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Stadium Capital Releases Statement to Sleep Number Shareholders

December 2, 2024  by Karen Parrish in Business Strategy, Industry   

Fellow Shareholders:
Stadium Capital is Sleep Number’s largest shareholder, holding approximately 11.7% of the Company’s outstanding shares. Last week, we expressed our grave concerns with Sleep Number’s financial underperformance, corporate governance and flawed CEO search process and made specific proposals to solve these pressing issues. Based on the conversations we had with many of you both before and after the publication of our letter, we are confident the majority of you share our frustrations. That is why it was so surprising to see the Board respond by vehemently defending its actions, instead of pursuing the path of private collaboration with its largest shareholder (as we have done with Sleep Number previously).

Today we are writing to inform you that we have nominated four exceptionally qualified directors with capital allocation, product innovation, business turnaround and unrivaled industry experience for election to Sleep Number’s Board at the upcoming Annual Meeting. We did not come to this decision lightly, as we strongly prefer private engagement with the management teams and boards of our portfolio companies on ideas for value creation and improved governance.

In this case, our hand has been forced because Sleep Number’s Board is unwilling to work with its largest shareholder to add new directors to the boardroom to ensure an independent CEO search, and most concerningly, seems intent on continuing on its current perilous path. This was made particularly evident by the Board’s decision to reject our Nov 12 and Nov 25 proposals (seemingly without entertaining them whatsoever) that would have ensured a truly independent CEO search process.

Concerningly, the Board’s obstinance is occurring in the face of investors embracing the prospect of change, with Sleep Number’s shares appreciating 20% since we highlighted the path to enhanced value in our letter last week.

Most troubling in the Board’s response, which failed to address any of our concerns, was its characterization of our request as “unusual” for direct participation in the CEO search – the most consequential decision facing the Company over the next decade. Under standard circumstances, we believe a willing and experienced owner who holds more stock than the entire Board by many multiples should have a seat at the table for such a momentous decision. In these specific circumstances, where the long-tenured directors directly involved in this critical decision have such abysmal track records of value destruction, it is especially vital. A thoughtful and open-minded Board should welcome the input of a diligent, patient and large owner who brings a valuable and differentiated perspective to this enormously consequential decision.

Unfortunately for this Board, the facts are starkly obvious: Sleep Number’s long-tenured directors (Shelly Ibach, Stephen Gulis, Brenda Lauderback, Michael Harrison and Barbara Matas, in particular) have failed all of us as fiduciaries. They have not only harmed but are now also insulting key constituents – the shareholders they are supposed to represent and the employees who are the heart and soul of the organization they govern – by wasting our money to protect their lucrative roles as directors for as long as possible. Their indefensible long-term record and recent self-serving actions make it overwhelmingly clear that they cannot be trusted with the important decisions that lie ahead.

To fix this broken situation, we have nominated four highly qualified individuals who have the necessary expertise and independence to address Sleep Number’s most pressing issues. Our nominees are:

Patrick A. Hopf — Mr. Hopf is the former Interim CEO and Chairman of Sleep Number and a successful private investor in consumer-oriented companies. He will bring a positive track record of value creation as well as strategic change and board development experience.

Jeffrey T. Jackson — Mr. Jackson is an experienced CEO and public company director with an outstanding record of value creation and extensive experience managing cyclical companies across market cycles, which will be particularly relevant for Sleep Number.

Jessica M. Prager — Ms. Prager has extensive experience building and scaling high-performing, culturally relevant brands. Her expertise in leveraging consumer data, driving product innovation and bridging digital and physical touchpoints will be particularly relevant in helping Sleep Number achieve its growth potential.

Kevin Baker — Mr. Baker is a Managing Partner at Stadium Capital, Sleep Number’s largest owner, and will bring a much-needed ownership perspective to Sleep Number’s boardroom.

Our nominees’ highly effective and complementary skillsets will ensure that a refreshed, unbiased Board works constructively to identify the biggest causes of Sleep Number’s underperformance, uses those insights to identify the best CEO, and empowers and incentivizes Sleep Number’s next CEO to reignite the Company’s growth, profitability and market value. Most importantly, this refreshed Board will put Sleep Number’s owners’ interests above its own.

We continue to believe that it is in the best interest of all shareholders for Sleep Number to collaborate with us by pursuing the path we articulated in our November 25th letter: work with us to refresh the Board, appoint an Executive Chairman and ensure a wholly independent CEO search process to identify the Company’s next leader. That is certainly the overwhelming message we have heard from fellow shareholders, and to be clear, that is our preferred outcome. However, if the Board continues down a self-serving path and unnecessarily squanders resources to defend those who are most responsible for the current calamity, then we will look forward to letting the owners decide the future of our Company at the Annual Meeting in spring 2025.

Sincerely, The Stadium Capital Investment Team