Stadium Capital Mgt. Issues Letter to Sleep Number Board

December 15, 2024  by Karen Parrish in Business Strategy, Industry   

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December 12, 2024

Members of the Board:

The legendary investor Benjamin Graham famously said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” The voting machine has been unequivocal at Sleep Number – shareholders resoundingly support the changes we suggested in our public letter issued on November 25, 2024 (the “November 25th Letter”). We are confident that with the prompt implementation of our suggestions, the weighing machine will reflect significantly more value creation at Sleep Number over time. However, without the right changes, or with changes that take too long to occur, we remain concerned that the Board will continue to destroy shareholder value.

Since we published the November 25th Letter, we have received feedback from shareholders representing more than 45% of the outstanding shares (which equates to a majority of votes cast at the Company’s recent annual meetings) in support of our recommended path forward. We also understand that many of these shareholders have expressed (or attempted to express) their views directly to the Board as well. With Sleep Number’s share price up over 63% since we published the November 25th Letter, and no intervening news from the Company, it is incumbent upon the members of the Board to stop burying their heads in the sand and recognize that shareholders are clamoring for the changes we are seeking.

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In our view, the market reaction clearly indicates that the long-tenured Company directors we identified for replacement in the November 25th Letter (Stephen Gulis, Michael Harrison, Shelly Ibach, Brenda Lauderback and Barbara Matas) lack credibility with investors. These directors have destroyed hundreds of millions of dollars of value during their tenures. In glaring contrast, the prospect of meaningful change at Sleep Number has now increased shareholder value by over 63%.

Let that sink in, the prospect of these directors’ departure from the Board has increased the value of Sleep Number by more than $175 million. We cannot recall a more damning indictment by the market. Shielding yourselves with shareholder-unfriendly governance policies while, appallingly, spending investors’ money to defend your positions in the face of the catastrophic harm endured by Sleep Number’s owners and employees, not to mention overwhelming shareholder opposition, is unacceptable and, frankly, embarrassing. The Company’s performance under your leadership demonstrates that you are failed fiduciaries, and it is time to step aside. The owners whom you supposedly represent want change, now.

To be abundantly clear, we do not support the current CEO search process, especially given the influence of the Company’s failed, lame duck CEO. We firmly believe the process cannot continue under current leadership. Instead, we have a specific plan of action, with the right people to execute it, that we are prepared to implement immediately to stabilize Sleep Number’s business. It is inexplicable that the Board has not reached out to engage with us following the issuance of the November 25th Letter or our nomination of four exceptionally qualified director candidates on December 2, 2024.

In our view, it is past time for you to put the interests of the constituents you legally represent ahead of your own self-serving interests. In the interests of Sleep Number’s shareholders, employees and other key stakeholders, we implore you to step aside and respect the will of shareholders.

Sincerely,
The Stadium Capital Investment Team