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Business and Summary of Significant Accounting Policies
 12 Months Ended
Dec. 28, 2024
Accounting Policies [Abstract]  
Business and Summary of Significant Accounting Policies Business and Summary of Significant Accounting Policies
Business & Basis of Presentation
Sleep Number Corporation and its 100%-owned subsidiaries (Sleep Number or the Company) have a vertically
integrated business model and are the exclusive designer, manufacturer, marketer, retailer and servicer of Sleep Number
beds which allows it to offer consumers high-quality, individualized sleep solutions and services. Sleep Number also
offers FlextFit adjustable bases, and Sleep Number pillows, sheets and other bedding products.
Sleep Number generates revenue by marketing its innovations directly to new and existing customers, and selling
products through its Stores, Online, Phone, Chat (Total Retail) and Other.
The consolidated financial statements include the accounts of Sleep Number Corporation and its 100%-owned
subsidiaries. All intra-entity balances and transactions have been eliminated in consolidation.
Fiscal Year
The Company’s fiscal year ends on the Saturday closest to December 31. Fiscal years and their respective fiscal year
ends were as follows: fiscal 2024 ended December 28, 2024; fiscal 2023 ended December 30, 2023; and fiscal 2022
ended December 31, 2022. Fiscal 2024, 2023 and 2022 each had 52 weeks.
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles
(GAAP) requires the Company to make estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial
statements, and the reported amounts of sales, expenses and income taxes during the reporting period. Predicting
future events is inherently an imprecise activity and, as such, requires the use of judgment. As future events and their
effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in
these estimates will be reflected in the consolidated financial statements in future periods and could be material.
The Company’s critical accounting policies consist of stock-based compensation, warranty liabilities and revenue
recognition.
Cash and Cash Equivalents
Cash and cash equivalents include highly-liquid investments with original maturities of three months or less. The carrying
value of these investments approximates fair value due to their short-term maturity. The Company’s banking
arrangements allow it to fund outstanding checks when presented to the financial institution for payment, resulting in
book overdrafts. Book overdrafts are included in accounts payable in the consolidated balance sheet and in net increase
(decrease) in short-term borrowings in the financing activities section of the Company’s consolidated statement of cash
flows. Book overdrafts totaled $22 million and $30 million at December 28, 2024 and December 30, 2023, respectively.
Accounts Receivable
Accounts receivable are recorded net of an allowance for expected credit losses and consist primarily of receivables from
third-party financiers for customer credit purchases. The allowance is recognized in an amount equal to anticipated
future write-offs. The Company estimates future write-offs based on delinquencies, aging trends, industry risk trends, its
historical experience and current trends. Account balances are charged off against the allowance when the Company
believes it is probable the receivable will not be recovered.
Inventories
Inventories include materials, labor and overhead and are stated at the lower of cost or net realizable value. Cost is
determined by the first-in, first-out method. The Company reviews inventory quantities on hand and records reserves for
obsolescence based on historical selling prices, current market conditions and forecasted product demand, to reduce
inventory to net realizable value.
Property and Equipment
Property and equipment, carried at cost, is depreciated using the straight-line method over the estimated useful lives of
the assets. The cost and related accumulated depreciation of assets sold or retired is removed from the accounts with
any resulting gain or loss included in net (loss) income in the consolidated statement of operations. Maintenance and
repairs are charged to expense as incurred. Major renewals and betterments that extend useful life are capitalized.
Leasehold improvements are depreciated over the shorter of the estimated useful lives of the assets or the contractual
term of the lease, with consideration of lease renewal options if renewal appears probable.
Estimated useful lives of the Company’s property and equipment by major asset category are as follows:
Leasehold improvements
5 to 15 years
Furniture and equipment
3 to 15 years
Production machinery
3 to 7 years
Computer equipment and software
3 to 12 years
Goodwill and Intangible Assets, Net
Goodwill is the difference between the purchase price of a company and the fair market value of the acquired company’s
net identifiable assets. The Company’s intangible assets include developed technologies and trade names/trademarks.
Definite-lived intangible assets are being amortized using the straight-line method over their estimated lives, ranging
from 8-10 years.
Asset Impairment Charges
Long-lived Assets and Definite-lived Intangible Assets
The Company reviews its long-lived assets and definite-lived intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When evaluating long-
lived assets for potential impairment, the Company first compares the carrying value of the asset to the estimated future
cash flows (undiscounted and without interest charges plus proceeds expected from disposition, if any). If the estimated
undiscounted cash flows are less than the carrying value of the asset, the Company calculates an impairment loss. The
impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value. When the
Company recognizes an impairment loss, the carrying amount of the asset is reduced to estimated fair value based on
discounted cash flows, quoted market prices or other valuation techniques. Assets to be disposed of are reported at the
lower of the carrying amount of the asset or fair value less costs to sell. The Company reviews retail store assets for
potential impairment based on historical cash flows, lease termination provisions and expected future retail store
operating results. If the Company recognizes an impairment loss for a depreciable long-lived asset, the adjusted carrying
amount of the asset becomes its new cost basis and will be depreciated (amortized) over the remaining useful life of that
asset.
Goodwill and Indefinite-lived Intangible Assets
Goodwill and indefinite-lived intangible assets are not amortized but are tested for impairment annually, or when there
are indicators of impairment, using a fair value approach. The goodwill impairment test involves a comparison of the fair
value of a reporting unit with its carrying value. Fair value is determined using a market-based approach utilizing widely
accepted valuation techniques, including quoted market prices and the Company’s market capitalization. The Company
has only one reporting unit, which has a negative carrying value. The reporting unit had a goodwill balance of $64 million
at December 28, 2024 and December 30, 2023. Indefinite-lived intangible assets are assessed for impairment by
comparing the carrying value of an asset with its fair value. If the carrying value exceeds fair value, an impairment loss is
recognized in an amount equal to the excess. Based on the Company’s 2024 assessments, it determined there was no
impairment.
Other Investments
The Company had an investment in non-marketable equity securities of $1.2 million at both December 28, 2024 and
December 30, 2023. This investment was made in a strategic product-development partner and is included in other non-
current assets in the consolidated balance sheet. Non-marketable equity securities are equity securities without readily
determinable fair value that are measured and recorded using a measurement alternative that measures the securities at
cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes.
Warranty Liabilities
The Company provides a limited warranty on most of the products it sells. The estimated warranty costs, which are
expensed at the time of sale and included in cost of sales, are based on historical trends and warranty claim rates
incurred by the Company and are adjusted for any current trends as appropriate. The majority of the Company’s
warranty claims are incurred within the first year. The Company’s warranty liability contains uncertainties because its
warranty obligations cover an extended period of time and require management to make estimates for claim rates and
the projected cost of materials and freight associated with sending replacement parts to customers. The Company
regularly assesses and adjusts the estimate of accrued warranty claims by updating claims rates for actual trends and
projected claim costs. The warranty liabilities are included in other current liabilities and other non-current liabilities in
the consolidated balance sheet.
The Company classifies as non-current those estimated warranty costs expected to be paid out in greater than one year.
The activity in the accrued warranty liabilities account was as follows (in thousands):
 
2024
2023
2022
Balance at beginning of period
$8,503
$8,997
$10,069
Additions charged to costs and expenses for current-year sales
13,821
15,939
16,694
Deductions from reserves
(14,657)
(16,438)
(17,157)
Change in liabilities for pre-existing warranties during the current
year, including expirations
(720)
5
(609)
Balance at end of period
$6,947
$8,503
$8,997
Fair Value Measurements
Fair value measurements are reported in one of three levels based on the lowest level of significant input used:
•Level 1 – observable inputs such as quoted prices in active markets;
•Level 2 – inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
•Level 3 – unobservable inputs in which there is little or no market data, which require the reporting entity to develop
its own assumptions.
The Company generally estimates fair value of long-lived assets, including its retail stores, using the income approach,
which the Company based on estimated future cash flows (discounted and with interest charges). The inputs used to
determine fair value relate primarily to future assumptions regarding sales volumes, gross profit rates, retail store
operating expenses and applicable probability weightings regarding future alternative uses. These inputs are
categorized as Level 3 inputs under the fair value measurements guidance. The inputs used represent management’s
assumptions about what information market participants would use in pricing the assets and are based upon the best
information available at the balance sheet date.
Shareholders’ Deficit
Dividends
The Company is not restricted from paying cash dividends under the Credit Agreement so long as it is not in default
under the Credit Agreement, the Company’s leverage ratio (as defined in the Credit Agreement) after giving effect to
such restricted payments (as defined in the Credit Agreement) would not exceed 3.00:1.00 and no default or event of
default (as defined in the Credit Agreement) would result therefrom. At December 28, 2024, the Company exceeded the
3.00:1.00 leverage ratio. However, Sleep Number has not historically paid, and has no current plans to pay, cash
dividends on the Company’s common stock.
Share Repurchases
At December 28, 2024, there was $348 million remaining authorization under the $600 million board-approved share
repurchase program. There is no expiration date governing the period over which the Company can repurchase shares.
Any repurchased shares are constructively retired and returned to an unissued status. The cost of stock repurchases is
first charged to additional paid-in-capital. Once additional paid-in capital is reduced to zero, any additional amounts are
charged to accumulated deficit.
Revenue Recognition
The Company recognizes revenue when control of the promised goods or services is transferred to its customers in an
amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. Revenue
recognized excludes sales taxes. Amounts billed to customers for delivery and setup are included in net sales. For most
products, the Company receives payment before or promptly after the products or services are delivered to the
customer.
The Company accepts sales returns of most products during a 100-night trial period. Accrued sales returns represent a
refund liability for the amount of consideration that the Company does not expect to be entitled to because it will be
refunded to customers. The refund liability estimate is based on historical return rates and is adjusted for any current
trends as appropriate. Each reporting period, the Company remeasures the liability to reflect changes in the estimate,
with a corresponding adjustment to net sales.
Sleep Number beds sold with SleepIQ technology contain multiple performance obligations including the bed, and
SleepIQ hardware and software. The Company analyzes its multiple performance obligations to determine whether they
are distinct and can be separated or whether they must be accounted for as a single performance obligation. The
Company determined that beds sold with the SleepIQ technology have two performance obligations consisting of: (i) the
bed; and (ii) SleepIQ hardware and software. SleepIQ hardware and software are not separable as the hardware and
related software are not sold separately and the software is integral to the hardware’s functionality. The Company
determined the transaction price for multiple performance obligations based on their relative standalone selling prices.
The performance obligation related to the bed is satisfied at a point in time. The performance obligation related to
SleepIQ technology is satisfied over time based on the ongoing access and usage by the customer of software essential
to the functionality of SleepIQ technology. The deferred revenue and costs related to SleepIQ technology are
recognized on a straight-line basis over the estimated period of benefit to the customer of 4.5 to 5.0 years because its
inputs are generally expended evenly throughout the performance period.
See Note 9, Revenue Recognition, for additional information on revenue recognition and sales returns.
Cost of Sales, Sales and Marketing, General and Administrative (G&A) and Research & Development (R&D) Expenses
The following tables summarize the primary costs classified in each major expense category (the classification of which
may vary within the Company’s industry):
Cost of Sales
Sales & Marketing
•
Costs associated with purchasing, manufacturing, shipping,
handling and delivering the Company’s products to its retail
stores and customers, including payroll and benefits;
•
Advertising, marketing and media production;
•
Marketing and selling materials such as brochures, videos,
websites, customer mailings and in-store signage;
•
Physical inventory losses, scrap and obsolescence;
•
Payroll and benefits for sales and customer service staff;
•
Related occupancy and depreciation expenses;
•
Store occupancy costs;
•
Costs associated with returns and exchanges; and
•
Store depreciation expense;
•
Estimated costs to service customer warranty claims.
•
Credit card processing fees; and
•
Promotional financing costs.
G&A
R&D(1)
•
Payroll and benefit costs for corporate employees, including
information technology, legal, human resources, finance, sales
and marketing administration, investor relations and risk
management;
•
Internal labor and benefits related to research and
development activities;
•
Outside consulting services related to research and
development activities; and
•
Occupancy costs of corporate facilities;
•
Testing equipment related to research and development
•
Depreciation related to corporate assets;
___________________________
(1) Costs incurred in connection with R&D are charged to expense as incurred.
•
Information hardware, software and maintenance;
•
Insurance;
•
Investor relations costs; and
•
 Other overhead costs.
Leases
The Company determines if an arrangement is a lease at inception. Right-of-use (ROU) assets and operating lease
liabilities are recognized at the lease commencement date based on the estimated present value of future lease
payments over the lease term. The Company elected the option to not separate lease and non-lease components for all
of its leases. Most of the Company’s leases do not provide an implicit interest rate nor is the rate available to it from its
lessors. As an alternative, the Company uses its estimated incremental borrowing rate, which is derived from information
available at the lease commencement date, including publicly available data, in determining the present value of lease
payments. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet as an
ROU asset or operating lease liability. The Company recognizes operating lease costs for these short-term leases,
primarily small equipment leases, on a straight-line basis over the lease term. At December 28, 2024, the Company’s
finance lease ROU assets and associated lease liabilities were not significant.
See Note 7, Leases, for further information regarding the Company’s operating leases.
Pre-opening Costs
Costs associated with the start-up and promotion of new retail store openings are expensed as incurred.
Advertising Costs
The Company incurs advertising costs associated with print, digital and broadcast advertisements. Advertising costs are
charged to expense when the ad first runs. Advertising expense was $248 million, $272 million and $309 million in 2024,
2023 and 2022, respectively and is included in sales and marketing expenses on the consolidated statement of
operations. Advertising costs deferred and included in prepaid expenses in the consolidated balance sheet were not
significant at December 28, 2024 or December 30, 2023, respectively.
Insurance
The Company is self-insured for certain losses related to health and workers’ compensation claims, although the
Company obtains third-party insurance coverage to limit exposure to these claims. The Company estimates its self-
insured liabilities using a number of factors including historical claims experience and analysis of incurred but not
reported claims. The Company’s self-insurance liability was $11 million and $13 million at December 28, 2024 and
December 30, 2023, respectively. At December 28, 2024 and December 30, 2023, $7 million and $8 million,
respectively, were included in current liabilities: compensation and benefits in the consolidated balance sheet and
$4 million and $5 million, respectively, were included in other non-current liabilities in the consolidated balance sheet.
Software Capitalization
For software developed or obtained for internal use, the Company capitalizes direct external costs associated with
developing or obtaining internal-use software. In addition, the Company capitalizes certain payroll and payroll-related
costs for employees who are directly involved with the development of such applications. Capitalized costs related to
internal-use software under development are treated as construction-in-progress until the program, feature or
functionality is ready for its intended use, at which time depreciation commences. The Company expenses any data
conversion or training costs as incurred. Capitalized software costs are included in property and equipment, net in the
consolidated balance sheet.
The Company capitalizes costs incurred with the implementation of a cloud computing arrangement that is a service
contract, consistent with its policy for software developed or obtained for internal use. The capitalized implementation
costs of cloud computing arrangements are expensed over the term of the cloud computing arrangement in the same
line item in the statement of operations as the associated hosting fees. Capitalized costs incurred with the
implementation of a cloud computing arrangement are included in prepaid expenses and other non-current assets in the
Company’s consolidated balance sheet, and in operating cash flows in its consolidated statement of cash flows.
Stock-based Compensation
The Company compensates officers, directors and key employees with stock-based compensation under stock plans
approved by its shareholders and administered under the supervision of the Company’s Board of Directors (Board). At
December 28, 2024, a total of 2.2 million shares were available for future grant. These plans include non-qualified stock
options and stock awards.
The Company records stock-based compensation expense based on the award’s fair value at the grant date and the
awards that are expected to vest. The Company recognizes stock-based compensation expense over the period during
which an employee is required to provide services in exchange for the award. The Company reduces compensation
expense by estimated forfeitures. Forfeitures are estimated using historical experience and projected employee
turnover. The Company includes, as part of cash flows from operating activities, the benefit of tax deductions in excess
of recognized stock-based compensation expense. In addition, excess tax benefits or deficiencies are recorded as
discrete adjustments to income tax expense.
Stock Options
Stock option awards are granted at exercise prices equal to the closing price of the Company’s stock on the grant date.
Generally, options vest proportionally over three years and expire after 10 years. Compensation expense is recognized
ratably over the vesting period.
The Company determines the fair value of stock options granted and the resulting compensation expense at the date-of-
grant using the Black-Scholes-Merton option-pricing model. Descriptions of significant assumptions used to estimate the
expected volatility, risk-free interest rate and expected term are as follows:
Expected Volatility – expected volatility was determined based on implied volatility of the Company’s traded options
and historical volatility of the Company’s stock price.
Risk-Free Interest Rate – the risk-free interest rate was based on the implied yield available on U.S. Treasury zero-
coupon issues at the date of grant with a term equal to the expected term.
Expected Term – expected term represents the period that the Company’s stock-based awards are expected to be
outstanding and was determined based on historical experience and anticipated future exercise patterns, giving
consideration to the contractual terms of unexercised stock-based awards.
Stock Awards
The Company issues stock awards to certain employees in conjunction with its stock-based compensation plan. The
stock awards generally vest over three years based on continued employment (time-based). Compensation expense
related to stock awards, except for stock awards with a market condition, is determined on the grant date based on the
publicly quoted closing price of the Company’s common stock and is charged to earnings on a straight-line basis over
the vesting period. Stock awards with a market condition are valued using a Monte Carlo simulation model. The
significant assumptions used to estimate the expected volatility and risk-free interest rate are similar to those described
above in Stock Options.
Certain time-based stock awards have a performance condition (performance-based). The final number of shares earned
for performance-based stock awards and the related compensation expense is adjusted up or down to the extent the
performance target is met. The actual number of shares that will ultimately be awarded range from 0% - 200% of the
targeted amount for the 2024, 2023 and 2022 awards. The Company evaluates the likelihood of meeting the
performance targets at each reporting period and adjust compensation expense, on a cumulative basis, based on the
expected achievement of each of the performance targets. For performance-based stock awards granted in 2024, 2023
and 2022, the performance targets are based on growth in net sales and in operating profit, and the performance
periods are fiscal 2024 through 2026, 2023 through 2025 and fiscal 2022 through 2024, respectively.
See Note 8, Shareholders’ Deficit, for additional information on stock-based compensation.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax
rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. A
valuation allowance is established for any portion of deferred tax assets that are not considered more likely than not to
be realized. The Company evaluates all available positive and negative evidence, including its forecast of future taxable
income, to assess the need for a valuation allowance on its deferred tax assets.
The Company records a liability for unrecognized tax benefits from uncertain tax positions taken, or expected to be
taken, in the Company’s tax returns. The Company follows a two-step approach to recognizing and measuring uncertain
tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence
indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50%
likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating
its tax positions and tax benefits, which may require periodic adjustments, and may not accurately forecast actual
outcomes.
The Company classifies net interest and penalties related to income taxes as a component of income tax expense in its
consolidated statement of operations.
Net (Loss) Income Per Share
The Company calculates basic net (loss) income per share by dividing net (loss) income by the weighted-average number
of common shares outstanding during the period. It calculates diluted net (loss) income per share based on the
weighted-average number of common shares outstanding adjusted by the number of potentially dilutive common shares
as determined by the treasury stock method. Potentially dilutive shares consist of stock options and stock awards.
Sources of Supply
The Company currently obtains materials and components used to produce its beds from outside sources. As a result,
the Company is dependent upon suppliers that in some instances, are its sole source of supply, or supply the vast
majority of the particular component or material. The Company continuously evaluates opportunities to dual-source key
components and materials. The failure of one or more of the Company’s suppliers to provide it with materials or
components on a timely basis could significantly impact the consolidated results of operations and net (loss) income per
share. While the Company believes that these materials and components, or suitable replacements, could be obtained
from other sources in the event of a disruption or loss of supply, it may not be able to find alternative sources of supply
or alternative sources of supply on comparable terms and an unexpected loss of supply over a short period of time may
not allow the Company to replace these sources in the ordinary course of business.
Recently Adopted and Recently Issued Accounting Pronouncements
Accounting Pronouncements Recently Adopted
In November 2023, the Financial Accounting Standards Board (FASB) issued guidance within Accounting Standards
Update (ASU) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU
requires that a public entity that has a single reportable segment provide all the disclosures required by the amendments
in this ASU and all existing disclosures in Topic 280. The Company has determined that its current business and
operations consist of a single business segment and a single reporting unit.
The amendments in this ASU are intended to improve segment disclosure requirements, primarily through enhanced
disclosures about significant segment expenses. The key amendments included in this ASU:
•Require disclosure on an annual and interim basis, of significant segment expenses that are regularly provided to the
chief operating decision maker (CODM) and are included within each reported measure of segment profit and loss.
•Require disclosure on an annual and interim basis, an amount for other segment items (defined in this ASU) and a
description of its composition.
•Clarify that if the CODM uses more than one measure of the segment’s profit or loss in assessing performance, one
or more of those additional measures may be reported.
•Require disclosure of the title and position of the CODM and an explanation of how the CODM uses the reported
measure(s) of segment profit or loss in assessing performance.
This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning
after December 15, 2024, with early adoption permitted. This guidance is required to be adopted by the Company
beginning with the annual period of 2024. The amendments should be applied retrospectively to all prior periods
presented in the consolidated financial statements. The Company adopted the new standard in the fourth quarter of
2024. The new required disclosures are included in Note 13, "Segments."
Accounting Pronouncements Issued But Not Yet Effective
In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements in Income Tax Disclosures"
to enhance the transparency and decision usefulness of income tax disclosures. This amendment requires public
companies to disclose specific categories in the rate reconciliation and provide additional information for reconciling
items that meet a quantitative threshold. Additionally, under the amendment, entities are required to disclose the
amount of income taxes paid disaggregated by federal, state and foreign taxes, as well as disaggregated by material
individual jurisdictions. Finally, the amendment requires entities to disclose income from continuing operations before
income tax expense disaggregated between domestic and foreign and income tax expense from continuing operations
disaggregated by federal, state and foreign. The new rules are effective for annual periods beginning after December
15, 2024. The adoption of this standard is not expected to have a material impact on the Company’s consolidated
financial statements and related disclosures.
In November 2024, the FASB issued ASU 2024-03, "Income Statement - Reporting Comprehensive Income - Expense
Disaggregation Disclosures (Subtopic 220-40)", which requires public business entities to disclose in the notes to the
financial statements more detailed information about the types of expenses included in certain expense captions in the
consolidated financial statements, including purchases of inventory, employee compensation, and depreciation and
amortization. The amendments are effective for the Company beginning with the 2027 annual period and in interim
periods beginning in 2028. Early adoption is permitted. The ASU may be adopted prospectively or retrospectively. The
Company is currently evaluating the impact of ASU 2024-03 on its consolidated financial statements and related
disclosures.
Currently, management does not believe that any other recently issued, but not yet effective accounting
pronouncements, if currently adopted, would have a material impact on the Company’s consolidated financial
statements.