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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2022
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
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
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ☒  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐   No
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 ☒   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  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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No
The aggregate market value of the common stock held by non-affiliates of the registrant as of July 3, 2021, was $1,734,376,000 (based on the last reported sale price of the registrant’s common stock on that date as reported by Nasdaq).
As of January 29, 2022, there were 22,685,000 shares of the registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement to be furnished to shareholders in connection with its 2022 Annual Meeting of Shareholders are incorporated by reference in Part III, Items 10-14 of this Annual Report on Form 10-K.



TABLE OF CONTENTS
   
Item 1.
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Item 1B.
Item 2.
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Item 4.
   
   
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
   
   
Item 10.
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i | 2021 FORM 10-K


SLEEP NUMBER CORPORATION
AND SUBSIDIARIES

Sleep Number®, SleepIQ®, Sleep Number 360®, 360®, SleepIQ Kids®, the Double Arrow logo, Select Comfort®, AirFit®, BAM Labs®, the “B” logo, Comfortaire®, ComfortFit®, Comfort.Individualized.®, Does Your Bed Do That?®, the DualTemp logo, the DualAir Technology Inside logo, FlexTop®, IndividualFit®, It®, Know Better Sleep®, Pillow[ology]®, PillowFit®, Probably the Best Bed in the World®, Responsive Air®, Sleep Is Training®, Sleep Number Inner Circle®, Sleep30®, Smart Bed For Smart Kids®, Tech-e®, The Only Bed That Grows With Them®, This Is Not A Bed®, Tonight Bedtime. Tomorrow The World®, We Make Beds Smart®, What’s Your Sleep Number?®, Auto Snore™, Climate360™, EnviroIQ™, HealthIQ™, HeartIQ™, Individualized Sleep Experiences™, RespiratoryIQ™, Retail Flow™, Sleep Number Labs logo, Sleep Number Labs, Sleep For The Future logo, WellnessIQ™, ActiveComfort™, Comfortable. Adjustable. Affordable.™, CoolFit™, DualAir™, DualTemp™, Firmness Control™, FlexFit™, In Balance™, Partner Snore™, The Bed Reborn™, The Bed That Moves You™, The Best Bed For Couples™, our bed model names, and our other marks and stylized logos are trademarks and/or service marks of Sleep Number. This Form 10-K may also contain trademarks, trade names and service marks that are owned by other persons or entities.

Our fiscal year ends on the Saturday closest to December 31, and, unless the context otherwise requires, all references to years in this Form 10-K refer to our fiscal years. Our fiscal year is based on a 52- or 53-week year. All years presented in this Form 10-K are 52 weeks, except for the 2020 fiscal year ended January 2, 2021, which is a 53-week year.

Forward-Looking Statements

This Annual Report on Form 10-K contains or incorporates by reference certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in or incorporated by reference into this Annual Report on Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements, including but not limited to projections of revenues, results of operations, financial condition or other financial items; any statements of plans, strategies and objectives of management for future operations; any statements regarding proposed new products, services or developments, including potential features of our products that may be developed in the future; any statements regarding future economic conditions, prospects or performance; statements of belief and any statement or assumptions underlying any of the foregoing. In addition, we or others on our behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or Webcasts open to the public, in press releases or reports, on our website or otherwise. We try to identify forward-looking statements in this report and elsewhere by using words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “predict,” “intend,” “potential,” “continue” or the negative of these or similar terms.

Our forward-looking statements speak only as of the date made and by their nature involve substantial risks and uncertainties. Our actual results may differ materially depending on a variety of factors, including the items discussed in greater detail below under the caption “Risk Factors.” These risks and uncertainties are not exclusive and further information concerning the Company and our business, including factors that potentially could materially affect our financial results or condition, may emerge from time to time, including factors that we may consider immaterial or do not anticipate at this time.

We wish to caution readers not to place undue reliance on any forward-looking statement and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. We assume no obligation to update forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. We advise you, however, to review and consider any further disclosures we make on related subjects in our quarterly reports on Form 10-Q and current reports on Form 8-K that we file with or furnish to the Securities and Exchange Commission.
2 | 2021 FORM 10-K
FORWARD-LOOKING STATEMENTS


PART I

ITEM 1. BUSINESS

Overview

At Sleep Number, our purpose is to improve the health and wellbeing of society through higher quality sleep. We are committed to leveraging the power of sleep and sleep science to improve lives and create a healthier, kinder and more inclusive world. We deliver on our mission of improving lives by individualizing sleep experiences through the superior execution of our differentiated consumer innovation strategy, the talents of our dedicated teams and the operating efficiencies of our vertically integrated business model. With our revolutionary Sleep Number 360® smart beds and SleepIQ® technology, we have improved nearly 14 million lives.

Financial Highlights

Our 2021 fiscal year included 52 weeks, compared with 53 weeks in fiscal 2020. Adjusting to exclude the estimated impact from this additional week in 2020, we increased annual 2021 net sales by 20% to $2.2 billion, grew 2021 earnings per diluted share (EPS) by 34% to $6.16 and generated cash from operations of $300 million. Return on invested capital (ROIC) was 27.6%, a 260 basis point improvement from 2020. Our net sales in the fourth quarter of 2021 were constrained by delayed receipt of critical semiconductor components, preventing deliveries and shifting more than $125 million of net sales to future periods. 2021 costs were also significantly impacted by inflation and inefficiencies arising from supply disruption and other global COVID challenges.

Breakthrough financial performance in 2021, despite significant headwinds, reflects the alignment of our sleep innovation strategy with consumers’ prioritization of their health and wellness, its connection to quality sleep and their increased adoption of digital products and services – all of which drive continued growth in demand for our life-changing 360 smart beds. In addition, in an environment characterized by ongoing and shifting pandemic impacts, including global supply chain disruption, labor shortages and inflationary cost pressures, our vertically-integrated business model and mission-focused team enabled Sleep Number to accelerate our operating efficiency, increase our organizational agility and advance sleep innovation, science and research while maintaining our focus on delivering an exceptional customer experience.

As we navigate the current complexities of this global-business environment, we are unwavering in retaining our long-term perspective. For the five-year period ending with fiscal 2021, our compound annual growth rate (CAGR) for EPS was 41 percent and our net sales CAGR was 11 percent. With our strategic, enterprise-wide investments in innovation, technology, logistics, marketing and customer service, we have created a competitively-advantaged business and a highly-relevant brand – which together, are delivering superior shareholder value.

Proprietary Sleep Innovations

Delivering life-changing innovations, sleep health, sleep science and research, Sleep Number’s innovation roadmap is driven by proprietary data and research from its millions of Smart Sleepers, with a purpose to improve the health and wellbeing of society through higher-quality sleep. Our award-winning 360® smart bed started as the foundation of the global sleep tech category and has continued to propel its growth as consumers increasingly connect the impact of quality sleep to their overall health. Today, by leveraging 13 billion hours of sleep data gathered nightly from 1.6 billion, real-world sleep sessions, Sleep Number has significantly advanced the 360 smart bed, creating a superior sleep experience with every detail tailored to each individual sleeper. Developed with leading technologists, sleep scientists and data, our 360 smart beds are also a highly-innovative tool for sleep health, science and research, which helps our Company drive our innovation flywheel.

The 360 smart bed’s proprietary “sense and do” technology digitally responds to each sleeper’s movements and automatically adjusts to relieve pressure points, effortlessly adjusting firmness, comfort and support throughout the night, keeping both sleepers comfortable at their individual Sleep Number® settings. It enables data quantification and delivers individualized sleep health evaluations and outcomes, responding to the needs of sleepers. SleepIQ technology, the bed’s operating system, is embedded into every Sleep Number 360 smart bed and its proprietary, dynamic algorithm measures sleep time, restful and restless sleep, average heart rate and average respiratory rate. Advancements to the smart bed platform enable new groundbreaking innovations: At CES 2022, we unveiled a new Sleep Number 360
3 | 2021 FORM 10-K
SLEEP NUMBER CORPORATION


smart bed technology platform that may be capable of providing advanced monitoring of personalized insights and health-risk evaluations – all from home. Coming in late 2022, the new Sleep Number Climate360® smart bed will also capture skin and microclimate temperature monitoring to facilitate temperature adjustments during the night.

Artificial intelligence (AI) and data science enable the automatic adjustments to improve sleep and provide actionable insights for our Smart Sleeper℠ community, connecting quality sleep to sleep health through highly accurate, comprehensive, longitudinal biometric data collected during each sleep session. Ongoing advancements to the 360 smart bed platform via over-the-air updates enable real-time, effortless data collection and the delivery of sleep and wellness insights including Sleep Circadian Analytics, Sleep Wellness Reports, Heart Rate Variability, My Daytime Alertness and My Sleep Health.

Sleep Number offers a full line of exclusive FlexFit™ smart adjustable bases that allow customers to raise the head or foot of the bed. These industry-leading bases seamlessly integrate with the 360 smart bed to deliver features like our Partner Snore™ technology, which allows a sleeping partner to temporarily relieve mild snoring by raising the companion’s head at the touch of a button.

Our exclusive Sleep Number bedding collection and smart furniture (coming in 2023) feature a full line of sleep products designed to improve sleep comfort and quality, including a pillow collection designed to fit each individual’s sleeping position. Our new smart furniture is designed to complement and enhance the features and health and wellness benefits of the 360 smart bed and FlexFit smart adjustable bases. The furniture creates an ideal environment to support sleep health and provides an integrated sleep experience with a modifiable form factor for aging and recovery, providing comfort, aiding in mobility and helping maintain independence at home. The new furniture also eliminates clutter, conveniently combining popular sleep accessories into a single solution for customers to have the perfect individualized sleep environment to fall asleep and stay asleep.

Our smart bed technology is being used to capture data on natural sleep for research on disease prediction, diagnosis and treatment in a noninvasive, ecologically-valid manner. The 360 smart bed – along with partnerships and collaborations with the world’s leading physicians, researchers and institutions – is helping to advance the development of meaningful sleep health solutions, bringing significant benefits to real-world sleepers.

Data, Research and Collaborations

Sleep Number is redefining the standards for monitoring sleep for research and health, and our 360 smart bed offers a non-invasive, real-world and accurate method to conduct sleep research. Based on ballistocardiographic readings and leveraging high-resolution, full-body, continuous sensor recordings, as well as signal processing and machine-learning methods, SleepIQ technology automatically collects and analyzes billions of data points nightly, conducting one of the largest sample sizes of sleep studies every night.

To date, we have leveraged and learned from over 13 billion hours of sleep data gathered from over 1.6 billion real-world sleep sessions, generating comprehensive longitudinal and ecologically-valid data to improve sleep quality. Ongoing sleep science research is enabled by the more than 200,000 sleepers in the 360 smart bed Smart Sleeper community that have opted in to participate and advance the science of sleep and health. These sleepers have enabled rapid enrollment in Institutional Review Board (IRB)-approved studies, which combine the power of our broad sleep database with subjective understanding of sleeper behaviors to understand real-world outcomes.

The 360 smart beds stand out because of their continuous, longitudinal, ecologically-valid biosignal collection and they are effortless to use – with no need to wear or charge anything. They are the first and only smart bed with integrated and validated data collection and feedback that requires no action by the user to deliver proven quality sleep. The 360 smart bed is helping to advance the linkage of quality sleep to health, bringing significant benefits to real-world sleepers.


4 | 2021 FORM 10-K
SLEEP NUMBER CORPORATION


Sleep Number Scientific Advisory Board

We collaborate with renowned physicians and clinicians as part of our Scientific Advisory Board, an interdisciplinary group of physicians, clinicians and researchers with expertise in sleep science, research and health.

Eve Van Cauter, PhD: Frederick H. Rawson Professor and Director of the Sleep, Metabolism and Health Center at the University of Chicago

Daniel Buysse, MD: Professor of Sleep Medicine and Psychiatry and Clinical and Translational Science at University of Pittsburgh School of Medicine

Judith Owens, MD, MPH: Professor of Neurology at Harvard Medical School and Director of the Center for Pediatric Sleep Disorders at Boston Children’s Hospital

Virend Somers, MD, PhD: Professor of Medicine at Mayo Clinic College of Medicine and Science, Director of the Cardiovascular Facility and the Sleep Facility Center for Clinical and Translational Science at Mayo Clinic

Mayo Clinic Collaboration

In 2020, we announced a collaboration with Mayo Clinic. Our collective goal is to further sleep science and improve health care quality and clinical outcomes. We established foundational data sharing capabilities, which are being utilized by Mayo Clinic. The scalable data sharing infrastructure will allow us to expand data sharing to other research communities this year.

American Cancer Society

In 2022, we formed a landmark partnership with the American Cancer Society to study the connection between cancer and quality sleep, with the goal of developing the first-ever sleep strategies and guidance for cancer patients and survivors. Over six years, American Cancer Society will conduct research with contributions from Sleep Number’s proprietary sleep data, leading to improved sleep outcomes for cancer patients and survivors. Our partnership will advance not only the fundamental understanding of the science of sleep but also the translation of that knowledge into practical actions that provide meaningful outcomes.

Research and Development

Our Minneapolis, MN-based R&D team leads the innovation of our smart bed, adjustable base design and bedding solutions and is comprised of experts in mechanical engineering, comfort, adjustability, temperature, anthropometrics and test systems. Our Sleep Number Labs team in San Jose, CA supports the evolution of SleepIQ technology with leading experts in sleep research, data science, analytics and full-stack Internet of Things platform development.

We have accelerated our investments in R&D to enhance our competitive advantage. We continue to enhance our expertise and capabilities specific to the healthcare industry, forming an internal SleepIQ health team, advancing Sleep Number’s leadership in connected sleep health and further underscoring the commitment to innovation in health and wellness. As a result of our R&D and strategic efforts, we have continued to grow our patent portfolio, with a particular focus on smart features that improve sleep quality, and thermal solutions to solve temperature disruptions to sleep. Our world-wide patent portfolio now contains more than 380 patents, which enhances our protection of our exclusive and proprietary technologies. Our research and development expenses were $59 million in 2021, $41 million in 2020 and $35 million in 2019.
5 | 2021 FORM 10-K
SLEEP NUMBER CORPORATION


Exclusive Direct-to-Consumer Distribution

Our exclusive, direct-to-consumer distribution model supports lifelong relationships with our customers. Across our customer touchpoints which include Stores, Online, Phone and Chat, we deliver a value-added retail experience that seamlessly integrates our digital and physical experiences to meet customer needs. We offer an engaging and dynamic online experience to educate consumers and advance their purchase path, driving highly-qualified traffic to all our retail touchpoints. Our mission-driven, highly-trained sleep experts use digital technology and our best-in-class relationship-based selling process, which is continually tested and refined, to find the right sleep solutions for our customers — wherever and whenever they want to shop. This “sell-from-anywhere” model supports our customers’ shopping preferences and results in new customer acquisition, sustained repeat and referral, high conversion and strong revenue per smart bed unit — all of which drive continued sales and profitable growth.

As the exclusive distributor of Sleep Number® products, we target high-quality, convenient and visible store locations based on several factors, including each market’s overall sales potential and store geography, demographics and proximity to other brand experiences. Since 2010, we have invested to reposition a large percentage of our mall stores to stronger, optimally-sized, non-mall locations, adding stores in both existing and new markets. As of January 1, 2022, we operated 648 Sleep Number® stores, with locations in all 50 states. More than 39% of our stores (including remodels) are less than five years old and more than 56% are less than seven years old.

Our Stores accounted for 87% of net sales in 2021. Average annual net sales per store in 2021, based on Total Retail (which includes Stores, Online, Phone and Chat), were $3.6 million, a new record. In 2021, 84% of our Stores open for a full year generated net sales of greater than $2 million, and 48% of our Stores open for a full year generated more than $3 million in net sales. In 2021, our Online, Phone, Chat and Other sales accounted for 13% of our net sales.

Brand Communications

Sleep Number has become a beloved brand, which was built on a foundation of individuality and wellbeing. Our relevant, engaging and individualized communications help to drive sustained demand and market share gains for our award-winning 360 smart beds. Our consumer innovation strategy — which has guided us since 2012 — enables a deep understanding of, and insights about, our target customers. These insights give us the perceptual acuity to see ahead of structural consumer-behavior shifts and helps us pivot when necessary, such as during the recent global pandemic.

Our brand communications strategies are designed to emotionally connect consumers with high-quality content about the benefits of life-changing sleep and the value of our 360 smart beds. We leverage and amplify our brand through highly-visible strategic partnerships; engage consumers seamlessly across multiple touchpoints with an emphasis on digital; and create lifelong customer relationships and brand advocacy by delivering an unparalleled sleep experience. Together, these actions result in driving strong brand health, increased brand interest, heightened consumer consideration, customer engagement and authentic advocacy for Sleep Number’s brand, innovations and services.

Strategic partnerships amplify the effectiveness, impact and scale of our brand and marketing efforts:

We are in the fourth year of our strategic partnership as the Official Sleep and Wellness Partner of the National Football League (NFL) — one of the world’s largest marketing and fan-engagement platforms. Our partnership with the NFL broadens our brand reach, deepens our brand relevance and magnifies the benefits of our proprietary innovations. Additional partnerships with four clubs — Super Bowl LVI Champion Los Angeles Rams, Dallas Cowboys, Kansas City Chiefs and Minnesota Vikings — add to our national and community-activation efforts. Over 75% of active NFL players now have a Sleep Number 360 smart bed, which helps with the optimization of their performance and recovery through quality sleep; and
Our multi-year partnerships with content and media companies like CNN, Yahoo!, Thrive Global, YouTube, NFL Media and more also provide opportunities to influence and educate consumers about the benefits of proven quality sleep on a regular basis.

We leverage a sophisticated media mix to drive our performance marketing and advertising, with emphasis on digital and aligned with consumer consumption, contributing to improved media return on investment (ROI). High-profile video, including television and online streaming, is our most efficient media, followed by digital and social platforms. Our world-class, in-house digital capabilities, content marketing, online user experience and data-driven tools give us the
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flexibility to pivot quickly and optimize media investment, messages and audience by platform in real-time. Our promotional strategy focuses on simplicity and relevance, driving consumers to the brand at the time when they are seeking a smart bed. In 2021, media expense represented 14.8% of net sales.

We continue to strengthen our digital interactions with a new “sell-from-anywhere” model which makes it easy for our customers to select the best Sleep Number solution for their needs, however they want to interact with us. And by delivering a superior, personalized customer connection with our highly-knowledgeable sleep professionals, we are building lifelong relationships. Overall, 2021 represented our fourth straight year of double-digit, digital-traffic growth.

We focus on lifelong relationships with our customers, whom we refer to as our Insiders, part of our Smart Sleeper community. The more deeply engaged our Insiders are with the brand, the greater their advocacy. Our Smart Sleeper community, now 2.1 million strong, regularly interacts with our brand through their 360 smart bed and SleepIQ technology. Our award-winning InnerCircle Rewards program amplifies this engagement and drives acquisition of new customers through referral, and greater retention with repeat purchases. That brand loyalty and advocacy has grown significantly in recent years — representing approximately 50% of our business — and we expect that the incremental health and wellbeing features introduced through their 360 smart beds will continue to drive Insider loyalty. Our Smart Sleeper community is our most efficient, and most valuable, source of new customers to the brand.

We continue to invest in our demand drivers for the near- and long-term success of our brand, delivering a simpler and even more engaging experience for our customers. Our newly launched enterprise customer identity platform creates a seamless connection for deeper customer engagement. This enables efficient customer acquisition and increased revenue, and empowers our customers to participate more deeply in the brand. By making it easier for our Smart Sleeper community to share their personal sleep health success stories from our 360 smart beds, we are driving lifetime value, richer customer relationships and lean into our purpose of improving the health and wellbeing of society through higher quality sleep.

Operations

Integrated Sourcing and Logistics

Our commitments to innovation and continuous improvement are employed to leverage our vertical business model by optimizing culture, processes and technology. In addition to a network of global suppliers, we currently operate two component manufacturing plants (Irmo, SC and Salt Lake City, UT) and five assembly distribution centers (Irmo, SC; Salt Lake City, UT; Ontario, CA; Baltimore, MD; and Tampa, FL) with three additional assembly distribution centers (Dallas, TX; Cincinnati, OH; and Minneapolis, MN) opening in 2022. Primary operations at the manufacturing sites, which have consistently won awards for safety and manufacturing excellence, include cutting and sewing of the fabric covers for our beds. In our Utah plant, we also assemble our electrical Firmness Control™ systems. Teams at our assembly distribution centers fulfill customer orders that are made-to-order daily and assemble final mattress and order kitting with bases and accessories for shipment. We also operate a national bedding-fulfillment center.

We source the raw materials and components used in our products from third parties. Throughout 2021, we encountered temporary disruptions in our supply of various materials and components due to well-documented shortages and constraints in the global supply chain. We have taken, and continue to take, various measures to mitigate the potential impact of supply disruptions, including strengthening relationships with primary suppliers, identifying new alternate suppliers, redesigning products, exploring alternative components and maintaining safety stocks. While we expect some supply constraints to persist through 2022, we are leveraging the flexibility, visibility and resilience of our vertically-integrated model to respond nimbly as conditions change and communicate clearly with customers regarding their delivery experience.

At the end of 2021, approximately 60% of our smart beds were pre-assembled in our assembly distribution centers prior to delivery versus being assembled in customers’ homes by Sleep Number technicians. We expect to complete a multi-year evolution of our supply chain distribution network to pre-assemble 100% of our smart beds by the end of 2022. Additionally in 2022, we will move our bedding fulfillment center from Minnesota to Ohio to be closer to our customers. We are advancing our outbound logistics network by adding full truckload carriers and dedicated cross docks to reduce product handling, hand-offs, damage and costs while in transit to customers’ homes. This new network design enables scale and agility to support volume spikes and disruptions, providing a superior and reliable experience for customers with lower costs for the business.
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Home Delivery Service

Our home delivery teams are another direct touchpoint with our customers. Since 2018, 100% of our 360 smart beds sold are delivered and installed by our home delivery technicians or by our third-party service providers.

Our home delivery teams across the nation overcame the challenges of the COVID-19 pandemic throughout 2021, adopting measures to safeguard customer and team member health while ensuring that customers were still able to receive the quality sleep they needed.

Customer Service

Serving our customers remains a strong focus. Through our U.S.-based, in-house customer service team based in Minneapolis, MN and New Orleans, LA, we provide direct post-purchase support that improves the customer experience and drives our business. Through frequent service and support interactions with customers via phone, email, live chat and social media, these team members also provide a unique opportunity to gather insights that help us continuously improve our products, strengthen our service quality and advance our innovation. This integration enables operational synergies and drives organizational efficiencies.

Information Systems

We use information technology systems to operate, analyze and manage our business, to reduce operating costs and to enhance our customers’ experience. Our major systems include an in-store order entry system, a retail portal system, a payment processing system, in-bound and out-bound telecommunications systems for direct marketing, delivery scheduling and customer service systems, e-commerce systems, a data warehouse system and an enterprise resource planning (ERP) system. These systems are primarily comprised of packaged applications licensed from various software vendors plus a limited number of internally developed programs and digital solutions.

Intellectual Property

We hold various U.S. and foreign patents and patent applications regarding certain elements of the design and function of our products, including air control systems, remote control systems, air chamber features, mattress construction, foundation systems, sensing systems, automated adjustments, in-bed temperature control, as well as other technology. We have numerous U.S. patents, expiring at various dates between January 2022 and August 2045, and numerous U.S. patent applications pending. We also have numerous foreign patents and patent applications pending. Notwithstanding these patents and patent applications, we cannot ensure that these patent rights will provide substantial protection or that others will not be able to develop products that are similar to, or competitive with, our products.

We have a number of trademarks and service marks registered with the U.S. Patent and Trademark Office, including Sleep Number®, SleepIQ®, Sleep Number 360®, 360®, SleepIQ Kids®, the Double Arrow logo, Select Comfort®, AirFit®, the “B” logo, Comfortaire®, Does Your Bed Do That?®, the DualTemp logo, the DualAir Technology Inside logo, FlexTop®, HealthIQ®, IndividualFit®, It®, Know Better Sleep®, Pillow[ology]®, PillowFit®, Probably the Best Bed in the World®, Responsive Air®, Sleep Is Training®, Sleep Number Inner Circle®, Sleep30®, Smart Bed For Smart Kids®, Tech-e®, The Only Bed That Grows With Them®, This Is Not A Bed®, Tonight Bedtime. Tomorrow The World®, We Make Beds Smart® and What’s Your Sleep Number?®. We have several trademarks that are the subject of pending applications, including Auto Snore™, Climate360™, EnviroIQ™, HeartIQ™, Individualized Sleep Experiences™, RespiratoryIQ™, Retail Flow™, Sleep Number Labs logo, Sleep Number Labs Sleep For The Future logo, Smart SleeperSM, and WellnessIQ™. Each registered mark is renewable indefinitely as long as the mark remains in use and/or is not deemed to be invalid or canceled. We also have a number of common law trademarks, including ActiveComfort™, Comfortable. Adjustable. Affordable.™, CoolFit™, DualAir™, DualTemp™, Firmness Control™, FlexFit™, In Balance™, Partner Snore™, The Bed Reborn™, The Bed That Moves You™, The Best Bed For Couples™ and our bed model names.
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Several of our trademarks have been registered, or are the subject of pending applications for registration, in various foreign countries. We also have other intellectual property rights related to our products, processes and technologies, including trade secrets, trade dress and copyrights. We protect and enforce our intellectual property rights, including through litigation as necessary.

Industry and Competition

Sleep disorders have been declared a public health epidemic by the U.S. Center for Disease Control. One in three adults suffer from a lack of adequate sleep. Sleep Number is focused on producing products to address this growing problem. The total U.S. sleep-health economy was estimated to be $30 billion to $40 billion in a 2017 report published by McKinsey & Company. This reflects the traditional view of the bedding industry which includes the sales of mattresses and foundations, as well as emerging solutions for insufficient sleep such as routine modification and therapeutic treatment. We believe the sleep economy will continue to evolve and grow as consumers look for products and reliable data sources to address sleep deprivation challenges.

The traditional view of the U.S. bedding industry, including mattresses and foundations (static and adjustable), is measured through data provided by the International Sleep Products Association (ISPA). According to ISPA, the industry has grown by approximately 5% annually over the last 20 years, including 6% annually, on average, over the past five years. According to ISPA and our estimates, industry wholesale shipments of mattresses and foundations (including imported products and adjustable bases) were approximately $13 billion in 2021 (approximately $26 billion at retail).

The retail bedding industry is commoditized and highly competitive. Sleep Number competes against regional and local specialty bedding retailers, home furnishing stores, mass merchants, national discount stores and online marketers. Furniture Today, a furniture industry trade publication, has ranked Sleep Number as the 5th largest mattress manufacturer and 2nd largest U.S. bedding retailer for 2020, with an estimated 8% market share of industry retail revenue. Our consumer innovation strategy with proprietary sleep innovations and exclusive direct-to-consumer distribution is highly differentiated, resulting in lifelong customer relationships and contributing to our continued profitable growth.

Manufacturers in the bedding industry compete through retail partners on price, quality, brand name recognition, product availability and product performance, including the perceived levels of comfort and support provided by a mattress. There is a high degree of concentration among manufacturers, who produce innerspring, memory foam and hybrid beds, under nationally recognized brand names, including Tempur Sealy, Stearns & Foster, Serta and Simmons. In recent years, numerous direct-to-consumer companies and low-cost importers have entered the market, offering “bed-in-a-box” products to consumers, primarily through online distribution though many now partner with traditional mattress retailers. Their products are generally foam-based and undifferentiated in terms of sleep benefits.
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Governmental Regulation and Compliance

As a vertically integrated manufacturer and retailer, we are subject to extensive federal, state and local laws and regulations affecting all aspects of our business.

As a manufacturer, we are committed to product quality and safety, including adherence to all applicable laws and regulations affecting our products and services. Compliance with health, safety and environmental laws and regulations, including the federal fire retardant standards developed by the U.S. Consumer Product Safety Commission, which requires rigorous and costly testing, has increased the cost and complexity of manufacturing our products and may adversely impact the speed and cost of product development efforts. Further, our manufacturing, distribution, delivery and other business operations and facilities are subject to additional federal, state or local laws or regulations including supply chain transparency, conflict minerals sourcing and disclosure, end-of-life disposal and recycling requirements, transportation and other laws or regulations relating to environmental protection and health and safety requirements, including COVID-19 safety and prevention.

As a retailer, we are subject to additional laws and regulations that apply to retailers generally and govern the marketing and sale of our products and the operation of both our retail stores and our e-commerce activities. Many of the statutory and regulatory requirements that impact our retail and e-commerce operations are consumer-focused and pertain to activities such as our promotions, advertising claims, pricing, credit-based promotional offers, truth-in-advertising, privacy, “do not call/mail” requirements, text messaging requirements, warranty disclosure, delivery timing requirements, accessibility and similar requirements.

Our operations are subject to federal, state and local labor laws including, but not limited to, those relating to occupational health and safety, employee privacy, wage and hour, overtime pay, harassment and discrimination, equal opportunity and employee leaves and benefits. We are also subject to existing and emerging federal and state laws relating to data security and privacy.

It is our policy and practice to comply with all legal and regulatory requirements. Our procedures and internal controls are designed to promote such compliance.

Seasonality

Our business is modestly impacted by seasonal influences inherent in the U.S. bedding industry and general retail shopping patterns. The U.S. bedding industry generally experiences lower sales demand in the second quarter of the calendar year and increased sales demand during selected holiday or promotional periods.

Working Capital

We are able to operate with minimal working capital requirements because we sell directly to customers, utilize both “make-to-order” and “make-to-stock” production processes and operate retail stores that serve mainly as showrooms. We have historically generated sufficient cash flows to self-fund operations through an accelerated cash-conversion cycle. Our Credit Agreement provides a revolving credit facility for general corporate purposes with net aggregate availability of $825 million. The Credit Agreement contains an accordion feature that allows us to increase the amount of the credit facility from $825 million up to $1.2 billion in total availability, subject to Lenders’ approval. The Credit Agreement matures in December 2026.

Qualified customers are offered revolving credit to finance purchases through a private-label consumer credit facility provided by Synchrony Bank. Approximately 50% of our net sales in 2021 were financed by Synchrony Bank. Our current agreement with Synchrony Bank expires December 31, 2023, subject to earlier termination upon certain events. We pay Synchrony Bank a fee for extended credit promotional financing offers. Under the terms of our agreement, Synchrony Bank sets the minimum acceptable credit ratings, interest rates, fees and all other terms and conditions of the customers’ accounts, including collection policies and procedures. As the receivables are owned by Synchrony Bank, at no time are the receivables purchased or acquired from us. We are not liable to Synchrony Bank for our customers’ credit defaults. In connection with all purchases financed under these arrangements, Synchrony Bank pays us an amount equal to the total amount of such purchases, net of promotional related discounts, upon delivery to the customer. Customers that do not qualify for credit under our agreement with Synchrony Bank may apply for credit under a secondary program that we offer through another provider.
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Human Capital

Grounded in our shared values of passion, integrity, innovation, courage and teamwork, and guided by our purpose to improve society’s health and wellbeing through higher quality sleep, our team members are highly engaged and make a difference in the world every day. With sleep at the center, our culture supports the wellbeing of our team members across the pillars of physical, emotional, financial, career and community, and connects their work to the Sleep Number mission and goals. We celebrate individuality in each other, in our own lives and in our customers’ lives. We embrace every individual’s unique talents, perspectives and experiences, and strive to create an environment where we can each be our best selves. Valuing diversity, equity and inclusion makes us stronger, smarter and fuels our innovation and teamwork.

At January 1, 2022, we employed a total of 5,515 team members, of which 145 were classified as part-time and 110 were employed on a temporary basis. The breakdown of team members by area was as follows: 2,487 in retail sales and support, 1,054 in field services, 415 in customer service, 642 in manufacturing and logistics, and 917 in technology, corporate, management and administrative positions.

Our holistic approach to talent management, designed to attract, motivate, develop, reward and retain the right talent is critical to the execution of our consumer innovation strategy. We sustain our inclusive culture built on individuality and wellbeing by providing an exceptional team member experience, offering ample opportunities for professional learning and advancement. Our leaders are deeply committed to the success of our talent management approach and we hold ourselves accountable by routinely measuring our progress on a variety of elements and metrics including:

Retention: To advance brand awareness, increase overall candidate traffic and diverse hiring, and improve retention strategies, we track numerous talent recruitment, retention and turnover metrics, including new hires on a monthly, quarterly and rolling 12-month basis;
Diversity, Equity and Inclusion (DEI): We maintain a dashboard that tracks race/ethnicity and gender by job grade, tenure and generation to provide increased visibility to leaders across our Company on progress toward key goals. We also measure and report a team member inclusion and belonging index, and conduct a self-identification survey to learn how our team members identify and how they want to be appreciated as individuals;
Engagement: We have a continuous listening strategy to ensure we stay connected to the voice of our team members at critical times of the team member experience. The key survey touchpoints are at new hire, pulse check-in, annual engagement and exit, enabling leaders to monitor team member sentiment and course-correct in real time as appropriate;
Performance Management: We utilize our human capital management (HCM) system to track and follow team member performance assessments and development plans. We use our HCM system to monitor the completion of learning courses for our team members. Our enterprise learning management system provides all team members access to an equitable learning and training curriculum that is dynamic and mobile-accessible;
Safety: We have a commitment to maintain a safety-first mindset at Sleep Number. We have policies and practices that create clear expectations for how each team member contributes to a safe and healthy workplace. We collect and monitor workplace injury and accident information across all our locations and take appropriate steps to reduce incident rates, number of workers’ compensation claims and lost workdays. We also evolved our health and safety policies during the year to ensure the safety of our team members and customers by reducing the risk of contracting or spreading the coronavirus; and
Total Rewards: We benchmark and review, at least annually, all aspects of our total rewards program for team members. Our rewards offering is unique because all team members participate in some type of variable pay program (e.g., bonus, commissions) in addition to base pay. Recognizing the increasingly competitive environment for talent, we continue to enhance our benefits and wellbeing resources to maintain a strong team member value proposition.
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Social Impact Commitment

We are committed to leveraging the power of sleep, and sleep science, to improve lives and create a healthier, kinder, more inclusive world. To further support this commitment and amplify our positive community impact, we are honored to partner with several national organizations to fulfill our purpose of improving the health and wellbeing of society through higher quality sleep. The strength of our purpose meets the needs of military personnel, children and adults facing health challenges and families in transition, including:

MAKE-A-WISH, with its mission to create life-changing wishes for children with critical illnesses, is one of the nation’s most beloved nonprofit organizations. During the past year, Sleep Number partnered with Make-A-Wish, granting bedroom makeover wishes – complete with Sleep Number 360 smart beds – for immunocompromised children, helping them find comfort and sanctuary in the benefits of quality sleep while at home. In addition, Sleep Number customers – our Smart Sleeper℠ community members – were given the opportunity to donate their InnerCircle℠ Rewards to purchase additional product for “Wish kids.”
BLUE STAR FAMILIES is a nonprofit devoted to strengthening military families by connecting them with supportive individuals and organizations within their communities. Sleep Number has partnered with Blue Star Families for seven years, providing monetary support for the organization and the gift of quality sleep to the families of those who serve and sacrifice for our country.
GENYOUth, an organization whose programming reaches 38 million students annually in 73,000 U.S. schools, is devoted to helping students live healthfully and raise their academic achievement. In 2021, Sleep Number partnered with GENYOUth to educate at-risk middle schoolers about the importance of quality sleep.
My Very Own Bed is a Minnesota-based non-profit that provides new beds and bedding to children of families who have recently transitioned into more stable housing, helping their new house feel more like a home and supporting their health and wellbeing through improved sleep.
Bridging, a nonprofit organization primarily serving the Twin Cities area that provides donated furniture and household goods to families and individuals transitioning out of homelessness and poverty, by providing sheets, pillows and blankets.
Let’s Sleep! Webinars, championed by the nonprofit Start School Later - a nonprofit that aims to help communities ensure safe, healthy school hours and provide sleep education programs for students and school communities - by sponsoring a monthly webinar for educators and school administrators about the importance of sleep and sharing 360 smart bed data to reinforce the information. Sleep Number also sponsored the creation of an online resource for parents of teens to help them access videos, articles and lectures featuring sleep experts to help their family achieve better sleep.
Dream Foundation, a national organization serving terminally-ill adults and their families by providing end-of-life dreams that offer inspiration, comfort and closure, by providing smart beds and once-in-a-lifetime NFL experiences to terminal patients.

Our social impact extends beyond philanthropic partnerships. We announced a long-term partnership with the AMERICAN CANCER SOCIETY to enable cancer research and prevention tied explicitly to quality sleep, as well as to provide support for patients and caregivers who need sleep to bolster their physical, mental and emotional resilience. And through our collaboration with MAYO CLINIC, Sleep Number continues to advance sleep science research and enhance our understanding of sleep's impact on cardiovascular health. In 2021, we provided funding for Mayo Clinic to conduct several multi-year studies, two of which particularly demonstrated our societal impact:

A study that will investigate the prevalence of obstructive sleep apnea and determine the presence of comorbid cardiovascular diseases in U.S. patients of Somali descent, a large and growing population in Minnesota, which is also home to both Sleep Number and Mayo Clinic headquarters; and
A study that will explore the relationship between disrupted sleep and markers of aging to test the hypotheses that disrupted or inadequate sleep and sleepiness are indicative of older biological age and may contribute to the acceleration of the aging process.

As part of our commitment to team member wellbeing and the health of our communities, Sleep Number also encourages team members to become involved in their local communities by volunteering their time and talents in support of causes or organizations that inspire them. Our leaders who participate on the board of directors of a qualified nonprofit are eligible to apply for a grant of up to $1,500 per calendar year that benefits the organization.
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Through strategic partnerships, team member involvement and support for sleep science research, combined with the continued advancement of our proprietary innovations, Sleep Number is fulfilling our purpose to improve the health and wellbeing of society through higher quality sleep.

Our Corporate Responsibility and Sustainability Report, posted within the Investor Relations section of our Company website, provides additional information about our commitment to talent management and human rights at Sleep Number, including strategy details, performance metrics and our engagement. The report highlights our commitments:

Purpose driven Company committed to improving the health and wellbeing of society through higher quality sleep;
Enterprise-wide commitment to measure, advance and report on ESG initiatives, informed by and integrated into our business strategy;
Became signatory to the United Nations Global Compact, pledging intent to incorporate their Ten Principles into our strategy, culture and operations;
Focused on accountable goal setting as we track performance on waste and energy management; and
Effectively collaborate with our diverse, independent board to sustain our long-standing, highly-admired strength in corporate governance.

This report may be accessed at www.sleepnumber.com by clicking on the “INVESTORS” link, then click on the “ESG” link and “Sustainability Reports.” The information contained on our website or connected to our website is not incorporated by reference into this Form 10-K and should not be considered part of this report.

Information about our Executive Officers

SHELLY R. IBACH, 62
President and Chief Executive Officer (Joined the Company in April 2007 and was promoted to President and CEO in June 2012)
Shelly R. Ibach, Sleep Number® setting 40, serves as the President and Chief Executive Officer (CEO) for Sleep Number (Nasdaq: SNBR). From June 2011 to June 2012, Ms. Ibach served as the Company’s Executive Vice President and Chief Operating Officer and from October 2008 to June 2011, she served as Executive Vice President, Sales & Merchandising. Ms. Ibach joined the Company in April 2007 as Senior Vice President of U.S. sales for Company-owned channels. Before joining the Company, Ms. Ibach was Senior Vice President and General Merchandise Manager for Macy’s home division. From 1982 to 2005, Ms. Ibach held various leadership and executive positions within Target Corporation.

DAVID R. CALLEN, 55
Executive Vice President and Chief Financial Officer (Joined the Company in 2014 and was promoted to current role in December 2020)
David R. Callen, Sleep Number® setting 50, serves as the Executive Vice President and Chief Financial Officer for Sleep Number. Prior to joining Sleep Number in April 2014, Mr. Callen served as the Principal Financial Officer for Ethan Allen Interiors, Inc., from 2007 to 2014. Mr. Callen has served for more than 30 years in several high-performing companies in increasingly responsible international financial management positions. His breadth of experience has emphasized global business, capital and financial strategy, all aspects of mergers and acquisitions, global brand support and operational excellence across multiple industries, including automotive, high-tech, dental, outdoor recreational products and public accounting.

MELISSA BARRA, 50
Executive Vice President and Chief Sales and Services Officer (Joined the Company in 2013 and was promoted to current role in December 2020)
Melissa Barra, Sleep Number® setting 30, serves as the Executive Vice President and Chief Sales and Services Officer. From June 2019 to December 2020, Ms. Barra was Senior Vice President, Chief Sales, Services and Strategy Officer. Ms. Barra was Senior Vice President and Chief Strategy and Customer Relationship Officer from January 2015 to June 2019 and Vice President, Consumer Insights and Strategy from February 2013 to January 2015. Her breadth of experience covers finance, mergers and acquisitions, strategy, sales, services, real estate, PR and communications. Prior to joining Sleep Number in February 2013, Ms. Barra held leadership positions in the U.S. and internationally in process reengineering, finance, strategic alliances and corporate development for Best Buy, Grupo Futuro S.A., Citibank and GE Capital.
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ANDREA L. BLOOMQUIST, 52
Executive Vice President and Chief Innovation Officer (Joined the Company in 2008 and was promoted to current role in December 2020)
Annie L. Bloomquist, Sleep Number® setting 25, serves as Executive Vice President and Chief Innovation Officer. Ms. Bloomquist leads innovation, including sleep science research and development, strategic development of the SleepIQ® technology platform, 360® smart bed strategy, and partnerships to further sleep science, health and wellbeing. Ms. Bloomquist was the Senior Vice President and Chief Product Officer from June 2012 to December 2020 and Chief Merchandising Officer from June 2011 to June 2012. Ms. Bloomquist joined Sleep Number in May 2008 as Vice President and General Merchandise Manager. Prior to Sleep Number, Ms. Bloomquist held leadership positions in product development and merchandising at Macy’s and The Department Stores for Target Corporation.

KEVIN K. BROWN, 53
Executive Vice President and Chief Marketing Officer (Joined the Company in 2014 and was promoted to current role in December 2020)
Kevin K. Brown, Sleep Number® setting 40, serves as Executive Vice President and Chief Marketing Officer and is responsible for building the Sleep Number brand through stories that set the Company apart, communicating Sleep Number’s innovation and driving brand advocacy across all customer touchpoints. Before joining Sleep Number in 2014, Mr. Brown served in executive leadership roles at Meijer, Inc., Sears Holdings Corporation, Jo-Ann Stores, Inc. and Accenture.

SAMUEL R. HELLFELD, 43
Senior Vice President and Chief Legal and Risk Officer and Secretary (Joined the Company in 2013 and was promoted to current role in September 2018)
Samuel R. Hellfeld, Sleep Number® setting 65, serves as the Senior Vice President and Chief Legal and Risk Officer and Secretary and leads legal, internal audit, corporate security and asset protection. From October 2015 to September 2018, Mr. Hellfeld served as Vice President, Associate General Counsel. Mr. Hellfeld joined Sleep Number in March 2013 as Corporate Counsel. Prior to joining Sleep Number, Mr. Hellfeld was a Partner in the law firm of Fox Rothschild LLP (fka Oppenheimer Wolff & Donnelly LLP) practicing in the areas of intellectual property and litigation. Prior to 2010, Mr. Hellfeld was an Associate at several law firms and also served as Law Clerk in the United States Court of Appeals for the Ninth Circuit and the United States District Court, Southern District of California.

CHRISTOPHER D. KRUSMARK, 42
Senior Vice President and Chief Human Resources Officer (Joined the Company in 2005 and was promoted to current role in July 2020)
Christopher Krusmark, Sleep Number® setting 55, serves as the Senior Vice President and Chief Human Resources Officer, where he leads all human resources, training and learning functions. Prior to being promoted to his new role in July 2020, Mr. Krusmark served as Sleep Number’s Vice President of Sales Operations, Field Services and Training where he led retail operations, sales promotions and incentives, home delivery operations, the Company’s customer sales center and wholesale business development. From June 2005 to October 2015, Mr. Krusmark held a variety of leadership roles in finance at Sleep Number supporting sales, real estate, marketing and product. Prior to joining Sleep Number, Mr. Krusmark worked on the financial audit staff of EY and Arthur Andersen.

J. HUNTER SAKLAD, 52
Executive Vice President and Chief Supply Chain Officer (Joined the Company in 2004 and was promoted to current role in January 2021)
Hunter Saklad, Sleep Number® setting 65, serves as the Executive Vice President and Chief Supply Chain Officer at Sleep Number. From December 2012 to December 2020, Mr. Saklad served as Senior Vice President and Chief Information Officer. From June 2011 to December 2012, Mr. Saklad served as the Vice President, Consumer Insight and Strategy at Sleep Number. From March 2006 to June 2011 he was Vice President of Finance and held a variety of positions across Finance serving business partners in marketing, sales, supply chain, FP&A, investor relations and treasury. Mr. Saklad joined Sleep Number in October 2004 as Sr. Director of Finance. Prior to joining Sleep Number, Mr. Saklad held finance leadership roles at Ford Motor Company and Visteon.
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Available Information

We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the Securities and Exchange Commission (SEC).

Our corporate website is www.SleepNumber.com. Through a link to a third-party content provider, our corporate website provides free access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. These documents are posted on our website at www.SleepNumber.com — select the “Investors” link, the “Financials” link, and then the “SEC Filings” link. The information contained on our website or connected to our website is not incorporated by reference into this Form 10-K and should not be considered part of this report.

We also make available, free of charge on our website, the charters of the Audit Committee, Management Development and Compensation Committee and Corporate Governance and Nominating Committee, as well as our Code of Business Conduct (including any amendment to, or waiver from, a provision of our Code of Business Conduct) adopted by our Board. These documents are posted on our website — select the “Investors” link, the “Governance” link and then the “Governance Documents” link. The information contained on our website or connected to our website is not incorporated by reference into this Form 10-K and should not be considered part of this report.

Copies of any of the above-referenced information will also be made available, free of charge, upon written request to:

Sleep Number Corporation
Investor Relations Department
1001 Third Avenue South
Minneapolis, MN 55404
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ITEM 1A. RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the specific risks set forth below and other matters described in this Annual Report on Form 10-K before making an investment decision. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties, including risks and uncertainties that impact the business environment generally, those not presently known to us, or those that we currently see as immaterial, may also harm our business. If any of these risks occur, our business, results of operations, cash flows and financial condition could be materially and adversely affected.

Risks Related to COVID-19, Economic Conditions, Consumer Sentiment and the Availability of Credit

The COVID-19 pandemic has had, and may continue to have, an adverse effect on our business and our financial results.

The COVID-19 pandemic has created significant volatility, uncertainty and economic, consumer, supply chain and workforce disruption, which have adversely affected, and may continue to adversely affect, our business operations and financial results. Specifically, the COVID-19 pandemic and related governmental restrictions and guidelines, including business closures, stay at home orders, and isolation and quarantine recommendations and requirements, adversely affected, and may continue to adversely affect, our business, operations, supply chain, workforce, demand for our product, traffic to our stores, and macroeconomic factors that affect us, such as consumer confidence and spending. In 2020, the COVID-19 pandemic and related restrictions resulted in the temporary closure of most of our retail stores nationwide, with 47% of our stores closed on average during the second quarter of 2020. For the second half of 2020 and all of 2021, the COVID-19 pandemic continued to impact our financial performance, but we were able to keep our stores open. As the pandemic continues, COVID-19, new variants, infection rates, related governmental restrictions and recommendations, and individual concerns of becoming infected may again adversely impact our stores and other business operations, including product development, manufacturing, supply, distribution, home delivery operations and staffing, which could have an adverse impact on our sales and profits. As vaccines and other treatments for COVID-19 become available and the pandemic evolves, consumer behavior may continue to evolve or change, including spending more time away from home, and discretionary consumer spending on home goods such as our smart beds and related products may decrease.

Since the beginning of the COVID-19 pandemic, we scaled our digital and “sell-from-anywhere” capabilities including: remote retail selling, customer service, private appointments, flexible work schedules, solutions for contactless delivery, and remote access for team members across the country. This shift to our team members working remotely has amplified certain risks to our business, including increased demand on our information technology resources and systems and increased risk of cybersecurity breaches and IT outages. In addition, as recommendations and/or mandates have been modified, eased, lifted, and in some cases re-implemented across the country, we have implemented and evolved our health and safety policies for our operations, facilities and teams across the country, which are intended to ensure the safety of our team members and customers and reduce the risk of contracting or spreading the coronavirus for team members, contractors, and customers. As the coronavirus variants have changed and presented different risks, it is possible that our health and safety policies may not adequately protect our team members, contractors, and customers from contracting or spreading the coronavirus, which may have an adverse effect on our business operations or financial results.

In response to the COVID-19 pandemic, including the changes in customer purchasing patterns, supply chain constraints and workforce considerations we did, and in some situations continue to, take decisive actions to strengthen liquidity and reduce costs. It is possible that our cost reduction efforts may be insufficient to maintain adequate liquidity if our operations are further restricted or disrupted due to the COVID-19 pandemic or governmental recommendations or mandates, including vaccination or testing mandates that may be imposed in jurisdictions in which we operate, that may result in material impact on our sales and profits.

Additionally, if we do not respond appropriately to the pandemic, or if customers do not perceive our response to be adequate for a particular region or our Company as a whole, we could suffer damage to our reputation and our brand, which could adversely affect our business and financial results in the future.

We are highly dependent on the effectiveness of our marketing messages and the efficiency of our advertising expenditures in generating consumer awareness and sales of our products. In light of COVID-19 and the overall fluid
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nature of the pandemic and the consumer environment, we may not be as successful in developing effective messages and achieving efficiency in our advertising expenditures.

Our business depends heavily on the uninterrupted operation of our manufacturing plants, our assembly distribution centers, bedding fulfillment center, and home delivery teams across the country. Our business also depends on the successful function of our customer service operations and headquarters. The operation of all of our facilities and operations, including those of our suppliers and vendors, is critically dependent on adequate staffing by our team members or contractors, and COVID-19 could directly threaten or impact their health, ability to work, and/or willingness to work, and, therefore, adversely affect our operations and facilities. In addition, COVID-19 and governmental restrictions or recommendations, including vaccination or testing mandates, could require closures of our facilities, restrict our facilities and operations, and otherwise limit or adversely impact our ability to continue these operations and staff our facilities. COVID-19 has also adversely impacted, and may continue to adversely impact, the global supply chain and our logistics, lead times, and delivery timeframes, including availability of raw materials, components, and products we or our suppliers source from third parties as well as our sole source of supply for certain components and products, such as adjustable foundations and certain electronic components, due to COVID-19 infection rates, new variants, workforce impacts, governmental restrictions or recommendations and spikes in demand or shortages in supply with respect to certain raw materials and components driven by other industries. This has adversely affected, and we expect will continue to adversely affect, our business operations and financial results in 2022.

The inability or limitations of certain suppliers, both domestic and foreign, to ramp production to meet growing or surging global demand or to operate due to the COVID-19 pandemic, governmental restrictions or recommendations, staffing or supply shortages, or a reluctant workforce has delayed and may continue to delay the introduction of new innovations and product lines.

The situation surrounding COVID-19 remains fluid, and the potential for an adverse effect on our business and our financial results increases the longer the virus and new variants impact activity levels in the United States and globally. For this reason, we cannot reasonably estimate with any degree of certainty the extent of the impact COVID-19 will have on our business. The extent and duration of the impact of COVID-19 on our business, operations, and financial results will depend on future developments, including the duration and spread of the pandemic, new variants, the availability, administration, and efficacy of vaccines, governmental mandates and recommendations, business and workforce disruptions, and the related impact on global and domestic supply chain and consumer confidence and spending, all of which are highly uncertain and unpredictable.

Current and future economic conditions could materially adversely affect our sales, profitability, cash flows and financial condition.

Our success depends significantly upon discretionary consumer spending, which is influenced by a number of general economic factors, including without limitation economic growth, consumer confidence, the housing market, employment and income levels, interest rates, inflation, taxation, consumer shopping trends and the level of customer traffic in malls and shopping centers, civil unrest, as well as the COVID-19 pandemic. Adverse trends in any of these economic factors may adversely affect our sales, profitability, cash flows and financial condition.

Inflationary pressures stemming from supply chain disruptions, increased demand or other economic factors have resulted in increased fuel, shipping, raw material, labor and other costs, which have adversely affected, and may continue to adversely affect, our business operations and financial results, especially if continued for a prolonged period. If our costs rise due to continuing supply chain disruptions or inflationary pressures, we may not be able to fully offset such higher costs through price increases.

A reduction in the availability of credit to consumers generally or under our existing consumer credit programs could harm our sales, profitability, cash flows and financial condition.

A significant percentage of our sales are made under consumer credit programs through third parties. The amount of credit available to consumers may be adversely impacted by macroeconomic factors, including those related to or resulting from the COVID-19 pandemic, that affect the financial position of consumers, and as suppliers of credit adjust their lending criteria.

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Synchrony Bank provides credit to our customers through a private label credit card agreement that is currently scheduled to expire on December 31, 2023, subject to earlier termination upon certain events. Synchrony Bank has discretion to control the content of financing offers to our customers and to set minimum credit standards under which credit is extended to customers.

Reduction of credit availability due to changing economic conditions, including rising inflation, increased interest rates, changes in credit standards under our private label credit card program or changes in regulatory requirements, or the termination of our agreement with Synchrony Bank, could harm our sales, profitability, cash flows and financial condition.

Risks Related to Our Reliance on Third Parties and Reliance on a Global Supply Chain

We could be vulnerable to shortages in supply of components necessary to manufacture our products due to our manufacturing processes which operate with minimal levels of inventory or due to global shortages of supply of electronic componentry or other materials, which may harm our ability to satisfy consumer demand and may adversely impact our sales and profitability.

A significant percentage of our products are assembled after we receive orders from customers utilizing manufacturing processes with minimal levels of raw materials, work-in-process and finished goods inventories. Lead times for ordered components may vary significantly, and some components used to manufacture our products are provided on a sole source basis. We have experienced lengthened lead times throughout our supply chain as a result of supply chain constraints and material shortages that occurred in 2021 and may continue in 2022. Our efforts to mitigate supply chain weaknesses may not be successful or may have unfavorable effects. For example, efforts to purchase raw materials in advance for product manufacturing may result in increased storage costs or excess supply. In addition, with the increasing prevalence of and consumer demand for electronic products, along with COVID-19’s impact on the global supply chain, the global supply of electronic componentry is increasingly strained, which has led to shortages in supply and increased prices, and has adversely affected, and we expect may continue to adversely affect, our operations, costs, production capacity, delivery timeframe, product development, sales, profitability, and financial results. Any shortage of materials caused by any disruption or unavailability of supply or an increase in the demand for our products, has harmed and could continue to harm our ability to satisfy customer demand, delay deliveries of our products to customers, lead to customer cancellations and returns, delay the development and launch of new products, or increase our costs. Any such impacts or delays could adversely affect our sales, customer satisfaction, profitability, cash flows and financial condition.

We rely upon several key suppliers and third parties that are, in some instances, the only source of supply or services currently used by us for particular materials, components, products or services. A disruption in the supply or substantial increase in cost of any of these products or services could harm our sales, profitability, cash flows and financial condition.

We currently obtain all the materials and components used to produce our smart beds from outside sources including some that are located outside the United States. In several cases, including our air chambers, integrated non-adjustable foundations, adjustable foundations, various components for our Firmness Control systems, certain electronic componentry, certain foam formulations, as well as our fabrics and zippers, we obtain these materials, components and products from suppliers who serve as the only source of supply, or who supply the vast majority of our needs of the particular material, component or product. While we believe that some of these materials, components and products, or suitable replacements, could be obtained from other sources in the event of a disruption or loss of supply, we may not be able to find alternative sources of supply or alternative sources of supply on comparable terms, quantities and timelines. If our relationship with the primary supplier of our air chambers, adjustable foundations, or electronic components is terminated or significantly disrupted, we could have difficulty in replacing these sources since there are relatively few other suppliers presently capable of manufacturing these components and products. Constraints on the ability of certain of our suppliers to timely meet commitments in an environment of increased demand for consumer products and reduced labor during the COVID-19 pandemic, which has, and may continue to, adversely impact our ability to meet our product demand, result in additional costs, or may otherwise adversely impact our business, operations and financial results.

Similarly, we rely on third parties to deliver some of our products to our facilities and customers on a timely and cost-effective basis. These third-party providers could be vulnerable to labor shortages, liquidity concerns, the impacts of COVID-19 or other pandemics, or other factors that may result in delays in deliveries or increased costs of deliveries. Any significant delay in deliveries to our customers could lead to increased cancellations or returns and cause us to lose sales
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or incur increased costs. Any increase in freight charges or other costs of deliveries could harm our sales, profitability, cash flows and financial condition.

Fluctuations in commodity prices or availability or third-party logistics costs could result in an increase in component costs and/or delivery costs.

Our business is subject to significant increases or volatility in the prices of certain commodities, including but not limited to electronic componentry, fuel, oil, natural gas, rubber, cotton, plastic resin, corrugate, steel and chemical ingredients used to produce foam, as well as third-party logistic costs. Increases in prices of these commodities or logistics costs or other inflationary pressures may result in significant cost increases for our raw materials and product components, as well as increases in the cost of delivering our products to our customers. To the extent we are unable to offset any such increased costs through value engineering and similar initiatives, or through price increases, our profitability, cash flows and financial condition may be adversely impacted. If we choose to increase prices to offset the increased costs, our sales volumes could be adversely impacted.

Our business is subject to risks inherent in global sourcing activities.

Our air chambers, certain electronic components, and some of our other components are manufactured outside the United States, and therefore are subject to risks associated with foreign sourcing of materials, including but not limited to:

Existing or potential duties, tariffs or quotas on certain types of goods that may be imported into the United States;
Political instability, unrest, geo-political turmoil, acts of terrorism, global conflicts or war (such as the current conflict in Ukraine), outbreaks of pandemics or contagious diseases (such as the COVID-19 pandemic), shipping delays, foreign or domestic strikes, customs inspections, or other factors resulting in disruption in supply, transportation, trade, labor, or the availability of global contractors utilized in our business operations;
Foreign currency fluctuations; and
Economic uncertainties, including inflation.

We cannot predict whether the countries in which some of our components are manufactured, or may be manufactured in the future, or where we contract for labor will be subject to new or additional trade restrictions imposed by the United States or other foreign governments, including the likelihood, type, or effect of any such restrictions. The United States government has implemented certain trade policies, including imposing tariffs on certain goods imported from China and other countries, and may take further actions with respect to these policies in the future. These factors could increase our costs of doing business with foreign suppliers, lead to inadequate inventory levels or delays in shipping beds to our customers, which could harm our sales, customer satisfaction, profitability, cash flows and financial condition.

Our operations and those of our suppliers are located in various regions of the U.S. and across the globe, which subjects us to regional risks, such as adverse weather conditions and other natural or man-made disasters.

The locations where we and our suppliers and global contractors operate have experienced, and may experience in the future, adverse regional events such as extreme weather conditions and other natural and man-made disasters, which could have a material adverse effect on us, our ability to source necessary materials, components and products, and our ability to develop, launch, sell and deliver our products to customers. Climate change may increase the frequency and severity of adverse weather conditions and other natural disasters. All regions of the U.S. and warmer climates globally may be particularly impacted by extreme weather, such as hurricanes, natural disasters, droughts, wildfires and rising sea levels. These events may disrupt our operations and ability to source components and products.

Risks Related to Our Marketing Strategy and Execution of Total Retail Distribution Strategy

Our future growth and profitability depend upon the effectiveness and efficiency of our marketing programs.

We are highly dependent on the effectiveness of our marketing messages and the efficiency of our advertising expenditures in generating consumer awareness, consideration and conversation leading to sales of our products. We continue to evolve our marketing strategies, adjust our messages, and review the amount we spend on advertising and
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where we spend it. We may not always be successful in developing effective messages, as the consumer and competition change, or in achieving efficiency in our advertising expenditures.

We rely in part upon third parties, such as social media influencers and athletes, to market our brand, and we are unable to fully control their efforts. Influencers and athletes with whom we maintain a relationship could engage in behavior or use their platforms to communicate directly with our customers in a manner that reflects poorly on our brand, and these communications may be attributed to us or otherwise adversely affect us. It is not possible to prevent such behavior, and the precautions we take to prevent or detect this activity may not be effective.

Consumers are increasingly having digital experiences and interactions as a part of their shopping experience. As a result, our future growth and profitability will depend in part on (i) the effectiveness and efficiency of our online experience, including without limitation advertising and search marketing and optimization programs, in generating consumer awareness and sales of our products; (ii) our ability to prevent confusion among consumers that can result from search engines that allow competitors to use our trademarks to direct consumers to competitors’ websites through confusing or misleading advertisements; (iii) our ability to prevent Internet publication of false or misleading information regarding our products or our competitors’ products; (iv) reviews of our products; (v) the nature and tone of consumer sentiment, including those published online or elsewhere; and (vi) the stability of our website. In recent periods, competitor spending on digital marketing programs has increased, including without limitation from a number of direct-to-consumer, digital retailers and omnichannel retailers, which has and may continue to increase the cost of basic search terms and the cost of our digital marketing programs.

If our marketing messages are ineffective or our advertising expenditures and other marketing programs, including digital programs, are inefficient in creating awareness and consideration of our products and brand name, and in driving consumer traffic to our website, call centers, or stores, our sales, profitability, cash flows and financial condition may be adversely impacted. In addition, if we are not effective in preventing the publication of confusing, false or misleading information regarding our brand or our products, or if there is publication online or elsewhere of significant negative consumer sentiment regarding our Company, brand or our products, our sales, profitability, cash flows and financial condition may be adversely impacted.

Our future growth and profitability depend on our ability to execute our Total Retail distribution strategy.

The vast majority of our sales occur through Total Retail, including our retail stores and our website. Total Retail represents our largest opportunity for growth in sales and improvement in profitability. Our retail stores carry significant fixed costs. We also make significant capital expenditures as we open new stores and remodel or reposition existing stores. We are highly dependent on our ability to maintain and increase sales per store to cover these fixed expenses, provide a return on our capital investments and improve our operating margins.

Some of our stores are mall-based. We depend on the continued popularity of malls as shopping destinations and the ability of mall anchor tenants and other attractions to generate customer traffic for our mall-based retail stores. Any decrease in mall traffic, including due to governmental recommendation or mandates related to COVID-19, could adversely affect our sales, profitability, cash flows and financial condition.

Our Total Retail distribution strategy results in relatively few points of distribution, including 648 retail stores in 50 U.S. states as of the end of 2021, Online, Phone and Chat. Several of the mattress manufacturers and retailers with which we compete have significantly more brick-and-mortar points of distribution than we do, which makes us highly dependent on our ability to drive consumers to our points of distribution to gain market share.

Our longer-term Total Retail distribution strategy is also dependent on our ability to renew existing store leases and to secure suitable locations for new store openings, in each case on a cost-effective basis. We may encounter higher than anticipated rents and other costs in connection with managing our retail store base. We may also be unable to find or obtain suitable new locations.

Failure to achieve and maintain a high level of product quality could negatively impact our sales, profitability, cash flows and financial condition.

Our products are highly differentiated from traditional innerspring mattresses and from viscoelastic and other foam mattresses, which have little or no technology and do not rely on electronics and air control systems. As a result, our
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beds may be susceptible to failures that do not exist with traditional or foam mattresses. Failure to achieve and maintain acceptable quality standards could impact consumer acceptance of our products or result in negative media and Internet reports or owner dissatisfaction that could negatively impact our brand image and sales levels.

In addition, a decline in product quality could result in an increase in return rates and a corresponding decrease in sales, or an increase in product warranty claims in excess of our warranty reserves. An unexpected increase in return rates or warranty claims could harm our sales, profitability, cash flows and financial condition.

As a consumer innovation Company with differentiated products, we face an inherent risk of exposure to product liability claims or regulatory actions if the use of our products is alleged to have resulted in personal injury or property damage. If any of our products proves to be defective or non-compliant with applicable regulations such as the federal Consumer Product Safety Commission flammability standards, we may be required to recall or redesign such products. We have at times experienced increased returns and adverse impacts on sales, as well as product liability litigation, as a result of media reports related to the alleged propensity of our products to develop mold. We may experience additional adverse impacts on sales and additional litigation if any similar media reports were to occur in the future. We maintain insurance against some forms of product liability claims, but such coverage may not be applicable to, or adequate for, liabilities actually incurred. A successful claim brought against us outside of, or in excess of, available insurance coverage, or any claim or product recall that results in significant adverse publicity about us, may have a material adverse effect on our sales, profitability, cash flows and financial condition.

Our future growth and profitability depend in part on our ability to continue to improve and expand our product line and to successfully execute new product introductions.

As described in greater detail below, the bedding industry, as well as the market for sleep monitoring products, are both highly competitive, and our ability to compete effectively and to profitably grow our market share depend in part on our ability to continue to improve and expand our product line of adjustable firmness air beds, SleepIQ technology and related accessory products. We incur significant research and development and other expenditures in the pursuit of improvements and additions to our product line. If these efforts do not result in meaningful product improvements or new product introductions, if we are not able to gain widespread consumer acceptance of product improvements or new product introductions, or there are delays or production limitations with respect to our product improvements or new product introductions, our sales, profitability, cash flows and financial condition may be adversely affected. In addition, if any significant product improvements or new product introductions are not successful, delayed, or constrained our reputation and brand image may be adversely affected.

Our intellectual property rights may not prevent others from using our technology or trademarks in connection with the sale of competitive products. We are from time to time subject to claims that our products, processes or trademarks infringe intellectual property rights of others.

We own various U.S. and foreign patents and patent applications related to certain elements of the design and function of our beds and related products. We own numerous registered and unregistered trademarks and trademark applications, including in particular our Sleep Number, Sleep Number 360, 360, and SleepIQ trademarks, as well as other intellectual property rights, including trade secrets, trade dress and copyrights, which we believe have significant value and are important to the development, function, and marketing of our products. These intellectual property rights may not provide adequate protection against infringement or piracy, may not prevent competitors from developing and marketing products that are similar to or competitive with our beds or other products, and may be costly and time-consuming to protect and enforce. Our patents are also subject to varying expiration dates. In addition, the laws of some foreign countries may not protect our intellectual property rights and confidential information to the same extent as the laws of the United States. If we are unable to protect and enforce our intellectual property, we may be unable to prevent other companies from using our technology or trademarks in connection with competitive products, which could adversely affect our sales, profitability, cash flows and financial condition.

We are from time to time subject to claims that our products, processes, advertising, or trademarks infringe the intellectual property rights of others. The defense of these claims, even if we are ultimately successful, may result in costly litigation, and if we are not successful in our defense, we could be subject to injunctions and liability for damages or royalty obligations, and our sales, profitability, cash flows and financial condition could be adversely affected.

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Risks Related to Our Vertically Integrated Business

Significant competition could adversely affect our business.

Because of the vertical integration of our business model, our products and distribution face significant competition from both manufacturers of different types of mattresses and a variety of retailers. Our SleepIQ technology also faces significant competition from various manufacturers and retailers of sleep tracking and monitoring products.

The mattress industry is characterized by a high degree of concentration among the largest manufacturers of innerspring mattresses and foam mattresses and one dominant national mattress retailer. In recent years, numerous direct-to-consumer companies and low-cost importers have entered the market, offering “bed-in-a-box” or similar products primarily through online distribution directly to consumers though many now also partner with traditional mattress retailers. The emergence of these new competitors has increased the costs of search terms and digital advertising.

A variety of sleep tracking and monitoring products that compete with our SleepIQ technology have been introduced by various manufacturers and retailers, both within and outside of the traditional mattress industry.

Some of our competitors have substantially greater financial, marketing and manufacturing resources and greater brand name recognition than we do and sell products through broader and more established distribution touchpoints. Our national, exclusive distribution competes with other retailers who generally provide a wider selection of mattress alternatives than we offer. A number of these retailers also have more points of distribution, greater marketing resources, and greater brand name recognition than we do.

These manufacturing and retailing competitors, or new entrants into the market, may compete aggressively and gain market share with existing or new products, and may pursue or expand their presence in the adjustable firmness air bed segment of the market as well as in the market for sleep tracking and monitoring products. We have limited ability to anticipate the timing and scale of new product introductions, advertising campaigns or new pricing strategies by our competitors, which could inhibit our ability to retain or increase market share, or to maintain our profit margins.

If we are unable to effectively compete with other manufacturers and retailers of mattress and sleep tracking and monitoring products, our sales, profitability, cash flows and financial condition may be adversely impacted.

Disruption to of our manufacturing, distribution, logistics, home delivery, product development, and customer service operations could increase our costs of doing business or harm our ability to satisfy customer demand, develop and launch new products, and service our products and customers.

We have two main manufacturing plants, which are located in Irmo, South Carolina and Salt Lake City, Utah, and a network of several assembly distribution centers across the county. A significant percentage of our products are assembled to fulfill orders rather than stocking finished goods inventory in our plants, assembly distribution centers, or stores. We have home delivery operations and contractors that deliver our products to customers across the country as well as a bedding fulfillment center that ships bedding products to consumers via third-party services. Our product development and testing operations primarily occur in our corporate headquarters in Minneapolis, Minnesota and Sleep Number Labs facility in San Jose, California. Our customer service operations are located in New Orleans, Louisiana and Minneapolis, Minnesota and we have retail stores across the country. Disruption to any of these operations, facilities, workforce, or our nationwide logistics network could harm or delay our ability to satisfy customer demand, develop, test and launch new products, service our products and customers, and increase our costs. Such impacts and delays could adversely affect our sales, customer satisfaction, profitability, cash flows and financial results.

Risks Related to Legal Compliance and Legal Proceedings

Our business is subject to a wide variety of government laws and regulations. These laws and regulations, as well as any new or changed laws or regulations, could disrupt our operations or increase our compliance costs. Failure to comply with such laws and regulations could have further adverse impacts on our operations.

We are subject to a wide variety of laws and regulations relating to the bedding industry or to various aspects of our business. Laws and regulations at the federal, state and local levels frequently change and we cannot always reasonably predict the impact from, or the ultimate cost of compliance with, future regulatory or administrative changes. Changes in
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law, the imposition of new or additional regulations or the enactment of any new or more stringent legislation that impacts employment and labor, trade, advertising and marketing practices, pricing, consumer credit offerings, “do not call/mail” requirements, text messaging requirements, product testing and safety, transportation and logistics, health care, tax, accounting, privacy and data security, health and safety or environmental issues, warranty disclosures, delivery timing requirements, accessibility requirements, among others, could require us to change the way we do business and could have a material adverse impact on our sales, profitability, cash flows and financial condition. New or different laws or regulations could increase direct compliance costs for us or may cause our vendors to raise the prices they charge us because of increased compliance costs. Further, the adoption of a multi-layered regulatory approach to any one of the state or federal laws or regulations to which we are currently subject, particularly where the layers are in conflict, could require alteration of our manufacturing processes or operational parameters which may adversely impact our business.

Legislative or regulatory changes that impact our relationship with our workforce, such as minimum wage requirements or health insurance or other employee benefits mandates, could increase our expenses and adversely affect our operations. While it is our policy and practice to comply with legal and regulatory requirements and our procedures and internal controls are designed to promote such compliance, we cannot assure that all of our operations will comply with all such legal and regulatory requirements. Further, laws and regulations change over time and we may be required to incur significant expenses and/or to modify our operations in order to ensure compliance. This could harm our profitability or financial condition. If we are found to be in violation of any laws or regulations, we could become subject to fines, penalties, damages or other sanctions as well as potential adverse publicity or litigation exposure. This could adversely impact our business, reputation, sales, profitability, cash flows or financial condition.

Our ability to commercialize new products and innovations may be delayed or prevented by regulatory requirements.

As we work to develop innovations with enhanced health capabilities, including possible capabilities of providing advanced monitoring and health risk evaluations, depending on the features that ultimately become commercially available, some features may require regulatory requirements or approvals beyond those that apply to our current products or features. These additional regulatory requirements or approvals may be prohibitively expensive or otherwise delay or prevent certain features, innovations, or product from being commercialized.

Pending or unforeseen litigation and the potential for adverse publicity associated with litigation could adversely impact our business, reputation, financial results or financial condition.

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. We currently do not expect the outcome of any pending matters 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 pending claims asserted against us, or claims that may be asserted in the future that we are currently not aware of, or adverse publicity resulting from any such litigation, could adversely impact our business, reputation, sales, profitability, cash flows and financial condition.

Risks Related to Our Information Systems and Cybersecurity

Information systems that contain confidential Company data, consumers’ personal information, and team members’ personal information may be subject to attacks by hackers or other cyber threats that could compromise the confidentiality, integrity, and availability of the data, which could substantially disrupt our business and could result in a breach of the data.

Our information systems and information systems of third-party vendors we use to assist in the storage and management of information, including on-premise and cloud-based systems, contain personal information related to our customers and team members collected and maintained in the ordinary course of our business, such as credit card and demographic information of our customers, SleepIQ® data, including biometric data (e.g., sleep, physiological) from our customer base and social security numbers, demographic information, and employment-related information of our team members. These information systems also contain confidential Company data regarding our business and innovations. Our use and dependence on our information systems has increased with amplified remote working during the COVID-19 pandemic and additional data storage in cloud-based systems. While we maintain and require our third-party vendors to maintain security measures to protect this information, a breach of these security measures, such as through third-party
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action and attacks, team member error, access to our data and systems, malfeasance or otherwise, could compromise the security of our data and customers’ and team members’ personal information. Like many other businesses, we have and will likely continue to experience cyber-based attacks and incidents from time to time. As the techniques used to breach such security measures change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. Any failure of our systems and processes or our third-party vendors’ systems and processes to adequately protect our data or customer or team member personal information from exposure, theft or loss could adversely impact our business, reputation, sales, profitability, cash flows and financial condition.

Any maintenance, improvements or upgrades to information systems that may be required to meet the evolving needs of our business and cybersecurity needs as well as existing and emerging regulatory requirements may be costly to implement and may take longer or require greater resources than anticipated, and may result in disruptions to our systems or business.

We depend on our information systems for many aspects of our business. If our information systems are disrupted in any material way, or maintenance, improvements or upgrades are required to meet the evolving needs of our business, cybersecurity needs, and existing and emerging regulatory requirements, we may be required to incur significant capital expenditures in the pursuit of improvements or upgrades to our information systems. These efforts may take longer and may require greater financial and other resources than anticipated, may cause distraction of key personnel, and may cause short-term disruptions or security vulnerabilities to our existing systems and our business. Any of these outcomes could impair our ability to achieve critical strategic initiatives and could adversely impact our sales, profitability, cash flows and financial condition.

Risks Related to Workforce

Our future growth and profitability depend in part upon our ability to attract, retain and motivate qualified personnel.

As a vertically integrated manufacturer and retailer, our future growth and profitability will depend in part upon our ability to attract, retain and motivate qualified personnel in a wide variety of areas to execute our growth strategy, including qualified management and executive personnel, retail sales professionals and managers, and manufacturing, home delivery and technical personnel. The current labor shortage, the world-wide trends of corporate resignations, COVID-19 or other economic factors may prevent us, and our suppliers and vendors, from successfully hiring and retaining qualified personnel. The failure to attract, retain and motivate qualified personnel may hinder our ability to execute our business strategy and growth initiatives and may adversely impact our sales, profitability, cash flows and financial condition.

Risks Related to Our Stock

A substantial amount of our stock is held by a small number of large investors and significant sales of our common stock by one or more of these holders could cause our stock price to fall, which could cause investors to lose all or a portion of their investment in our stock.

As of December 31, 2021, we believe the ten largest holders of common stock were institutional investors who held approximately 58% of our outstanding shares of common stock in the aggregate, with BlackRock Fund Advisors being our largest shareholder with approximately 14% of our outstanding shares of common stock. These investors may sell their shares at any time for a variety of reasons, and such sales could depress the market price of our common stock, which could cause investors to lose all or a portion of their investment in our stock. In addition, any such sales of our common stock by these entities could also impair our ability to raise capital through the sale of additional equity securities.

The stock price of our Company may fluctuate significantly in response to numerous factors such as: the overall performance of the equity markets and the economy as a whole; changes in the financial projections we or third parties may provide to the public or our failure to meet these projections; actual or anticipated changes in our growth rate relative to that of our competitors; failure of securities analysts to maintain coverage of us, changes in financial estimates by any securities analysts who follow our Company or our failure to meet these estimates or the expectations of
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investors; and sales of share of our common stock by us or our shareholders particularly sales by our directors, executive officers and significant shareholders or the perception that these sales could occur.

General Risks

Increasing scrutiny and evolving expectations from consumers, regulators, investors and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.

Companies are facing increasing scrutiny from consumers, regulators, investors and other stakeholders related to their environmental, social and governance (ESG) practices and disclosures. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, climate change, health and safety, supply chain management, diversity, labor conditions and human rights, both in our own operations and in our supply chain. Increased ESG-related compliance costs could result in material increases to our overall operational costs. While we have taken steps to evolve our ESG strategy and related disclosures, including through implementing enhanced data collection methods and reporting certain data under recognized ESG reporting frameworks, our ESG practices may not meet the standards of all our stakeholders and advocacy groups may campaign for further changes. A failure, or perceived failure, to adopt to or comply with regulatory requirements or to respond to investor or stakeholder expectations and standards could negatively impact our business and reputation.

Climate change and legal or regulatory responses may adversely affect our business, operations and financial condition.

Climate change presents various near and long-term risks that may adversely impact our business. The enactment of new laws and regulations to address or limit the effects of climate change, or changes to existing laws and regulations, could mandate more restrictive standards or require such changes on a more accelerated time frame. The consequences of climate change and the ensuing governmental regulations could disrupt our operations or harm our ability to source necessary materials and components and manufacture our products, which may adversely affect our financial condition. If public perception of our compliance with laws and regulations related to climate change is negative, it could adversely affect our business, reputation and shareholder perception. Adverse publicity or climate-related litigation that impacts us could also have a negative impact on our business.

Extreme weather, natural disasters, power outages, or other unexpected events could result in physical damage to and complete or partial closure of one or more of our manufacturing, distribution centers or other facilities or those of our suppliers, temporary or long-term disruption in our supply chain, logistics, or workforce and/or disruption of our ability to deliver products to customers. Current or future insurance arrangements may not provide protection for costs that may arise from such events, particularly if such events are catastrophic in nature or if multiple such events occur. Climate change may also subject our business to significant increases or volatility in the prices of certain commodities, including but not limited to electronic componentry, fuel, oil, natural gas, rubber, cotton, plastic resin, corrugate, steel and chemical ingredients used to produce foam, as well as third-party logistic costs. Further, the long-term effects of climate change on general economic conditions and our industry in particular are unclear, and changes in the supply, demand, or available sources of energy and the regulatory and other costs associated with energy production and delivery may affect the availability or cost of goods and services, including natural resources, necessary to run our business. Any long-term disruption in our ability to service our customers from one or more manufacturing, distribution centers or other facilities could have an adverse effect on our operations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.
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ITEM 2. PROPERTIES

Retail Locations

We currently lease all of our existing retail store locations and expect that our policy of leasing stores, rather than owning stores, will continue. We lease our retail stores 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. Our retail store leases generally provide for an initial lease term of five to 10 years. In addition, our mall-based retail store leases may require payment of contingent rent based on net sales in excess of certain thresholds. Certain retail store leases may contain options to extend the term of the original lease.

The following table summarizes the geographic locations of our 648 retail stores as of January 1, 2022:
 Retail
Stores
 Retail
Stores
 Retail
Stores
Alabama11 Louisiana11 Ohio22 
AlaskaMaineOklahoma
Arizona13 Maryland15 Oregon
ArkansasMassachusetts11 Pennsylvania26 
California71 Michigan19 Rhode Island
Colorado15 Minnesota17 South Carolina10 
ConnecticutMississippiSouth Dakota
DelawareMissouri12 Tennessee17 
Florida45 MontanaTexas61 
Georgia23 NebraskaUtah
HawaiiNevadaVermont
IdahoNew HampshireVirginia19 
Illinois24 New Jersey13 Washington17 
Indiana12 New MexicoWest Virginia
IowaNew York24 Wisconsin11 
KansasNorth Carolina21 Wyoming
KentuckyNorth DakotaTotal648 
Manufacturing, Distribution and Headquarters
We lease our 238,000 square-foot corporate headquarters in Minneapolis, MN. The lease term commenced in November 2017 and runs through October 2032. The lease includes three five-year renewal options.
We lease two manufacturing facilities in Irmo, SC and Salt Lake City, UT of approximately 151,000 square feet and approximately 101,000 square feet, respectively. The Irmo facility lease runs through June 2026, with two five-year renewal options. The Salt Lake City facility lease runs through July 2025, with one five-year renewal option.
We have five distribution centers and four other distribution-related facilities located in Brooklyn Park, MN; Redlands, CA; Dallas, TX; Tampa, FL; Cincinnati, OH; Baltimore, MD; Salt Lake City, UT and Irmo, SC, with a total square footage of approximately 1.0 million square feet and lease terms ending in July 2023 through July 2031.
ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.
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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on The Nasdaq Stock Market LLC (Nasdaq Global Select Market) under the symbol “SNBR.” As of January 29, 2022, there were approximately 192 holders of record of our common stock.

We are not restricted from paying cash dividends under our Credit Agreement so long as we are not in default under the Credit Agreement, our leverage ratio (as defined in our Credit Agreement) after giving effect to such restricted payments (as defined in our Credit Agreement) would not exceed 3.75:1.00 and no default or event of default (as defined in our Credit Agreement) would result therefrom. However, we have not historically paid, and have no current plans to pay, cash dividends on our common stock.

Information concerning share repurchases completed during the fourth quarter of fiscal 2021 is set forth below:
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)
October 3, 2021 through October 30, 2021609 $86.60 — $402,939,000 
October 31, 2021 through November 27, 2021785 $81.41 — 402,939,000 
November 28, 2021 through January 1, 2022223 $77.47 — 402,939,000 
Total1,617 $82.82 — $402,939,000 
____________________
(1)We did not repurchase any shares during the three months ended January 1, 2022 under our Board-approved $600 million share repurchase program (effective April 4, 2021).
(2)In connection with the vesting of employee restricted stock grants, we repurchased 1,617 shares of our common stock at a cost of $0.1 million during the three months ended January 1, 2022.
(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.
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Comparative Stock Performance
The graph below compares the total cumulative shareholder return on our common stock over the last five years to the total cumulative return on the Standard and Poor’s (S&P) 400 Specialty Stores Index and The Nasdaq Stock Market (U.S.) Index assuming a $100 investment made on December 31, 2016. Each of the three measures of cumulative total return assumes reinvestment of dividends. The stock performance shown on the graph below is not necessarily indicative of future price performance. The information contained in this “Comparative Stock Performance” section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that we specifically request that it be treated as soliciting material or incorporate it by reference into a document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
snbr-20220101_g1.jpg
 12/31/1612/30/1712/29/1812/28/1901/02/2101/01/22
Sleep Number Corporation$100 $166 $142 $219 $362 $339 
S&P 400 Specialty Stores Index100 78 71 80 96 139 
The Nasdaq Stock Market (U.S.) Index100 130 125 171 248 304 
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ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share and selected operating data, unless otherwise indicated)
The Consolidated Statements of Operations Data and Consolidated Balance Sheet Data presented below have been derived from our Consolidated Financial Statements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and Notes thereto included in this Annual Report on Form 10-K.
 Year
 2021
2020(1)
201920182017
Consolidated Statements of Operations Data:
Net sales$2,184,949 $1,856,555 $1,698,352 $1,531,575 $1,444,497 
Gross profit1,318,847 1,156,000 1,051,923 927,961 897,347 
Operating expenses:
Sales and marketing905,359 771,195 766,922 687,380 650,357 
General and administrative161,412 158,999 137,956 119,378 127,269 
Research and development58,540 40,910 34,950 28,775 27,806 
Operating income193,536 184,896 112,095 92,428 91,915 
Net income$153,746 $139,189 $81,845 $69,539 $65,077 
Net income per share:
Basic$6.40 $5.03 $2.78 $1.97 $1.58 
Diluted$6.16 $4.90 $2.70 $1.92 $1.55 
Shares used in calculation of net income per share:
Basic24,038 27,665 29,472 35,256 41,212 
Diluted24,947 28,428 30,355 36,165 42,085 
Consolidated Balance Sheet Data:
Cash and cash equivalents$2,389 $4,243 $1,593 $1,612 $3,651 
Total assets(2)
919,540 800,136 806,043 470,138 471,834 
Borrowings under revolving credit facility382,500 244,200 231,000 199,600 24,500 
Total shareholders’ (deficit) equity(424,953)(223,978)(159,431)(109,550)89,156 
Selected Operating Data:
Stores open at period-end648 602 611 579 556 
Stores opened during period77 30 59 53 36 
Stores closed during period31 39 27 30 20 
Average sales per store (000’s)(3)
$3,600 $3,052 $2,877 $2,707 $2,618 
Percentage of stores with > $2 million in net sales(4)
84 %67 %70 %65 %61 %
Percentage of stores with > $3 million in net sales(4)
48 %29 %30 %25 %22 %
Average revenue per mattress unit - Total Retail(5)
$5,102 $4,856 $4,865 $4,482 $4,283 
Total Retail comparable-sales increase(6)
17 %%%%%
Total retail square footage (at period-end) (000’s)1,948 1,762 1,749 1,598 1,489 
Average square footage per store open during period(4)
3,006 2,926 2,802 2,725 2,647 
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 Year
 2021
2020(1)
201920182017
Average sales per square foot(3)
$1,212 $1,051 $1,034 $998 $995 
Average store age (in months at period-end)91 97 94 95 97 
Earnings before interest, depreciation and amortization (Adjusted EBITDA)(7)
$276,701 $267,891 $190,351 $165,588 $169,097 
Free cash flows(7)
$233,110 $242,561 $129,921 $86,025 $112,778 
Return on invested capital (ROIC)(7)
27.6 %25.0 %17.8 %16.0 %14.3 %
_____________________
(1)Fiscal year 2020 had 53 weeks. All other fiscal years presented had 52 weeks.
(2)On December 30, 2018, we adopted ASC Topic 842, Leases, on a modified-retrospective basis. Comparative information has not been restated and continues to be reported under the standards in effect for those periods.
(3)Trailing-twelve months Total Retail comparable sales per store open at least one year.
(4)For stores open during the entire period indicated (excludes Online, Phone and Chat sales).
(5)Represents Total Retail net sales divided by Total Retail smart bed units.
(6)Stores are included in the comparable sales calculation in the 13th full month of operation. Stores that have been remodeled or repositioned within the same shopping center remain in the comparable-store base. The number of comparable stores used to calculate such data was 568, 567, 539, 524 and 512 for 2021, 2020, 2019, 2018 and 2017, respectively. Fiscal 2020 included 53 weeks, as compared to 52 weeks for the other periods presented. Comparable sales have been adjusted and reported as if all years had the same number of weeks.
(7)These non-GAAP measures are not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates annual and year-over-year comparisons for investors and financial analysts. See pages 31 and 32 for the reconciliation of these non-GAAP measures to the appropriate GAAP measures.

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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):
 Year
 20212020201920182017
Net income$153,746 $139,189 $81,845 $69,539 $65,077 
Income tax expense33,545 36,783 18,663 16,982 25,961 
Interest expense6,245 9,021 11,591 5,911 975 
Depreciation and amortization59,779 60,783 61,410 61,648 61,077 
Stock-based compensation23,214 21,813 16,657 11,412 15,763 
Asset impairments172 302 185 96 244 
Adjusted EBITDA$276,701 $267,891 $190,351 $165,588 $169,097 

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 operations,” 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):
 Year
 20212020201920182017
Net cash provided by operating activities$300,010 $279,661 $189,160 $131,540 $172,607 
Subtract: Purchases of property and equipment(66,900)(37,100)(59,239)(45,515)(59,829)
Free cash flow$233,110 $242,561 $129,921 $86,025 $112,778 

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Non-GAAP Data Reconciliations (continued)

Return on Invested Capital (ROIC)

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 (in thousands):
 Year
 20212020201920182017
Net operating profit after taxes (NOPAT) 
Operating income$193,536 $184,896 $112,095 $92,428 $91,915 
Add: Rent expense(1)
101,679 91,458 87,835 79,390 74,019 
Add: Interest income— 97 97 
Less: Depreciation on capitalized operating leases(2)
(25,592)(24,001)(22,358)(20,392)(18,865)
Less: Income taxes(3)
(65,216)(59,387)(42,592)(36,444)(48,970)
NOPAT$204,407 $193,063 $134,983 $114,986 $98,196 
Average invested capital
Total (deficit) equity$(424,953)$(223,978)$(159,431)$(109,550)$89,156 
Add: Long-term debt(4)
383,037 244,849 231,756 200,458 — 
Add: Capitalized operating lease obligations(5)
813,432 731,664 702,680 635,120 592,152 
Total invested capital at end of period$771,516 $752,535 $775,005 $726,028 $681,308 
Average invested capital(6)
$739,873 $773,413 $757,361 $719,055 $686,436 
Return on invested capital (ROIC)(7)
27.6 %25.0 %17.8 %16.0 %14.3 %
_____________________
(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 five 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 24.2%, 23.5%, 24.0%, 24.1% and 33.3% for 2021, 2020, 2019, 2018 and 2017, 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.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The discussion in this Annual 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;
Risks inherent in global sourcing activities, including tariffs, outbreaks of pandemics or contagious diseases, strikes and the potential for shortages in supply or disruption or delay of production and delivery of materials and products in our supply chain;
Risks of disruption in the operation of any of our manufacturing, distribution, logistics, home delivery, product development, or customer service facilities or operations;
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 service providers;
Rising commodity costs and other inflationary pressures;
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;
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 or maintaining 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;
Environmental risks, including increasing environmental regulation and the broader impacts of climate change such as from weather-related events; and
Our ability, and the ability of our suppliers and vendors, to attract, retain and motivate qualified management, executive and other key team members, including qualified retail sales professionals and managers.
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Additional information concerning these and other risks and uncertainties is contained under the caption “Risk Factors” in this Annual Report on Form 10-K.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of our 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 the following sections:

Overview
Results of Operations
Liquidity and Capital Resources
Critical Accounting Policies and Estimates
Recent Accounting Pronouncements

Overview

Business Overview

At Sleep Number, our purpose is to improve the health and wellbeing of society through higher quality sleep. We are committed to leveraging the power of sleep, and sleep science, to improve lives and create a healthier, kinder, more inclusive world. And because our more than 5,500 team members are dedicated to our mission as well as the disciplined execution of our vertically integrated business model and differentiated strategy, Sleep Number is at the forefront of sleep innovation. As the exclusive designer, manufacturer, marketer, retailer and servicer of Sleep Number 360 smart beds and SleepIQ technology, Sleep Number is uniquely equipped to offer the life-changing benefit of high-quality, individualized sleep solutions and services. To date, we have improved almost 14 million lives.

With our enterprise-wide investments in innovation, technology, logistics, marketing and customer service, Sleep Number has created a highly relevant, competitively advantaged strategy and has become a beloved brand built on a foundation of individuality and wellbeing. Together with our expertise in sleep research, commitment to data science and analytics, and deep understanding of consumers – including structural shifts in their behavior that we have anticipated since the 2012 inception of our consumer innovation strategy and which were accelerated by the global pandemic – we are driving profitable growth and delivering superior value for all our stakeholders.

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. Despite the COVID-19 pandemic challenges, we continue to design, manufacture, sell and service Sleep Number products, invest in our business, develop and launch new products, and deliver innovative customer solutions.

The COVID-19 pandemic impacted our 2020 and 2021 financial performance. In 2020, the COVID-19 pandemic mainly impacted our second-quarter financial performance, as we generated strong demand and financial performance during the full-year of 2020. In 2021 we continued to generate strong demand; however, our financial performance was impacted by: (i) global supply constraints which affected our ability to deliver products to our customers; and (ii) incremental costs from labor and material inflation, and expediting costs resulting from current-period supply chain shortages. The pandemic's future effects on our global supply chain, consumer demand and our ongoing financial performance remains uncertain. See Part I: Item 1. Business and Item 1A. Risk Factors for additional discussion on the COVID-19 pandemic and the impact on our business.
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Results of Operations

Fiscal 2021 Summary

Financial highlights for fiscal 2021 were as follows:

Net sales for 2021 increased 18% to $2.2 billion, compared with $1.9 billion in 2020, and increased 29% compared with $1.7 billion in 2019. While customer order demand remained strong during 2021, global supply constraints limited our ability to deliver products to our customers, shifting more than $125 million of net sales to future periods. 2020 included 53 weeks compared with 52 weeks in 2021 and 2019, with the extra week benefiting 2020 net sales by $41 million. Total Retail comparable sales increased 17% and sales from net opened/closed stores in the past 12 months, and other (including the additional 53rd week in 2020) added 1.0 percentage point (ppt.) of growth in 2021. For additional details, see the components of total net sales growth on page 36.
Sales per store in 2021 (sales for stores open at least one year, Total Retail, including online, phone and chat, adjusted for the additional 53rd week in 2020) on a trailing twelve-month basis totaled $3.6 million, 18% higher than 2020.
2021 operating income of $194 million increased by $9 million, or 5%, compared with $185 million in the prior year, driven by the strong increase in net sales. Our 2021 operating income rate decreased to 8.9% of net sales, compared with 10.0% of net sales in 2020. Our 2021 operating income rate was impacted by the 1.9 ppt. decrease in our gross profit rate, partially offset by the leveraging impact of the 18% increase in net sales.
We continued to prioritize investments in near- and long-term growth drivers in 2021, including a 43% increase in our innovation driving R&D expenses.
Net income in 2021 increased 10% to $154 million, compared with net income of $139 million in 2020, and increased 88% compared with net income of $82 million in 2019. Net income per diluted share increased 26% to $6.16, compared with $4.90 per diluted share in 2020, and increased 128% compared with $2.70 per diluted share in 2019. Diluted earnings per share for 2020 benefited from the profits generated during the additional 53rd week ($0.30 per diluted share).
We achieved a return on invested capital (ROIC) of 27.6% in 2021, compared with 25.0% in 2020.
Cash provided by operating activities in 2021 increased by 7% to $300 million, compared with $280 million for the prior year. Purchases of property and equipment for 2021 increased to $67 million, compared with $37 million in 2020. Purchases of property and equipment in 2020 were temporarily reduced based on the economic uncertainties associated with the pandemic.
On December 3, 2021, we amended our revolving credit facility to expand the aggregate availability from $600 million to $825 million. We also replenished our outstanding share repurchase authorization to $600 million effective April 4, 2021, the beginning of our fiscal second quarter. We remain committed to our capital deployment priorities focused on performance drivers.
We ended 2021 with $383 million of borrowings under our credit facility, compared with $244 million at the end of 2020. Net liquidity available under our credit facility was $439 million at January 1, 2022. Our leverage ratio as defined in our credit agreement was 2.6x as of January 1, 2022. The maximum leverage ratio under our credit agreement is 4.5x.
In 2021, we invested $364 million to repurchase 3.1 million shares of our common stock ($116.79 per share, based on trade dates) under our Board-approved share repurchase program. As of January 1, 2022, the remaining authorization under our Board-approved share repurchase program was $403 million.

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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.
202120202019
$% of
Net Sales
$% of
Net Sales
$% of
Net Sales
Net sales$2,184.9 100.0 %$1,856.6 100.0 %$1,698.4 100.0 %
Cost of sales866.1 39.6 %700.6 37.7 %646.4 38.1 %
Gross profit1,318.8 60.4 %1,156.0 62.3 %1,051.9 61.9 %
Operating expenses:
Sales and marketing905.4 41.4 %771.2 41.5 %766.9 45.2 %
General and administrative161.4 7.4 %159.0 8.6 %138.0 8.1 %
Research and development58.5 2.7 %40.9 2.2 %35.0 2.1 %
Total operating expenses1,125.3 51.5 %971.1 52.3 %939.8 55.3 %
Operating income193.5 8.9 %184.9 10.0 %112.1 6.6 %
Interest expense, net6.2 0.3 %8.9 0.5 %11.6 0.7 %
Income before income taxes187.3 8.6 %176.0 9.5 %100.5 5.9 %
Income tax expense33.5 1.5 %36.8 2.0 %18.7 1.1 %
Net income$153.7 7.0 %$139.2 7.5 %$81.8 4.8 %
Net income per share:
Basic$6.40 $5.03 $2.78 
Diluted$6.16 $4.90 $2.70 
Weighted-average number of common shares:
Basic24.0 27.7 29.5 
Diluted24.9 28.4 30.4 

The percentage of our total net sales, by dollar volume, was as follows:
202120202019
Retail stores87.1 %85.2 %91.8 %
Online, phone, chat and other12.9 %14.8 %8.2 %
Total Company100.0 %100.0 %100.0 %

The components of total net sales change, including comparable net sales changes, were as follows:
Net Sales Increase/(Decrease)
202120202019
Retail comparable-store sales (1)
19 %(3 %)%
Online, phone and chat (1)
%104 %12 %
Total Retail comparable sales change (1)
17 %%%
Net opened/closed stores, other and 53rd week%%%
Total Company18 %%11 %
____________________
(1)Stores are included in the comparable-store calculation 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. Fiscal 2020 included 53 weeks, as compared to 52 weeks for the other periods presented. Total Retail comparable sales have been adjusted to remove the estimated impact of the additional week.

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Other sales metrics were as follows:
202120202019
Average sales per store ($ in thousands) (1)(4)
$3,600 $3,052 $2,877 
Average sales per square foot (1)(4)
$1,212 $1,051 $1,034 
Stores > $2 million in net sales (2)(4)
84 %67 %70 %
Stores > $3 million in net sales (2)(4)
48 %29 %30 %
Average revenue per smart bed unit – Total Retail (3)
$5,102 $4,856 $4,865 
____________________
(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 net sales divided by Total Retail smart bed 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:
202120202019
Beginning of period602 611 579 
Opened77 30 59 
Closed(31)(39)(27)
End of period648 602 611 

Comparison of 2021 and 2020

Net sales

Net sales in 2021 increased 18% to $2.2 billion, compared with $1.9 billion in 2020, and increased 29% compared with $1.7 billion in 2019. 2020 included 53 weeks compared with 52 weeks in 2021 and 2019, with the extra week benefiting 2020 net sales by $41 million. While customer order demand remained strong during 2021, global supply constraints limited our ability to deliver products to our customers, shifting more than $125 million of net sales to future periods. The 18% net sales increase was driven by a 17% comparable sales increase in Total Retail and 1.0 percentage point (ppt.) of growth from net opened/closed stores in the past 12 months, and other (including the additional 53rd week in 2020). Online, phone and chat sales (included in comparable sales noted above) made up 13% and 15% of total net sales in 2021 and 2020, respectively, compared with 8% in 2019 as consumers embraced transacting remotely with Sleep Number as well as in our stores. For additional details, see the components of total net sales growth on page 36.

The $328 million net sales increase compared with the same period one year ago was primarily comprised of: (i) a $297 million increase in our Total Retail comparable net sales; (ii) a $30 million increase resulting from net store openings; and (iii) a $1 million increase in phone, online, chat and other sales. Total Retail smart bed unit sales increased 12% compared with the prior year. Average revenue per smart bed unit in Total Retail increased by 5% to $5,102, compared with $4,856 in the prior-year period.

Gross profit

Gross profit for 2021 of $1.3 billion increased by $163 million, or 14%, compared with $1.2 billion in 2020. The 2021 gross profit rate decreased to 60.4% of net sales, compared with 62.3% for the prior-year period. The 1.9 ppt. decrease in the gross profit rate was mainly due to: (i) incremental costs due to rapid inflation related to labor and materials, and expediting costs resulting from current-period supply chain shortages (3.2 ppt.); partially offset by (ii) the leverage from the 18% net sales increase, including price increases to offset inflation pressures, combined with a more favorable sales mix of higher-margin products. In addition, our gross profit rate will fluctuate from year to year due to a variety of other factors, including return and exchange costs, and changes in performance-based incentive compensation.
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Sales and marketing expenses

Sales and marketing expenses totaled $905 million in 2021, compared with $771 million last year. The sales and marketing expense rate decreased to 41.4% of net sales, compared with 41.5% for the same period one year ago. The current-year sales and marketing expenses rate decrease of 0.1 ppt. was primarily due to: (i) the leveraging impact of the 18% net sales increase; (ii) efficiency gains through our digital ecosystem and operating initiatives; partially offset by (iii) restored marketing expenses which were temporarily reduced last year when we implemented appropriate expense management actions in response to the COVID-19 pandemic. Efficiency gains and operating initiatives included improved store operating productivity.

General and administrative expenses

General and administrative (G&A) expenses increased $2 million to $161 million in 2021, compared with $159 million in the prior year, but decreased to 7.4% of net sales, compared with 8.6% of net sales one year ago. The $2 million increase in G&A expenses mainly consisted of the following: (i) $3 million of additional professional and consulting fees; partially offset by (ii) a $1 million net reduction in employee compensation resulting from a year-over-year decrease in Company-wide performance-based incentive compensation, partially offset by increased employee compensation to support 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). The G&A expenses rate decreased by 1.2 ppt. in 2021, compared with 2020 due to the leveraging impact of the 18% net sales increase, partially offset by the items discussed above.

Research and development expenses

Research and development (R&D) expenses increased by 43% to $59 million in 2021, compared with $41 million in 2020. The R&D expense rate for 2021 increased to 2.7% of net sales, compared with 2.2% of net sales for the prior year. The 43% spending level increase supports our ongoing consumer innovation strategy.

Interest expense, net

Interest expense, net decreased to $6 million for the year ended January 1, 2022, compared with $9 million for the same period one year ago. The $3 million decrease was mainly driven by a lower level of outstanding borrowings during 2021 compared with 2020. 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 pandemic disruption. We repaid the $75 million term loan in September 2020.

Income tax expense

Income tax expense was $34 million for the year ended January 1, 2022, compared with $37 million for the same period one year ago. The effective income tax rate for the year ended January 1, 2022 was 17.9% compared with 20.9% for the year ended January 2, 2021. Both years’ effective tax rates were positively impacted by stock-based compensation excess tax benefits.

Comparison of 2020 and 2019

For a discussion of our 2020 versus 2019 results, see our 2020 Form 10-K.

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 $825 million revolving credit facility (increased from $600 million to $825 million as of December 3, 2021). As of January 1, 2022, we do not have any off-balance sheet financing other than our $4 million in outstanding letters of credit. 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, strategic initiatives and contractual obligations such as lease payments and
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capital commitments for new retail store locations for the foreseeable future. See Notes 7, Leases, and 12, Commitments and Contingencies, for further details on our contractual obligations.

Cash and cash equivalents totaled $2 million and $4 million at January 1, 2022 and January 2, 2021, respectively. Significant changes in cash and cash equivalents during 2021 included $300 million of cash provided by operating activities and $145 million increase in short-term borrowings, which were offset by $67 million of cash used to purchase property and equipment, and $382 million of cash used to repurchase our common stock.

The following table summarizes our cash flows (dollars in millions). Amounts may not add due to rounding differences:
20212020
Total cash provided by (used in):
Operating activities$300.0 $279.7 
Investing activities(66.6)(39.0)
Financing activities(235.2)(238.0)
Net change in cash and cash equivalents$(1.9)$2.7 

Cash provided by operating activities for the fiscal year ended January 1, 2022 was $300 million compared with $280 million for the fiscal year ended January 2, 2021. Significant components of the $20 million year-over-year increase in cash from operating activities included: (i) a $15 million increase in net income in 2021 compared with 2020; (ii) a $71 million fluctuation in accounts payable with both years impacted by business changes and timing of payments; (iii) a $62 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; and (iv) a $30 million change in inventories with both years’ changes in inventory balances driven by forecasted future customer demand and anticipated supply chain constraints. In addition, the 2021 balance included $10 million higher purchase costs due to rapid inflation pressures and increased inbound transportation expenses.

Net cash used in investing activities was $67 million for the fiscal year ended January 1, 2022, compared with $39 million in 2020. Investing activities in 2021 included $67 million of property and equipment purchases, compared with $37 million last year. The $30 million year-over-year increase was primarily due to higher property and equipment purchases for new and remodeled stores. In addition, 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 $235 million for the fiscal year ended January 1, 2022, compared with $238 million in 2020. During the fiscal year ended January 1, 2022, we repurchased $382 million of our common stock (based on settlement dates, $364 million under our Board-approved share repurchase program and $18 million in connection with the vesting of employee restricted stock grants), compared with $236 million in 2020. Short-term borrowings increased by $145 million during 2021 due to a $138 million increase in borrowings under our credit facility to $383 million, in addition to a $7 million increase in book overdrafts which are included in the net change in short-term borrowings. Short-term borrowings decreased by $12 million during 2020 due to a $13 million increase in borrowings under our credit facility to $244 million, which was more than offset by a $25 million decrease in book overdrafts. Financing activities for both years reflect the cash proceeds from the exercise of employee stock options.

Under our Board-approved share repurchase program, we repurchased 3.1 million shares at a cost of $364 million (based on trade dates, $116.79 per share) during the fiscal year ended January 1, 2022. During 2020, we repurchased 3.4 million shares at a cost of $228 million ($66.49 per share). As of January 1, 2022, the remaining authorization under our Board-approved share repurchase program was $403 million. There is no expiration date governing the period over which we can repurchase shares.

On December 3, 2021, we amended our revolving credit facility to increase our net aggregate availability from $600 million to $825 million. We maintain the accordion feature which allows us to increase the amount of the credit facility from $825 million to $1.2 billion, subject to lenders’ approval. The amended credit facility matures in December 2026. There were no other significant changes to the credit facility’s terms and conditions. As of January 1, 2022, we had $383 million of borrowings under our credit facility. We also had $4 million in outstanding letters of credit. Net liquidity available under our credit facility was $439 million at January 1, 2022. 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,
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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 2.6x as of January 1, 2022. 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 common stock. As of January 1, 2022, the weighted-average interest rate on borrowings under the credit facility was 1.6% and we were in compliance with all financial covenants.

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 certain financial covenants, including a maximum leverage ratio and a minimum interest coverage ratio consistent with our Credit Agreement. As of January 1, 2022, 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 customers’ 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.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). In connection with the preparation of our financial statements, we are required to make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, sales, expenses and the related disclosures. Predicting future events is inherently an imprecise activity and as such requires the use of judgment. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 1, Business and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, which are included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Management believes the accounting policies discussed below are the most critical because they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting policies and estimates, and related disclosures with the Audit Committee of our Board.
Our critical accounting policies and estimates relate to stock-based compensation, warranty liabilities and revenue recognition.
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DescriptionJudgments and UncertaintiesEffect if Actual Results
Differ from Assumptions
Stock-Based Compensation  
We have stock-based compensation plans, which include non-qualified stock options and stock awards.
 
See Note 1, Business and Summary of Significant Accounting Policies, and Note 8, Shareholders’ Deficit, to the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for a complete discussion of our stock-based compensation programs.
Option-pricing models and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the volatility of our stock price, future employee forfeiture rates and future employee stock option exercise behaviors. Changes in these assumptions can materially affect the fair value estimates or future earnings adjustments.
 
Performance-based stock awards require management to make assumptions regarding the likelihood of achieving performance targets.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to determine stock-based compensation expense. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in stock-based compensation expense that could be material.
 
In addition, if actual results are not consistent with the assumptions used, the stock-based compensation expense reported in our financial statements may not be representative of the actual economic cost of the stock-based compensation. Finally, if the actual forfeiture rates, or the actual achievement of performance targets, are not consistent with the assumptions used, we could experience future earnings adjustments.
 
A 10% change in our stock-based compensation expense for the year ended January 1, 2022, would have affected net income by approximately $1.7 million in 2021.
 
Warranty Liabilities  
We provide a limited warranty on most of the products we sell.
 
See Note 1, Business and Summary of Significant Accounting Policies, to the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for a complete discussion of our warranty program and liabilities.
 
The majority of our warranty claims are incurred within the first year. However, our warranty liability contains uncertainties because our warranty obligations cover an extended period of time. A revision of estimated claim rates or the projected cost of materials and freight associated with sending replacement parts to customers could have a material adverse effect on future results of operations.
 
We have not made any material changes in our warranty liability assessment methodology during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our warranty liability. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
 
A 10% change in our warranty liability at January 1, 2022, would have affected net income by approximately $0.8 million in 2021.
 











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DescriptionJudgments and UncertaintiesEffect if Actual Results
Differ from Assumptions
Revenue Recognition
Certain accounting estimates relating to revenue recognition contain uncertainty because they require management to make assumptions and to apply judgment regarding the effects of future events.
 
See Note 1, Business and Summary of Significant Accounting Policies, and Note 9, Revenue Recognition, to the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for a complete discussion of our revenue recognition policies.
Our estimates of sales returns contain uncertainties as actual sales return rates may vary from expected rates, resulting in adjustments to net sales in future periods. These adjustments could have an adverse effect on future results of operations.
We have not made any material changes in the accounting methodology used to establish our sales returns allowance during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our sales returns allowance. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to additional losses or gains in future periods.
 
A 10% change in our sales returns allowance at January 1, 2022 would have affected net income by approximately $1.7 million in 2021.

Recent Accounting Pronouncements

See “Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1, Business and Summary of Significant Accounting Policies - “New Accounting Pronouncements” for recent accounting pronouncements that may affect our financial reporting.

ITEM 7A. 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 $383 million of borrowings under our credit facility at January 1, 2022. We do not manage our interest-rate volatility risk through the use of derivative instruments.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Sleep Number Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Sleep Number Corporation and subsidiaries (the “Company”) as of January 1, 2022, and January 2, 2021, and the related consolidated statements of income, shareholders’ equity, and cash flows, for each of the three years in the period ended January 1, 2022, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 1, 2022, and January 2, 2021, and the results of its operations and its cash flows for each of the three years in the period ended January 1, 2022, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 1, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2022, expressed an unqualified opinion on the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Warranty Liability - Refer to “Note 1 -Warranty Liabilities”

Critical Audit Matter Description

The Company provides a limited warranty on most products sold. The estimated warranty liabilities, which are expensed at the time of sale and included in cost of sales, are based on historical trends and warranty claim rates incurred and the assumptions are adjusted for any current trends as appropriate. As of January 1, 2022, the Company has warranty liability of $10.1 million.

We identified the warranty liability as a critical audit matter because of the significant judgments made by management to estimate warranty claim rates. This required a high degree of auditor judgment and an increased extent of effort when
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performing audit procedures to evaluate the reasonableness of management’s estimates of future warranty claims based on historical claims paid, from which management uses to develop warranty liability estimates.

How the Critical Audit Matter Was Addressed in the Audit

Our procedures related to the warranty liabilities included the following, among others:

We tested the effectiveness of controls related to warranty liabilities, including those over historical warranty claim data and estimated future warranty claim rates.

We evaluated the reasonableness of management’s estimate of warranty liabilities by comparing the historical warranty claim trends to the current warranty claim rates of the Sleep Number 360 smart bed line and other products.

We evaluated the completeness of the warranty liabilities through inquiries of operational and executive management regarding knowledge of known product warranty claims or product issues and evaluated whether they were appropriately considered in the determination of the warranty liabilities.

We evaluated the methods and assumptions used by management to estimate the warranty liabilities by:

Testing the underlying data that served as the basis for the estimate, to test that the inputs to the estimate were reasonable and to test the mathematical accuracy of the calculation.

Developing an expectation of warranty liabilities and comparing it to the recorded balance.

Comparing management’s prior-year assumption of expected claim rates to actuals incurred during the year to evaluate management’s ability to estimate the warranty liabilities.

/s/  DELOITTE & TOUCHE LLP

Minneapolis, Minnesota
March 1, 2022

We have served as the Company’s auditor since 2010.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Sleep Number Corporation

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Sleep Number Corporation and subsidiaries (the “Company”) as of January 1, 2022, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 1, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended January 1, 2022, of the Company and our report dated March 1, 2022 expressed an unqualified opinion on those financial statements and financial statement schedule.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/  DELOITTE & TOUCHE LLP

Minneapolis, Minnesota
March 1, 2022
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SLEEP NUMBER CORPORATION
AND SUBSIDIARIES

Consolidated Balance Sheets
January 1, 2022 and January 2, 2021
(in thousands, except per share amounts)
 20212020
Assets
Current assets:
Cash and cash equivalents$2,389 $4,243 
Accounts receivable, net of allowances of $924 and $1,046, respectively
25,718 31,871 
Inventories105,644 81,362 
Prepaid expenses18,953 20,839 
Other current assets54,917 43,489 
Total current assets207,621 181,804 
Non-current assets:
Property and equipment, net195,128 175,223 
Operating lease right-of-use assets371,133 314,226 
Goodwill and intangible assets, net70,468 72,871 
Other non-current assets75,190 56,012 
Total assets$919,540 $800,136 
Liabilities and Shareholders’ Deficit
Current liabilities:
Borrowings under revolving credit facility$382,500 $244,200 
Accounts payable162,547 91,904 
Customer prepayments129,499 72,017 
Accrued sales returns22,368 24,765 
Compensation and benefits51,240 76,786 
Taxes and withholding22,087 23,339 
Operating lease liabilities72,360 62,077 
Other current liabilities64,177 60,856 
Total current liabilities906,778 655,944 
Non-current liabilities:
Deferred income taxes688 242 
Operating lease liabilities336,192 283,084 
Other non-current liabilities100,835 84,844 
Total liabilities1,344,493 1,024,114 
Shareholders’ deficit:
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding
  
Common stock, $0.01 par value; 142,500 shares authorized, 22,683 and 25,390 shares issued and outstanding, respectively
227 254 
Additional paid-in capital3,971  
Accumulated deficit(429,151)(224,232)
Total shareholders’ deficit(424,953)(223,978)
Total liabilities and shareholders’ deficit$919,540 $800,136 
See accompanying notes to consolidated financial statements.
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SLEEP NUMBER CORPORATION
AND SUBSIDIARIES

Consolidated Statements of Operations
Years ended January 1, 2022, January 2, 2021 and December 28, 2019
(in thousands, except per share amounts)

 202120202019
Net sales$2,184,949 $1,856,555 $1,698,352 
Cost of sales866,102 700,555 646,429 
Gross profit1,318,847 1,156,000 1,051,923 
Operating expenses:
Sales and marketing905,359 771,195 766,922 
General and administrative161,412 158,999 137,956 
Research and development58,540 40,910 34,950 
Total operating expenses1,125,311 971,104 939,828 
Operating income193,536 184,896 112,095 
Interest expense, net6,245 8,924 11,587 
Income before income taxes187,291 175,972 100,508 
Income tax expense33,545 36,783 18,663 
Net income$153,746 $139,189 $81,845 
Basic net income per share:
Net income per share – basic$6.40 $