Sleep Number Corporation Reports Third Quarter Financial Results

November 7, 2023  by HFBusiness Staff in Business Strategy, Industry   

“The third quarter was challenging for Sleep Number and the bedding industry as the consumer demand trajectory changed abruptly midway through the quarter,” said Shelly Ibach, chair, president and CEO, Sleep Number.

“In response, we acted quickly to further reduce costs, recalibrate our sales and marketing approach, and amend our credit agreement to provide additional covenant flexibility through the end of 2024.”

“We expect these actions and broad-based restructuring initiatives to result in a more durable operating model with improved profitability and cash flows in a range of economic environments. We remain confident in our strategic direction and ability to deliver superior value creation over time.”

Third Quarter Financial Overview

Net sales decreased 13% to $473 million; demand decelerated abruptly in August and September, leading to a low double-digit demand decline for the quarter versus prior year

Gross margin of 57.4% was up 130 bp versus the prior year, primarily benefiting from pricing actions and easing commodity prices

Operating expenses were reduced by $25 million to $266 million compared with $290 million last year

Loss per diluted share of $0.10 compared with diluted earnings per share of $0.22 last year

Cash Flows Overview

Net cash from operating activities of $32 million for the first nine months of the year, compared with $80 million for the same period last year

Leverage ratio of 4.8x EBITDAR at the end of the third quarter versus covenant maximum of 5.0x

Adjusted ROIC of 14.9% for the trailing twelve months

Business Restructuring Actions

In light of the demand trajectory change in August, the company initiated additional cost reduction actions which are expected to reduce 2024 operating expenses by approximately $50 million, and also accelerated gross margin initiatives.

The operating expense reductions are incremental to the $80 million of operating expense reductions we expect to realize in 2023.

The cost restructuring actions are broad-based and include a reduction in headcount across all areas of the organization, including in corporate and R&D functions

We are rationalizing our store portfolio with a planned closure of 40 to 50 stores by the end of 2024, along with slowing the rate of new store openings and remodels, and also reducing our 2024 capital expenditures

Gross margin improvement actions include value engineering and cost optimization strategies, including driving additional efficiencies through our manufacturing and home delivery network

The business restructuring actions are expected to result in up to $20 million of one-time restructuring costs, with an estimated $10 million of the costs being recorded in the fourth quarter of this year

Amended Credit Agreement

The company also amended the financial covenants of the revolving credit facility to provide greater flexibility through 2024, and right sized the aggregate availability of the credit facility to $685 million

Prospectively, the company will be utilizing a new definition for net leverage as highlighted on page 9 of this news release; our leverage ratio under the new definition was 3.8x EBITDAR at end of the third quarter

Financial Outlook

The company updated its full-year 2023 diluted EPS outlook to a loss of up to $0.70 per share. The updated EPS outlook includes an estimated $10 million, or $0.35 per share, of restructuring charges to be recorded in the fourth quarter. The 2023 outlook assumes net sales are down low double digits versus the prior year, with approximately 100 basis points of gross margin rate improvement year-over-year. The company anticipates 2023 capital expenditures of approximately $60 million.

Conference Call Information

To access the webcast, visit the investor relations area of the Sleep Number website at https://ir.sleepnumber.com. The webcast replay will remain available for approximately 60 days.