beginning of period	4,243	1,593
Cash and cash equivalents, at end of period	$ 2,173	$ 1,651

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Business and Summary of Significant Accounting Policies

6 Months Ended

Jul. 03, 2021

Accounting Policies [Abstract]

Business and Summary of Significant Accounting Policies

Business and Summary of Significant Accounting Policies

Business & Basis of Presentation

We prepared the condensed consolidated financial statements as of and for the three and six months ended July 3, 2021 of Sleep Number Corporation and our 100%-owned subsidiaries (Sleep Number or the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and they reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position as of July 3, 2021 and January 2, 2021, and the consolidated results of operations and cash flows for the periods presented. Our historical and quarterly consolidated results of operations may not be indicative of the results that may be achieved for the full year or any future period. Additionally, based on the duration and severity of the current global situation involving the novel coronavirus (COVID-19) pandemic, including but not limited to general economic conditions, consumer confidence, store restrictions mandated by federal, state or local authorities and possible supply chain disruptions, the extent to which COVID-19 will impact our business and our consolidated financial results will depend on future developments, which are highly uncertain and cannot be predicted.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with our most recent audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021 and other recent filings with the SEC.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of sales, expenses and income taxes during the reporting period. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. In addition, during the current environment involving COVID-19, predicting future events will be especially challenging for management. Changes in these estimates will be reflected in the consolidated financial statements in future periods and could be material. Our critical accounting policies consist of stock-based compensation, warranty liabilities and revenue recognition.

The condensed consolidated financial statements include the accounts of Sleep Number Corporation and our 100%-owned subsidiaries. All significant intra-entity balances and transactions have been eliminated in consolidation.

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Fair Value Measurements	6 Months Ended
	Jul. 03, 2021
Fair Value Disclosures [Abstract]
Fair Value Measurements	Fair Value MeasurementsAt July 3, 2021 and January 2, 2021, we had $17 million and $12 million, respectively, of debt and equity securities that fund our deferred compensation plan and are classified in other non-current assets. We also had corresponding deferred compensation plan liabilities of $17 million and $12 million at July 3, 2021 and January 2, 2021, respectively, which are included in other non-current liabilities. The majority of the debt and equity securities are Level 1 as they trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis. Unrealized gains/(losses) on the debt and equity securities offset those associated with the corresponding deferred compensation plan liabilities.

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Inventories

6 Months Ended

Jul. 03, 2021

Inventory Disclosure [Abstract]

Inventories

InventoriesInventories consisted of the following (in thousands):

	July 3, 2021		January 2, 2021
Raw materials	$	7,730	$	12,599
Work in progress	98		103
Finished goods	80,749		68,660
	$	88,577	$	81,362

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Goodwill and Intangible Assets, Net

6 Months Ended

Jul. 03, 2021

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Intangible Assets, Net

Goodwill and Intangible Assets, Net

Goodwill and Indefinite-lived Intangible Assets

Goodwill was $64 million at July 3, 2021 and January 2, 2021. Indefinite-lived trade name/trademarks totaled $1.4 million at July 3, 2021 and January 2, 2021.

Definite-lived Intangible Assets

The gross carrying amount of our developed technologies was $19 million at July 3, 2021 and January 2, 2021. Accumulated amortization was $14 million and $13 million at July 3, 2021 and January 2, 2021, respectively. Amortization expense for both the three months ended July 3, 2021 and June 27, 2020, was $0.5 million. Amortization expense for both the six months ended July 3, 2021 and June 27, 2020, was $1.1 million.

The gross carrying amount of our patents, which were acquired in June 2020, was $2.0 million at July 3, 2021 and January 2, 2021, respectively. Accumulated amortization was $0.2 million and $0.1 million at July 3, 2021 and January 2, 2021, respectively. Amortization expense for the three and six months ended July 3, 2021 was $55 thousand and $0.1 million, respectively. Amortization expense for the three and six months ended June 27, 2020 was not significant.

Annual amortization for definite-lived intangible assets for subsequent years are as follows (in thousands):

2021 (excluding the six months ended July 3, 2021)	$	1,201
2022	2,403
2023	1,431
2024	222
2025	226
2026	222
Thereafter	522
Total future amortization for definite-lived intangible assets	$	6,227

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Credit Agreement

6 Months Ended

Jul. 03, 2021

Debt Disclosure [Abstract]

Credit Agreement

Credit Agreement

Our credit facility as of July 3, 2021, has a net aggregate commitment amount of $600 million. The credit facility is for general corporate purposes, to meet our seasonal working capital requirements and to repurchase our stock. The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio (4.5x) and a minimum interest coverage ratio (3.0x). The credit agreement includes an accordion feature which allows us to increase the amount of the credit facility from $600 million to $800 million, subject to lenders' approval. Under the terms of the credit agreement, we pay a variable rate of interest and a commitment fee based on our leverage ratio. We were in compliance with all financial covenants as of July 3, 2021. The credit facility matures in February 2024.

The following table summarizes our borrowings under the credit facility ($ in thousands):

	July 3, 2021			January 2, 2021
Outstanding borrowings	$	382,200		$	244,200
Outstanding letters of credit	$	3,997		$	3,997
Additional borrowing capacity	$	213,803		$	201,803
Weighted-average interest rate	1.6		%	1.5		%

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Leases

6 Months Ended

Jul. 03, 2021

Leases [Abstract]

Leases

Leases

We lease our retail, office and manufacturing space under operating leases which, in addition to the minimum lease payments, may require payment of a proportionate share of the real estate taxes and certain building operating expenses. While our local market development approach generally results in long-term participation in given markets, our retail store leases generally provide for an initial lease term of five to 10 years. Our office and manufacturing leases provide for an initial lease term of up to 15 years. In addition, our mall-based retail store leases may require payment of variable rent based on net sales in excess of certain thresholds. Certain leases may contain options to extend the term of the original lease. The exercise of lease renewal options is at our sole discretion. Lease options are included in the lease term only if exercise is reasonably certain at lease commencement. Our lease agreements do not contain any material residual value guarantees. We also lease vehicles and certain equipment under operating leases with an initial lease term of three to five years.

Our operating lease costs include facility, vehicle and equipment lease costs, but exclude variable lease costs. Operating lease costs are recognized on a straight-line basis over the lease term, after consideration of rent escalations and rent holidays. The lease term for purposes of the calculation begins on the earlier of the lease commencement date or the date we take possession of the property. During lease renewal negotiations that extend beyond the original lease term, we estimate straight-line rent expense based on current market conditions. Variable lease costs are recorded when it is probable the cost has been incurred and the amount can be reasonably estimated. Future payments for real estate taxes and certain building operating expenses for which we are obligated are not included in operating lease costs.

At July 3, 2021, our finance right-of-use assets and lease liabilities were not significant.

Lease costs were as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Operating lease costs(1)	$	24,352	$	22,357	$	47,991	$	45,303
Variable lease costs	$	840	$	263	$	1,355	$	275

___________________________

(1)Includes short-term lease costs which are not significant.

The maturities of operating lease liabilities as of July 3, 2021, were as follows(1) (in thousands):

2021 (excluding the six months ended July 3, 2021)	$	45,819
2022	85,828
2023	75,838
2024	64,013
2025	54,458
2026	43,974
Thereafter	92,392
Total operating lease payments(2)	462,322
Less: Interest	82,942
Present value of operating lease liabilities(3)	$	379,380

___________________________

(1)During 2020, we deferred certain cash lease payments to future periods. At July 3, 2021, we had deferred cash rent payments of $1.6 million which are excluded from this table and are included in Other current liabilities and Other non-current liabilities.

(2)Total operating lease payments exclude $78 million of legally binding minimum lease payments for leases signed but not yet commenced.

(3)Includes the current portion of $68 million for operating lease liabilities.

Other information related to operating leases was as follows:

	July 3, 2021		January 2, 2021
Weighted-average remaining lease term (years)	6.4		6.3
Weighted-average discount rate	6.5	%	6.9	%

	Six Months Ended
(in thousands)	July 3, 2021		June 27, 2020
Cash paid for amounts included in present value of operating lease liabilities	$	43,414	$	42,773
Right-of-use assets obtained in exchange for operating lease liabilities	$	50,667	$	17,670

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Repurchases of Common Stock

6 Months Ended

Jul. 03, 2021

Repurchases Of Common Stock [Abstract]

Repurchases of Common Stock

Repurchases of Common Stock

Repurchases of our common stock were as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Amount repurchased under Board-approved share repurchase program	$	100,015	$	—	$	267,433	$	38,111
Amount repurchased in connection with the vesting of employee restricted stock grants	287		329		17,051		3,170
Total amount repurchased (based on trade dates)	$	100,302	$	329	$	284,484	$	41,281

As of July 3, 2021, the remaining authorization under the $600 million share repurchase program was $500 million.

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Revenue Recognition

6 Months Ended

Jul. 03, 2021

Revenue from Contract with Customer [Abstract]

Revenue Recognition

Revenue Recognition

Deferred contract assets and deferred contract liabilities are included in our condensed consolidated balance sheets as follows (in thousands):

	July 3, 2021		January 2, 2021
Deferred Contract Assets included in:
Other current assets	$	25,293	$	26,593
Other non-current assets	45,998		37,976
	$	71,291	$	64,569

	July 3, 2021		January 2, 2021
Deferred Contract Liabilities included in:
Other current liabilities	$	33,228	$	35,288
Other non-current liabilities	59,813		49,689
	$	93,041	$	84,977

The deferred revenue and costs related to SleepIQ technology are recognized on a straight-line basis over the product's estimated life of 4.5 years because our inputs are generally expended evenly throughout the performance period. During the three months ended July 3, 2021 and June 27, 2020, we recognized revenue of $8 million and $10 million, respectively, that were included in the deferred contract liability balances at the beginning of the respective periods. During the six months ended July 3, 2021 and June 27, 2020, we recognized revenue of $15 million and $18 million, respectively, that were included in the deferred contract liability balances at the beginning of the respective periods.

Revenue from goods and services transferred to customers at a point in time accounted for approximately 98% of our revenues for the three and six months ended July 3, 2021 and 97% of our revenues for the three and six months ended June 27, 2020.

Net sales were as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Retail stores	$	426,653	$	206,476	$	915,841	$	643,125
Online, phone, chat and other	57,663		78,462		136,731		114,379
Total Company	$	484,316	$	284,938	$	1,052,572	$	757,504

Obligation for Sales Returns

The activity in the sales returns liability account was as follows (in thousands):

	Six Months Ended
	July 3, 2021		June 27, 2020
Balance at beginning of year	$	24,765	$	19,809
Additions that reduce net sales	42,272		30,901
Deductions from reserves	(45,820)		(33,514)
Balance at end of period	$	21,217	$	17,196

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Stock-based Compensation Expense

6 Months Ended

Jul. 03, 2021

Share-based Payment Arrangement [Abstract]

Stock-based Compensation Expense

Stock-based Compensation Expense

Total stock-based compensation expense was as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Stock awards	$	5,218	$	4,440	11,027		$	5,846
Stock options	750		593		1,358		1,238
Total stock-based compensation expense (1)	5,968		5,033		12,385		7,084
Income tax benefit	1,473		1,218		3,071		1,714
Total stock-based compensation expense, net of tax	$	4,495	$	3,815	$	9,314	$	5,370

___________________________

(1) Changes in stock-based compensation expense reflect the cumulative impact of the change in the expected achievements of certain performance targets.

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Profit Sharing and 401(k) Plan	6 Months Ended
	Jul. 03, 2021
Profit Sharing And 401 (k) Plan [Abstract]
Profit Sharing and 401(k) Plan	Profit Sharing and 401(k) PlanUnder our profit sharing and 401(k) plan, eligible employees may defer up to 50% of their compensation on a pre-tax basis, subject to Internal Revenue Service limitations. Each pay period, we may make a discretionary contribution equal to a percentage of the employee’s contribution. During the three months ended July 3, 2021 and June 27, 2020, our contributions, net of forfeitures, were $1.8 million and $0.5 million, respectively. During the six months ended July 3, 2021 and June 27, 2020, our contributions, net of forfeitures, were $3.7 million and $2.1 million, respectively.

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Net Income (Loss) per Common Share

6 Months Ended

Jul. 03, 2021

Earnings Per Share [Abstract]

Net Income (Loss) per Common Share

Net Income (Loss) per Common Share

The components of basic and diluted net income (loss) per share were as follows (in thousands, except per share amounts):

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Net income (loss)	$	22,250	$	(12,630)	$	88,884	$	26,510
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	24,371		27,923		24,874		27,890
Dilutive effect of stock-based awards	823		—		995		633
Diluted weighted-average shares outstanding	25,194		27,923		25,869		28,523
Net income (loss) per share – basic	$	0.91	$	(0.45)	$	3.57	$	0.95
Net income (loss) per share – diluted	$	0.88	$	(0.45)	$	3.44	$	0.93

For the three and six months ended July 3, 2021 and the six months ended June 27, 2020, anti-dilutive stock-based awards excluded from the diluted net income per share calculations were immaterial. For the three months ended June 27, 2020, 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.

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Commitments and Contingencies

6 Months Ended

Jul. 03, 2021

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

Warranty Liabilities

The activity in the accrued warranty liabilities account was as follows (in thousands):

	Six Months Ended
	July 3, 2021		June 27, 2020
Balance at beginning of year	$	12,152	$	11,345
Additions charged to costs and expenses for current-year sales	7,863		4,965
Deductions from reserves	(9,235)		(4,789)
Changes in liability for pre-existing warranties during the current year, including expirations	(237)		(89)
Balance at end of period	$	10,543	$	11,432

Legal Proceedings

We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with U.S. generally accepted accounting principles, we record a liability in our consolidated financial statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. If a material loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. With respect to currently pending legal proceedings, we have not established an estimated range of reasonably possible material losses either because we believe that we have valid defenses to claims asserted against us, the proceeding has not advanced to a stage of discovery that would enable us to establish an estimate, or the potential loss is not material. We currently do not expect the outcome of pending legal proceedings to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against us could adversely impact our consolidated results of operations, financial position or cash flows. We expense legal costs as incurred.

On March 27, 2018, Level Sleep, LLC (Level Sleep) filed a patent infringement lawsuit against Sleep Number in the Federal District Court for the Eastern District of Texas. In its Complaint, Level Sleep claims that Sleep Number infringed two patents owned by Level Sleep, U.S. Patent Nos. 6,807,698 and 7,036,172 (the Patents), by, among other things, making, using, offering for sale, or selling within the United States, and/or importing into the United States, beds with sleep surfaces having foam with multiple zones in the longitudinal direction. Level Sleep has asserted that five non-360® beds no longer sold and two current non-360 beds infringe the

Patents. Level Sleep seeks damages in the form of a reasonable royalty. Sleep Number has asserted that the Patents are invalid and that our products do not infringe the Patents. On January 14, 2020, the Court granted summary judgment in favor of Sleep Number, finding that Sleep Number’s products do not infringe the Patents. Level Sleep filed an appeal of the Court’s summary judgment order to the Federal Circuit Court of Appeals which issued a decision on July 13, 2021, affirming the Court's summary judgment order and dismissal of Level Sleep's claims.

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COVID-19 Pandemic

6 Months Ended

Jul. 03, 2021

Unusual or Infrequent Items, or Both [Abstract]

COVID-19 Pandemic

COVID-19 Pandemic

At the onset of the COVID-19 pandemic in mid-March 2020, government restrictions resulted in the temporary closure of most of our retail stores, with 47% of our stores closed on average during the second quarter of 2020. While prioritizing the safety of our team, serving our customers and ensuring business continuity, we swiftly took decisive actions to strengthen our liquidity, cash flows and financial position, and mitigate the future impact on our operations and financial performance.

The COVID-19 pandemic mainly impacted our second quarter of 2020 financial performance, as we generated strong financial performance during the full-year of 2020 and the first six months of 2021. However, the pandemic's future effect on consumer demand and our ongoing financial performance remains uncertain. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q and Part I: Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, for additional discussion on the COVID-19 pandemic and the impact on our business.

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Business and Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jul. 03, 2021

Accounting Policies [Abstract]

Business and Basis of Presentation

Business & Basis of Presentation

We prepared the condensed consolidated financial statements as of and for the three and six months ended July 3, 2021 of Sleep Number Corporation and our 100%-owned subsidiaries (Sleep Number or the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and they reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position as of July 3, 2021 and January 2, 2021, and the consolidated results of operations and cash flows for the periods presented. Our historical and quarterly consolidated results of operations may not be indicative of the results that may be achieved for the full year or any future period. Additionally, based on the duration and severity of the current global situation involving the novel coronavirus (COVID-19) pandemic, including but not limited to general economic conditions, consumer confidence, store restrictions mandated by federal, state or local authorities and possible supply chain disruptions, the extent to which COVID-19 will impact our business and our consolidated financial results will depend on future developments, which are highly uncertain and cannot be predicted.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with our most recent audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021 and other recent filings with the SEC.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of sales, expenses and income taxes during the reporting period. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. In addition, during the current environment involving COVID-19, predicting future events will be especially challenging for management. Changes in these estimates will be reflected in the consolidated financial statements in future periods and could be material. Our critical accounting policies consist of stock-based compensation, warranty liabilities and revenue recognition.

Consolidation

The condensed consolidated financial statements include the accounts of Sleep Number Corporation and our 100%-owned subsidiaries. All significant intra-entity balances and transactions have been eliminated in consolidation.

Leases

We lease our retail, office and manufacturing space under operating leases which, in addition to the minimum lease payments, may require payment of a proportionate share of the real estate taxes and certain building operating expenses. While our local market development approach generally results in long-term participation in given markets, our retail store leases generally provide for an initial lease term of five to 10 years. Our office and manufacturing leases provide for an initial lease term of up to 15 years. In addition, our mall-based retail store leases may require payment of variable rent based on net sales in excess of certain thresholds. Certain leases may contain options to extend the term of the original lease. The exercise of lease renewal options is at our sole discretion. Lease options are included in the lease term only if exercise is reasonably certain at lease commencement. Our lease agreements do not contain any material residual value guarantees. We also lease vehicles and certain equipment under operating leases with an initial lease term of three to five years.

Our operating lease costs include facility, vehicle and equipment lease costs, but exclude variable lease costs. Operating lease costs are recognized on a straight-line basis over the lease term, after consideration of rent escalations and rent holidays. The lease term for purposes of the calculation begins on the earlier of the lease commencement date or the date we take possession of the property. During lease renewal negotiations that extend beyond the original lease term, we estimate straight-line rent expense based on current market conditions. Variable lease costs are recorded when it is probable the cost has been incurred and the amount can be reasonably estimated. Future payments for real estate taxes and certain building operating expenses for which we are obligated are not included in operating lease costs.

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Inventories (Tables)

6 Months Ended

Jul. 03, 2021

Inventory Disclosure [Abstract]

Schedule of Inventories

Inventories consisted of the following (in thousands):

	July 3, 2021		January 2, 2021
Raw materials	$	7,730	$	12,599
Work in progress	98		103
Finished goods	80,749		68,660
	$	88,577	$	81,362

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Goodwill and Intangible Assets, Net (Tables)

6 Months Ended

Jul. 03, 2021

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Annual Amortization of Definite-Lived Tangible Assets

Annual amortization for definite-lived intangible assets for subsequent years are as follows (in thousands):

2021 (excluding the six months ended July 3, 2021)	$	1,201
2022	2,403
2023	1,431
2024	222
2025	226
2026	222
Thereafter	522
Total future amortization for definite-lived intangible assets	$	6,227

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Credit Agreement (Tables)

6 Months Ended

Jul. 03, 2021

Debt Disclosure [Abstract]

Schedule of Borrowings Under Credit Facility

The following table summarizes our borrowings under the credit facility ($ in thousands):

	July 3, 2021			January 2, 2021
Outstanding borrowings	$	382,200		$	244,200
Outstanding letters of credit	$	3,997		$	3,997
Additional borrowing capacity	$	213,803		$	201,803
Weighted-average interest rate	1.6		%	1.5		%

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Leases (Tables)

6 Months Ended

Jul. 03, 2021

Leases [Abstract]

Schedule of Operating Lease Costs

Lease costs were as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Operating lease costs(1)	$	24,352	$	22,357	$	47,991	$	45,303
Variable lease costs	$	840	$	263	$	1,355	$	275

___________________________

(1)Includes short-term lease costs which are not significant.

Schedule of Maturities of Operating Lease Liabilities

The maturities of operating lease liabilities as of July 3, 2021, were as follows(1) (in thousands):

2021 (excluding the six months ended July 3, 2021)	$	45,819
2022	85,828
2023	75,838
2024	64,013
2025	54,458
2026	43,974
Thereafter	92,392
Total operating lease payments(2)	462,322
Less: Interest	82,942
Present value of operating lease liabilities(3)	$	379,380

___________________________

(1)During 2020, we deferred certain cash lease payments to future periods. At July 3, 2021, we had deferred cash rent payments of $1.6 million which are excluded from this table and are included in Other current liabilities and Other non-current liabilities.

(2)Total operating lease payments exclude $78 million of legally binding minimum lease payments for leases signed but not yet commenced.

(3)Includes the current portion of $68 million for operating lease liabilities.

Schedule of Other Information Related Operating Leases

Other information related to operating leases was as follows:

	July 3, 2021		January 2, 2021
Weighted-average remaining lease term (years)	6.4		6.3
Weighted-average discount rate	6.5	%	6.9	%

	Six Months Ended
(in thousands)	July 3, 2021		June 27, 2020
Cash paid for amounts included in present value of operating lease liabilities	$	43,414	$	42,773
Right-of-use assets obtained in exchange for operating lease liabilities	$	50,667	$	17,670

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Repurchases of Common Stock (Tables)

6 Months Ended

Jul. 03, 2021

Repurchases Of Common Stock [Abstract]

Schedule of Repurchases of Common Stock

Repurchases of our common stock were as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Amount repurchased under Board-approved share repurchase program	$	100,015	$	—	$	267,433	$	38,111
Amount repurchased in connection with the vesting of employee restricted stock grants	287		329		17,051		3,170
Total amount repurchased (based on trade dates)	$	100,302	$	329	$	284,484	$	41,281

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Revenue Recognition (Tables)

6 Months Ended

Jul. 03, 2021

Revenue from Contract with Customer [Abstract]

Schedule of Deferred Contract Liabilities and Deferred Contract Assets

Deferred contract assets and deferred contract liabilities are included in our condensed consolidated balance sheets as follows (in thousands):

	July 3, 2021		January 2, 2021
Deferred Contract Assets included in:
Other current assets	$	25,293	$	26,593
Other non-current assets	45,998		37,976
	$	71,291	$	64,569

	July 3, 2021		January 2, 2021
Deferred Contract Liabilities included in:
Other current liabilities	$	33,228	$	35,288
Other non-current liabilities	59,813		49,689
	$	93,041	$	84,977

Disaggregation of Revenue

Net sales were as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Retail stores	$	426,653	$	206,476	$	915,841	$	643,125
Online, phone, chat and other	57,663		78,462		136,731		114,379
Total Company	$	484,316	$	284,938	$	1,052,572	$	757,504

Schedule of Sales Return Liability

The activity in the sales returns liability account was as follows (in thousands):

	Six Months Ended
	July 3, 2021		June 27, 2020
Balance at beginning of year	$	24,765	$	19,809
Additions that reduce net sales	42,272		30,901
Deductions from reserves	(45,820)		(33,514)
Balance at end of period	$	21,217	$	17,196

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Stock-based Compensation Expense (Tables)

6 Months Ended

Jul. 03, 2021

Share-based Payment Arrangement [Abstract]

Schedule of Stock-Based Compensation Expense

Total stock-based compensation expense was as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Stock awards	$	5,218	$	4,440	11,027		$	5,846
Stock options	750		593		1,358		1,238
Total stock-based compensation expense (1)	5,968		5,033		12,385		7,084
Income tax benefit	1,473		1,218		3,071		1,714
Total stock-based compensation expense, net of tax	$	4,495	$	3,815	$	9,314	$	5,370

___________________________

(1) Changes in stock-based compensation expense reflect the cumulative impact of the change in the expected achievements of certain performance targets.

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Net Income (Loss) per Common Share (Tables)

6 Months Ended

Jul. 03, 2021

Earnings Per Share [Abstract]

Components of Basic and Diluted Net (Loss) Income per Share

The components of basic and diluted net income (loss) per share were as follows (in thousands, except per share amounts):

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Net income (loss)	$	22,250	$	(12,630)	$	88,884	$	26,510
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	24,371		27,923		24,874		27,890
Dilutive effect of stock-based awards	823		—		995		633
Diluted weighted-average shares outstanding	25,194		27,923		25,869		28,523
Net income (loss) per share – basic	$	0.91	$	(0.45)	$	3.57	$	0.95
Net income (loss) per share – diluted	$	0.88	$	(0.45)	$	3.44	$	0.93

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Commitments and Contingencies (Tables)

6 Months Ended

Jul. 03, 2021

Commitments and Contingencies Disclosure [Abstract]

Warranty Liabilities

The activity in the accrued warranty liabilities account was as follows (in thousands):

	Six Months Ended
	July 3, 2021		June 27, 2020
Balance at beginning of year	$	12,152	$	11,345
Additions charged to costs and expenses for current-year sales	7,863		4,965
Deductions from reserves	(9,235)		(4,789)
Changes in liability for pre-existing warranties during the current year, including expirations	(237)		(89)
Balance at end of period	$	10,543	$	11,432

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Fair Value Measurements (Details) - Level 1 - USD ($) $ in Millions	Jul. 03, 2021	Jan. 02, 2021
Other non-current assets | Available-for-sale securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities assets funding the deferred compensation plan	$ 17	$ 12
Other non-current liabilities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Deferred compensation plan liability	$ 17	$ 12

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Inventories (Details) - USD ($) $ in Thousands	Jul. 03, 2021	Jan. 02, 2021
Inventory Disclosure [Abstract]
Raw materials	$ 7,730	$ 12,599
Work in progress	98	103
Finished goods	80,749	68,660
Inventories	$ 88,577	$ 81,362

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Goodwill and Intangible Assets, Net - Additional Information (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 03, 2021	Jun. 27, 2020	Jul. 03, 2021	Jan. 02, 2021
Goodwill And Intangible Assets [Line Items]
Goodwill	$ 64,000		$ 64,000	$ 64,000
Developed Technologies
Goodwill And Intangible Assets [Line Items]
Gross carrying amount	19,000		19,000	19,000
Accumulated amortization	14,000		14,000	13,000
Amortization expense	500	$ 500	1,100
Patents
Goodwill And Intangible Assets [Line Items]
Gross carrying amount	2,000		2,000	2,000
Accumulated amortization	200		200	100
Amortization expense	55		100
Trade Names
Goodwill And Intangible Assets [Line Items]
Indefinite-lived trade name/trademarks	$ 1,400		$ 1,400	$ 1,400

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Goodwill and Intangible Assets, Net - Annual Amortization for Definite-Lived Intangible (Details) $ in Thousands	3 Months Ended	6 Months Ended
	Jul. 03, 2021 USD ($)	Jul. 03, 2021 USD ($)
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
2021 (excluding the six months ended July 3, 2021)	$ 1,201	$ 1,201
2022	2,403	2,403
2023	1,431	1,431
2024	222	222
2025	226	226
2026	222	222
Thereafter	522	522
Total future amortization for definite-lived intangible assets	6,227	6,227
Patents
Goodwill And Intangible Assets [Line Items]
Amortization expense	$ 55	$ 100

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Credit Agreement - Additional Information (Details) - USD ($) $ in Millions	Jul. 03, 2021	Jan. 02, 2021
Debt Disclosure [Abstract]
Current borrowing capacity	$ 600
Maximum leverage ratio	450.00%
Minimum interest coverage ratio	300.00%
Total commitment amount	$ 800	$ 600

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Credit Agreement - Schedule of Borrowings Under Credit Facility (Details) - USD ($) $ in Thousands	Jul. 03, 2021	Jan. 02, 2021
Debt Disclosure [Abstract]
Outstanding borrowings	$ 382,200	$ 244,200
Outstanding letters of credit	3,997	3,997
Additional borrowing capacity	$ 213,803	$ 201,803
Weighted-average interest rate	1.60%	1.50%

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Leases - Additional Information (Details)	Jul. 03, 2021
Minimum | Retail Store Leases
Lessee, Lease, Description [Line Items]
Lease term	5 years
Minimum | Lease Vehicles and Certain Equipment Under Operating Leases
Lessee, Lease, Description [Line Items]
Lease term	3 years
Maximum | Retail Store Leases
Lessee, Lease, Description [Line Items]
Lease term	10 years
Maximum | Office and Manufacturing Leases
Lessee, Lease, Description [Line Items]
Lease term	15 years
Maximum | Lease Vehicles and Certain Equipment Under Operating Leases
Lessee, Lease, Description [Line Items]
Lease term	5 years

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Leases - Schedule of Operating Lease Costs (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 03, 2021	Jun. 27, 2020	Jul. 03, 2021	Jun. 27, 2020
Leases [Abstract]
Operating lease costs	$ 24,352	$ 22,357	$ 47,991	$ 45,303
Variable lease costs	$ 840	$ 263	$ 1,355	$ 275

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Leases - Schedule of Maturities of Operating Lease Liabilities (Details) - USD ($) $ in Thousands	Jul. 03, 2021	Jan. 02, 2021
Leases [Abstract]
2021 (excluding the six months ended July 3, 2021)	$ 45,819
2022	85,828
2023	75,838
2024	64,013
2025	54,458
2026	43,974
Thereafter	92,392
Total lease payments	462,322
Less: Interest	82,942
Present value of operating lease liabilities	379,380
Amount of lease payments deferred due to COVID-19	1,600
Amount leases executed, not yet commenced, excluded from table.	78,000
Operating lease liabilities, current	$ 67,648	$ 62,077

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Leases - Schedule of Other Information Related Operating Leases (Details) - USD ($) $ in Thousands	6 Months Ended
	Jul. 03, 2021	Jun. 27, 2020	Jan. 02, 2021
Leases [Abstract]
Weighted-average remaining lease term (years)	6 years 4 months 24 days		6 years 3 months 18 days
Weighted-average discount rate	6.50%		6.90%
Cash paid for amounts included in present value of operating lease liabilities	$ 43,414	$ 42,773
Right-of-use assets obtained in exchange for operating lease liabilities	$ 50,667	$ 17,670

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Repurchases of Common Stock - Schedule of Repurchase of Common Stock (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 03, 2021	Jun. 27, 2020	Jul. 03, 2021	Jun. 27, 2020
Repurchases Of Common Stock [Abstract]
Amount repurchased under Board-approved share repurchase program	$ 100,015	$ 0	$ 267,433	$ 38,111
Amount repurchased in connection with the vesting of employee restricted stock grants	287	329	17,051	3,170
Total amount repurchased (based on trade dates)	$ 100,302	$ 329	$ 284,484	$ 41,281

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Repurchases of Common Stock - Additional Information (Details) $ in Millions	Jul. 03, 2021 USD ($)
Repurchases Of Common Stock [Abstract]
Authorized share repurchase program	$ 600
Remaining authorized stock purchase plan	$ 500

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Revenue Recognition - Schedule of Deferred Contract Assets and Deferred Contract Liabilities (Details) - USD ($) $ in Thousands	Jul. 03, 2021	Jan. 02, 2021
Deferred Contract Assets included in:
Deferred contract assets	$ 71,291	$ 64,569
Deferred Contract Liabilities included in:
Deferred contract liabilities	93,041	84,977
Other current assets
Deferred Contract Assets included in:
Other current assets	25,293	26,593
Other non-current assets
Deferred Contract Assets included in:
Other non-current assets	45,998	37,976
Other current liabilities
Deferred Contract Liabilities included in:
Other current liabilities	33,228	35,288
Other non-current liabilities
Deferred Contract Liabilities included in:
Other non-current liabilities	$ 59,813	$ 49,689

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Revenue Recognition - Additional Information (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Jul. 03, 2021	Jun. 27, 2020	Jul. 03, 2021	Jun. 27, 2020
Disaggregation of Revenue [Line Items]
Revenue recognized, included in beginning deferred contract liability balance	$ 8	$ 10	$ 15	$ 18
SleepIQ Technology
Disaggregation of Revenue [Line Items]
Estimated product life			4 years 6 months
Transferred at Point in Time | Revenue from Contract with Customer Benchmark | Timing of Transfer of Goods or Services Concentration Risk
Disaggregation of Revenue [Line Items]
Revenue recognized at a point in time	98.00%	97.00%	98.00%	97.00%

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Revenue Recognition - Disaggregation of Revenue (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 03, 2021	Jun. 27, 2020	Jul. 03, 2021	Jun. 27, 2020
Disaggregation of Revenue [Line Items]
Net sales	$ 484,316	$ 284,938	$ 1,052,572	$ 757,504
Retail stores
Disaggregation of Revenue [Line Items]
Net sales	426,653	206,476	915,841	643,125
Online, phone, chat and other
Disaggregation of Revenue [Line Items]
Net sales	$ 57,663	$ 78,462	$ 136,731	$ 114,379

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Revenue Recognition - Schedule of Sales Return Liability (Details) - USD ($) $ in Thousands	6 Months Ended
	Jul. 03, 2021	Jun. 27, 2020
Sales Return Liability [Roll Forward]
Balance at beginning of year	$ 24,765	$ 19,809
Additions that reduce net sales	42,272	30,901
Deductions from reserves	(45,820)	(33,514)
Balance at end of period	$ 21,217	$ 17,196

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Stock-based Compensation Expense (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jul. 03, 2021	Jun. 27, 2020	Jul. 03, 2021	Jun. 27, 2020
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock based compensation expense	$ 5,968	$ 5,033	$ 12,385	$ 7,084
Income tax benefit	1,473	1,218	3,071	1,714
Total stock-based compensation expense, net of tax	4,495	3,815	9,314	5,370
Stock awards
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock based compensation expense	5,218	4,440	11,027	5,846
Stock options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock based compensation expense	$ 750	$ 593	$ 1,358	$ 1,238

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Profit Sharing and 401(k) Plan (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Jul. 03, 2021	Jun. 27, 2020	Jul. 03, 2021	Jun. 27, 2020
Profit Sharing And 401 (k) Plan [Abstract]
Employee compensation deferral (as a percent)			50.00%
Employer contributions	$ 1.8	$ 0.5	$ 3.7	$ 2.1

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Net Income (Loss) per Common Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended				6 Months Ended
	Jul. 03, 2021	Apr. 03, 2021	Jun. 27, 2020	Mar. 28, 2020	Jul. 03, 2021	Jun. 27, 2020
Earnings Per Share [Abstract]
Net income (loss)	$ 22,250	$ 66,634	$ (12,630)	$ 39,140	$ 88,884	$ 26,510
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding (in shares)	24,371,000		27,923,000		24,874,000	27,890,000
Dilutive effect of stock-based awards (in shares)	823,000		0		995,000	633,000
Diluted weighted-average shares outstanding (in shares)	25,194,000		27,923,000		25,869,000	28,523,000
Net income per share – basic (in dollars per share)	$ 0.91		$ (0.45)		$ 3.57	$ 0.95
Net income per share – diluted (in dollars per share)	$ 0.88		$ (0.45)		$ 3.44	$ 0.93

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Commitments and Contingencies (Details) - USD ($) $ in Thousands	6 Months Ended
	Jul. 03, 2021	Jun. 27, 2020
Warranty Liabilities [Roll Forward]
Balance at beginning of year	$ 12,152	$ 11,345
Additions charged to costs and expenses for current-year sales	7,863	4,965
Deductions from reserves	(9,235)	(4,789)
Changes in liability for pre-existing warranties during the current year, including expirations	(237)	(89)
Balance at end of period	$ 10,543	$ 11,432

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COVID-19 Pandemic (Details)	3 Months Ended
	Jun. 27, 2020
Average
Unusual or Infrequent Item, or Both [Line Items]
Percentage of stores that are closed	47.00%