Market Overview

Sleep Number Announces Second Quarter 2018 Results

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

Sleep Number Corporation (NASDAQ:SNBR) today reported second quarter
2018 results for the period ended June 30, 2018.

"We are excited to provide proven quality sleep to our customers with
our Sleep Number 360® smart beds," said Shelly Ibach,
President and CEO of Sleep Number. "With our transition now complete, we
expect performance acceleration from our new marketing campaign,
differentiated retail experience and operating improvements."

Second Quarter Overview

  • Net sales increased 11% to $316 million, with comparable sales
    up 9%; note: the prior year's second quarter sales were impacted by an
    inventory shortage which shifted approximately $25 million to the
    third quarter
  • Operating income increased to $2 million, compared to a net
    operating loss of $3 million for the prior year's second quarter. The
    current quarter included 230 basis points (bps) of gross margin
    pressure and 400 bps of operating expense leverage compared with the
    prior year
  • Earnings per diluted share were $0.10, including one-time tax
    planning benefit of $0.08 associated with the new Tax Cuts and Jobs Act

Capital Deployment Review

  • Generated $29 million in net cash from operating activities, invested
    $21 million in capital expenditures and returned $140 million to
    shareholders through share repurchases during the first six months of
    2018
  • Ended the quarter with a $120 million liquidity cushion against our
    credit facility, compared with $138 million at the end of the prior
    year's second quarter, excluding $3 million letters of credit in both
    years
  • Return on invested capital (ROIC) was 14.3% for the
    trailing-twelve month period, well above our cost of capital

Financial Outlook
The company reiterates its outlook for
2018 earnings per diluted share of $1.70 to $2.00. The outlook for the
second half of 2018 assumes mid-single digit sales growth and an
estimated effective income tax rate of 25%. The company anticipates 2018
capital expenditures to be approximately $50 million.

Conference Call Information
Management will host its
regularly scheduled conference call to discuss the company's results at
5 p.m. EDT (4 p.m. CDT; 2 p.m. PDT) today. To listen to the call, please
dial 800-593-9959 (international participants dial 517-308-9340) and
reference the passcode "Sleep." To access the webcast, please visit the
investor relations area of the Sleep Number website at http://www.sleepnumber.com/eng/aboutus/InvestorRelations.cfm.
The webcast replay will remain available for approximately 60 days.

About Sleep Number Corporation
As the leader in sleep
innovation, Sleep Number Corporation delivers the best quality sleep
through effortless, adjustable comfort and biometric sleep tracking.
Sleep Number's proprietary SleepIQ® technology platform --
one of the most comprehensive databases of biometric consumer sleep data
– is proving the connection between sleep and wellbeing. With
breakthrough innovations such as the revolutionary Sleep Number 360®
smart bed, Sleep Number is redefining the future of sleep and shaping
the future of health and wellness. To experience better quality sleep,
visit one of the over 560 Sleep Number® stores located in all 50 states
or SleepNumber.com.
For additional information, visit our newsroom
and investor
relations
site.

Forward-looking Statements
Statements used in this news
release relating to future plans, events, financial results or
performance are forward-looking statements subject to certain risks and
uncertainties including, among others, such factors as current and
future general and industry economic trends and consumer confidence; the
effectiveness of our marketing messages; the efficiency of our
advertising and promotional efforts; our ability to execute our
company-controlled distribution strategy; our ability to achieve and
maintain acceptable levels of product and service quality, and
acceptable product return and warranty claims rates; our ability to
continue to improve and expand our product line; consumer acceptance of
our products, product quality, innovation and brand image; industry
competition, the emergence of additional competitive products, and the
adequacy of our intellectual property rights to protect our products and
brand from competitive or infringing activities; availability of
attractive and cost-effective consumer credit options; pending and
unforeseen litigation and the potential for adverse publicity associated
with litigation; our "just-in-time" manufacturing processes with minimal
levels of inventory, which may leave us vulnerable to shortages in
supply; our dependence on significant suppliers and our ability to
maintain relationships with key suppliers, including several sole-source
suppliers; the vulnerability of key suppliers to recessionary pressures,
labor negotiations, liquidity concerns or other factors; rising
commodity costs and other inflationary pressures; risks inherent in
global sourcing activities; risks of disruption in the operation of
either of our two primary manufacturing facilities; increasing
government regulations, which have added or may add cost pressures and
process changes to ensure compliance; the adequacy of our management
information systems to meet the evolving needs of our business and to
protect sensitive data from potential cyber threats; the costs,
distractions and potential disruptions to our business related to
upgrading our management information systems; our ability to attract,
retain and motivate qualified management, executive and other key
employees, including qualified retail sales professionals and managers;
and uncertainties arising from global events, such as terrorist attacks,
political unrest or a pandemic outbreak, or the threat of such events.
Additional information concerning these and other risks and
uncertainties is contained in the company's filings with the Securities
and Exchange Commission (SEC), including the Annual Report on Form 10-K,
and other periodic reports filed with the SEC. The company has no
obligation to publicly update or revise any of the forward-looking
statements in this news release.

       

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited – in thousands, except per share amounts)

 

Three Months Ended

June 30, % of July 1, % of
2018 Net Sales 2017 Net Sales
 
Net sales $ 316,338 100.0% $ 284,673 100.0%
Cost of sales   127,450   40.3%   108,054   38.0%
Gross profit   188,888   59.7%   176,619   62.0%
 
Operating expenses:
Sales and marketing 151,106 47.8% 144,498 50.8%
General and administrative 28,828 9.1% 28,819 10.1%
Research and development   6,868   2.2%   6,363   2.2%
Total operating expenses   186,802   59.1%   179,680   63.1%
Operating income (loss) 2,086 0.7% (3,061 ) (1.1%)
Other expense, net   1,453   0.5%   282   0.1%
Income (loss) before income taxes 633 0.2% (3,343 ) (1.2%)
Income tax benefit   (3,111 ) (1.0%)   (2,565 ) (0.9%)
Net income (loss) $ 3,744   1.2% $ (778 ) (0.3%)
 
Net income (loss) per share – basic $ 0.10   $ (0.02 )
 
Net income (loss) per share – diluted $ 0.10   $ (0.02 )
 
 

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding 36,138 41,716
Dilutive effect of stock-based awards 1   706     -  
Diluted weighted-average shares outstanding 1   36,844     41,716  

 

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

 

 
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)
       
Six Months Ended
June 30, % of July 1, % of
2018 Net Sales 2017 Net Sales
 
Net sales $ 704,971 100.0% $ 678,572 100.0%
Cost of sales   278,606 39.5%   255,494

37.7%

Gross profit   426,365 60.5%   423,078 62.3%
 
Operating expenses:
Sales and marketing 323,023 45.8% 313,764 46.2%
General and administrative 60,562 8.6% 62,588 9.2%
Research and development   13,793 2.0%   13,959 2.1%
Total operating expenses   397,378 56.4%   390,311 57.5%
Operating income 28,987 4.1% 32,767 4.8%
Other expense, net   1,978 0.3%   420 0.1%
Income before income taxes 27,009 3.8% 32,347 4.8%
Income tax expense   2,717 0.4%   8,664 1.3%
Net income $ 24,292 3.4% $ 23,683 3.5%
 
Net income per share – basic $ 0.65 $ 0.56
 
Net income per share – diluted $ 0.64 $ 0.55
 
 

 

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding 37,191 42,233
Dilutive effect of stock-based awards   905   847
Diluted weighted-average shares outstanding   38,096   43,080
 
 
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited – in thousands, except per share amounts)
subject to reclassification
   

    June 30,    

December 30,
2018 2017
Assets
Current assets:
Cash and cash equivalents $ 2,407 $ 3,651

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

22,065 19,312
Inventories 90,241 84,298
Income taxes receivable 6,527 -
Prepaid expenses 10,580 17,565
Other current assets   26,399     27,665
Total current assets 158,219 152,491
 
Non-current assets:
Property and equipment, net 202,378 208,646
Goodwill and intangible assets, net 76,497 77,588
Deferred income taxes - 2,625
Other non-current assets   33,256     30,484
Total assets $ 470,350   $ 471,834
 
Liabilities and Shareholders' (Deficit) Equity
Current liabilities:
Borrowings under revolving credit facility $ 182,500 $ 24,500
Accounts payable 100,996 129,194
Customer prepayments 28,136 27,767
Accrued sales returns 16,527 19,270
Compensation and benefits 24,688 34,602
Taxes and withholding 9,078 24,234
Other current liabilities   48,065     46,822
Total current liabilities 409,990 306,389
 
Non-current liabilities:
Deferred income taxes 4,587 -
Other non-current liabilities   76,927     76,289
Total non-current liabilities   81,514     76,289
Total liabilities 491,504 382,678
 
Shareholders' (deficit) equity:

Undesignated preferred stock; 5,000 shares authorized, no shares
issued and outstanding

- -

Common stock, $0.01 par value; 142,500 shares authorized, 34,893
and 38,813 shares issued and outstanding, respectively

349 388
Additional paid-in capital - -
(Accumulated deficit) retained earnings   (21,503 )   88,768
Total shareholders' (deficit) equity   (21,154 )   89,156
Total liabilities and shareholders' (deficit) equity $ 470,350   $ 471,834
 
 
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited - in thousands)
subject to reclassification
   
Six Months Ended
June 30, July 1,
2018 2017
 
Cash flows from operating activities:
Net income $ 24,292 $ 23,683

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

Depreciation and amortization 31,089 31,177
Stock-based compensation 6,742 7,876
Net loss on disposals and impairments of assets 15 2
Deferred income taxes 7,212 4,974
Changes in operating assets and liabilities:
Accounts receivable (2,753 ) (4,781 )
Inventories (5,943 ) 5,170
Income taxes (19,075 ) (14,532 )
Prepaid expenses and other assets 8,242 2,110
Accounts payable (4,859 ) 11,858
Customer prepayments 369 19,518
Accrued compensation and benefits (9,944 ) 9,834
Other taxes and withholding (2,608 ) (6,032 )
Other accruals and liabilities   (3,648 )   (2,050 )
Net cash provided by operating activities   29,131     88,807  
 
Cash flows from investing activities:
Purchases of property and equipment (21,341 ) (27,132 )
Proceeds from sales of property and equipment   70     -  
Net cash used in investing activities   (21,271 )   (27,132 )
 
Cash flows from financing activities:
Net increase in short-term borrowings 133,253 3,098
Repurchases of common stock (142,940 ) (80,094 )
Proceeds from issuance of common stock 1,596 2,654
Debt issuance costs   (1,013 )   (10 )
Net cash used in financing activities   (9,104 )   (74,352 )
 
Net decrease in cash, cash equivalents and restricted cash (1,244 ) (12,677 )
Cash, cash equivalents and restricted cash, at beginning of period   3,651     14,759  
Cash, cash equivalents and restricted cash, at end of period $ 2,407   $ 2,082  
 

Note - Effective December 31, 2017, we adopted the provisions of
Accounting Standards Update No. 2016-18, Restricted Cash,
on a retrospective basis. Amounts for prior periods have
been retrospectively adjusted to conform to the current period
presentation.

 
 
SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)
       
Three Months Ended Six Months Ended
June 30, July 1, June 30, July 1,
2018 2017 2018 2017
 
Percent of sales:
Retail 90.7% 90.4% 91.2% 91.0%
Online and phone 7.9% 7.3% 7.5% 7.0%
Wholesale/other   1.4%   2.3%   1.3%   2.0%
Total   100.0%   100.0%   100.0%   100.0%
 
Sales change rates:
Retail comparable-store sales 8% (6%) 1% (1%)
Online and phone   19%   26%   12%   22%
Company-Controlled comparable sales change 9% (4%) 2% 0%
Net opened/closed stores   3%   8%   3%   9%
Total Company-Controlled Channel 12% 4% 5% 9%
Wholesale/other   (29%)   (31%)   (33%)   (27%)
Total   11%   3%   4%   8%
 
Stores open:
Beginning of period 558 546 556 540
Opened 11 8 24 24
Closed   (4)   (5)   (15)   (15)
End of period   565   549   565   549
 
Other metrics:
Average sales per store ($ in 000's) 1 $ 2,645 $ 2,535
Average sales per square foot 1 $ 985 $ 983
Stores > $1 million net sales 2 98% 97%
Stores > $2 million net sales 2 63% 58%
Average revenue per mattress unit 3 $ 4,508 $ 4,306 $ 4,459 $ 4,155
 
 

1 Trailing twelve months Company-Controlled comparable
sales per store open at least one year.

 

2 Trailing twelve months for stores open at least one
year.

 

3 Represents Company-Controlled Channel total net sales
divided by Company-Controlled Channel mattress units.

 
 
SLEEP NUMBER CORPORATION AND SUBSIDIARIES
Earnings before Interest, Taxes, Depreciation and Amortization
(Adjusted EBITDA)
(in thousands)
       
We define earnings before interest, taxes, depreciation and
amortization (Adjusted EBITDA) as net income plus: income tax
expense, interest expense, depreciation and amortization,
stock-based compensation and asset impairments. Management believes
Adjusted EBITDA is a useful indicator of our financial performance
and our ability to generate cash from operating activities. Our
definition of Adjusted EBITDA may not be comparable to similarly
titled definitions used by other companies. The table below
reconciles Adjusted EBITDA, which is a non-GAAP financial measure,
to the comparable GAAP financial measure:
 
Three Months Ended Trailing-Twelve Months Ended
June 30, July 1, June 30, July 1,
2018 2017 2018 2017
 
Net income (loss) $ 3,744 $ (778 ) $ 65,686 $ 60,715
Income tax (benefit) expense (3,111 ) (2,565 ) 20,014 25,597
Interest expense 1,454 288 2,486 924
Depreciation and amortization 15,326 14,918 60,945 60,170
Stock-based compensation 3,658 4,172 14,629 12,231
Asset impairments   85     2     327   47
Adjusted EBITDA $ 21,156   $ 16,037   $ 164,087 $ 159,684
 
 
 
 
Free Cash Flow
(in thousands)
 
Three Months Ended Trailing-Twelve Months Ended
June 30, July 1, June 30, July 1,
2018 2017 2018 2017
 
Net cash (used in) provided by operating activities $ (20,125 ) $ 1,938 $ 112,931 $ 193,332
Subtract: Purchases of property and equipment   12,536     13,921     54,038   61,220
Free cash flow $ (32,661 ) $ (11,983 ) $ 58,893 $ 132,112
 

Note - Our Adjusted EBITDA calculation and our "free cash flow"
data are considered non-GAAP financial measures and are not
in accordance with, or preferable to, "as reported," or GAAP
financial data. However, we are providing this information as
we believe it facilitates analysis of the Company's financial
performance by investors and financial analysts.

 
GAAP - generally accepted accounting principles in the U.S.
 
 
SLEEP NUMBER CORPORATION AND SUBSIDIARIES
Calculation of Return on Invested Capital (ROIC)
(in thousands)
   
ROIC is a financial measure we use to determine how efficiently we
deploy our capital. It quantifies the return we earn on our invested
capital. Management believes ROIC is also a useful metric for
investors and financial analysts. We compute ROIC as outlined below.
Our definition and calculation of ROIC may not be comparable to
similarly titled definitions and calculations used by other
companies. The tables below reconcile net operating profit after
taxes (NOPAT) and total invested capital, which are non-GAAP
financial measures, to the comparable GAAP financial measures:
 

Trailing-Twelve Months Ended

June 30,
2018

July 1,
2017

Net operating profit after taxes (NOPAT)

Operating income $ 88,135 $ 87,124
Add: Rent expense 1 76,215 70,815
Add: Interest income 50 112
Less: Depreciation on capitalized operating leases 2 (19,640 ) (17,956 )
Less: Income taxes 3   (43,934 )   (46,095 )
NOPAT $ 100,826 $ 94,000
 

Average invested capital

Total (deficit) equity $ (21,154 ) $ 114,439
Less: Cash greater than target 4 - -
Add: Long-term debt 5 183,405 -
Add: Capitalized operating lease obligations 6   609,720     566,520  
Total invested capital at end of period $ 771,971 $ 680,959
 
Average invested capital 7 $ 705,575 $ 690,524
 
Return on invested capital (ROIC) 8   14.3 %   13.6 %
 

1 Rent expense is added back to operating income to
show the impact of owning versus leasing the related assets.

 

2 Depreciation is based on the average of the last five
fiscal quarters' ending capitalized operating lease obligations
(see note 6) for the respective reporting periods with an assumed
thirty-year useful life. This is subtracted from operating income
to illustrate the impact of owning versus leasing the related
assets.

 

3 Reflects annual effective income tax rates, before
discrete adjustments, of 30.3% and 32.9% for 2018 and 2017,
respectively.

 

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

 

5 Long-term debt includes existing capital lease
obligations, if applicable. In conjunction with increasing our
revolving credit facility to $300 million in the first quarter of
2018, we include borrowings under that agreement, including
borrowings classified as short term.

 

6 A multiple of eight times annual rent expense is used
as an estimate for capitalizing our operating lease obligations.
The methodology utilized aligns with the methodology of a
nationally recognized credit rating agency.

 

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

 

8 ROIC equals NOPAT divided by average invested capital.

 

Note - Our ROIC calculation and data are considered non-GAAP
financial measures and are not in accordance with, or preferable
to, GAAP financial data. However, we are providing this
information as we believe it facilitates analysis of the Company's
financial performance by investors and financial analysts.

 
GAAP - generally accepted accounting principles in the U.S.
 

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