Sleep Number Corporation

conference call. All lines have been placed in a listen-only mode until the question and answer session. Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I would like to introduce Dave Shontes, Vice President of Finance and Investor Relations. Thank you. You may begin.

Good afternoon and welcome to the Sleep Number Corporation third quarter 2020 earnings conference call. Thank you for joining us. I am Dave Schwanes, Vice President of Finance and Investor Relations. With me today are Shelley Eibach, our President and CEO, and David Callen, our Chief Financial Officer. This telephone conference is being recorded and will be available on our website at sleepnumber.com. Please refer to the details in our news release to access the replay. Please also refer to our news release for a reconciliation of certain non-GAAP financial measures and supplemental financial information included in the news release or that may be discussed on this call. The primary purpose of this call is to discuss the results of the fiscal period just ended. However, our commentary and responses to your questions may include certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties outlined in our earnings news release and discussed in some detail in our annual report on Form 10-K and other periodic filings with the SEC. The company's actual future results may vary materially. I will now turn the call over to Shelly for her comments.

Good afternoon, and thank you for joining our 2020 third quarter earnings call. My Sleep IQ score was 88 last night. Quality sleep has the power to improve lives, and because of our team's dedication to our mission and our relentless focus on innovation, Sleep Number is at the forefront of delivering this life-changing benefit. We have now improved nearly 13 million lives and counting. This is particularly important in this time of extreme stress and disruption in everyone's lives. In the face of significant ambiguity caused by the pandemic, the Sleep Number team is helping our customers achieve and unparalleled sleep experience with our 360 smart beds. I am grateful every day for our team's tenacity, ingenuity, and the care they show to one another and our customers. Together, we have built a beloved brand and a purpose-driven company based on individuality and well-being. Our years of pacing and prioritizing strategic investments have contributed to our ability to deliver superior performance despite simultaneous health and economic challenges. We are well positioned for continued profitable growth and significant shareholder value creation. Our third quarter 2020 performance provides undeniable evidence of the strength, resilience, and sustainability of the differentiated consumer innovation strategy and efficient business model we have built since transitioning to all 360 smart beds in 2018. For the third consecutive year, our third quarter results reflect double-digit demand growth, including 16% growth this year. Third quarter financial results include net sales of $531 million, up 12% versus prior year, with an 11% comp gain. Net earnings per share were $1.79, up 90%. Net operating profit was $70 million, or 13% of net sales, an increase of 78%. Year-to-date cash flows were $287 million, up 51% versus the prior year-to-date. And net debt was $180 million lower than a year ago. These results clearly demonstrate our ability to create meaningful value for our customers, team, business partners, and shareholders. We are doing so in the short and long term. during both robust and more challenging times, while also significantly advancing our strategic initiatives. Several important factors contributed to this exceptional third quarter performance, including, first, our efficient and effective media performance. We continue to improve our media ROI each quarter as we advance our dynamic multi-platform strategy. We began leaning into customer acquisition a year ago and have rapidly accelerated our digital capabilities since the pandemic began. We are finding the highest value consumers through automation, machine learning, and our own proprietary data. Digital traffic has already surpassed all of 2019 and we delivered 80 basis points of leverage in our media spending in the quarter. Second, our highly productive and sustainable sell-from-anywhere model. We've developed an agile, go-to-market approach that leverages our sleep professional skills in building customer relationships and aligns seamlessly with how our customer wants to shop, in-store, online, or by phone. Results are evident in our strong average revenue per unit and unit performance. and increased conversion of digital traffic. During the third quarter, even as store sales recovered, our online and phone sales continued their triple-digit growth. Third, our exclusive direct-to-consumer competitive advantage. Our integrated approach to promotions, financing, selling process, media, and proprietary innovations are enabling us to increase sales and margin in a disruptive environment. And fourth, our new M7 and i10 360 smart beds, featuring temperature balancing layers and technologies for greater comfort, are exceeding expectations. Our pioneering innovations are linking sleep quality to individual health and wellness. With data from nearly one billion sleep sessions we now provide individual nighttime heart rate variability to our smart bed sleepers. This biometric data focuses on cardiovascular resilience and provides insights about activity levels and energy for the following day. With society more health conscious than ever, these new sleep and wellness features are increasing engagement to new highs, which translates to even stronger brand advocacy. All of these growth-driving initiatives will continue to progress in the coming quarters. Through smart and efficient use of capital, we have improved our operational efficiency and strengthened our competitive advantages. For example, even with the hyper V-shaped recovery in the third quarter demand, The integration and coordination of our sales and service operations, planning, production, fulfillment, and delivery have enabled us to effectively manage a challenging global supply chain and logistics environment, including constrained inventory and cost pressures. Strengthened partnerships and devised creative solutions with suppliers and kept everybody safe. while also meeting new standards for localized responsiveness. This kind of tenacity and dedication led Sleep Number to be recognized recently by Supply Chain Insights as a supply chain to admire for the second consecutive year. In addition to superior metrics from our digital transformation, we were highlighted as having one of the most customer-centric supply chain designs. Given our team's learnings during the past seven months, I am most excited about what is yet to come, the impact our continued improvements will have on long-term outcomes. Our financial and operational flexibility afforded by our strategic foresight in long-term planning horizon and aided by the immediate capital preservation actions we took when this crisis began secured our ability to pivot swiftly and deliver exceptional sales and profitability in the quarter. Although the COVID-19 pandemic continues, we are maintaining appropriate liquidity to continue investing in innovation, digital tools, and mechanisms to build incremental flexibility into how we operate. The pandemic has pressure tested our business model, and we have demonstrated greater than expected agility and operational efficiency as we leverage the digital technology and data we've been investing in for years. Our differentiated innovations, vertically integrated business model, learning agility, and deep understanding of consumer trends are hallmarks of Sleep Number, and they position us well for the balance of 2020 and longer term. We are now experiencing the two structural consumer shifts we anticipated at the inception of our consumer innovation strategy. We see them as important for the foreseeable future. Consumers are prioritizing their home as well as their own well-being. They understand the strong connection between sleep and overall health and wellness. Consumers are also adopting digital products and services at a much faster and higher rate. Our life-changing innovations have never been more relevant. Here are highlights of our strategic advancements in linking sleep to overall health and wellness. Our 360 smart beds effortlessly deliver proven quality sleep. And the connected health experience created by individualized Sleep IQ data drives daily engagement with our insiders, our customers. The meaningful value delivered by these Sleep Number innovations deepens customer loyalty and inspires increasing referrals of our brand. This strong affinity is intensifying demand. It's driving greater advocacy and new customer growth. In turn, the expanding scale of our profitable core business is providing the foundation for us to pursue new adjacencies and opportunities in the vibrant sleep health economy. We are accelerating our authority and expertise in connected health through our investments in sleep science, research, and selective partnerships. Through our analysis of nearly 8 billion hours of longitudinal sleep and biometric data, we are fueling new research insights and technologies. These outcomes deliver on our purpose of improving the health and well-being of society through higher quality sleep and health-related metrics like heart rate variability. Sleep Number has established an important new consumer-based research project aimed at identifying underlying populational health trends. The new sleep research capability within Sleep IQ technology provides the company's smart sleeper community the opportunity to help advance sleep science. Learnings will contribute to insights about the impact of sleep on holistic health, as well as inform the development of new products, services, and partnerships to advance the science of sleep. 2020 has demonstrated the relevance, resilience, and sustainability of our differentiated strategy, innovations, and integrated business model. As we enter the fourth quarter, our business momentum remains strong. For the full year 2020, we expect EPS of at least $4 compared to 2019's $2.70. This would reflect a five-year EPS growth CAGR of more than 30% in addition to our five-year total shareholder return of greater than 100%. Driven by our mission, culture of individuality, and capital flexibility, We are accelerating our competitive advantages, moving society forward by delivering life-changing sleep experiences and creating superior long-term value for all of our stakeholders. Now David will provide additional financial details on our third quarter performance and fourth quarter outlook.