Sleep Number Corporation

Welcome to Sleep Number's Q4 and full year 2020 earnings conference call. All lines have been placed in the 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. You may begin.

Good afternoon and welcome to the Sleep Number Corporation fourth 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 sleeknumber.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 welcome to our 2020 fourth quarter earnings call. My Sleep IQ score was 86 last night. Quality sleep is vital to our health and wellness. It affects our physical, mental, and emotional well-being. It helps boost immunity, increases energy, and improves recovery. It is life-changing. Sleep Number 360 smart beds benefit our overall health and wellness by improving our restful time asleep. Sleep Number is a beloved brand. Our team's deep relationship with customers is grounded in our culture of individuality and well-being. The result is more than 13 million lives improved and sustainable profitable growth. We are delivering long-term strategic and financial performance because of our differentiated strategy and vertically integrated business model. Our current five-year total shareholder return is greater than 600%. Over the past five fiscal years, we delivered compound annual growth rates of 9% in sales 15% in EBITDA, and 38% in earnings per share. Our 2020 ROIC was 25%, more than 14 points higher than five years ago. At the inception of our consumer innovation strategy in 2012, we positioned digital health at the core of our product and customer experience. This strategy, combined with subsequent strategic investments is fueling our profitable growth. Our core business supports our purpose of improving the health and well-being of society through proven quality sleep. Consumer trends that we have long anticipated were accelerated by the global pandemic in the past year, resulting in three structural shifts. First, consumers are prioritizing well-being, their own and that of their families, and they now better understand the strong link between sleep and overall health and wellness. Second, consumers are adopting digital products and services at a much higher rate, and they are increasingly relying on digital health solutions. And third, consumers have a heightened preference for brands that are characterized by authentic purpose and human empathy. Each of these shifts is enduring, driving permanent changes in consumer purchase behavior. With our strategic investment in fleet science-based innovation, digital technologies, and brand accelerators, we are positioned to continue taking market share and delivering superior stakeholder value in this transformed environment. We significantly broadened our sleep leadership and brand relevance during the past year. Our record results are a testament to our mission-driven team, their ingenuity, agility, and courage amid an unprecedented health crisis, global economic shock, and civil unrest. They generated new ways to digitally connect with customers and operate in a more efficient manner while in a constant state of hyper-change. Our strategy and vertically integrated business model create a flywheel for sustainable growth driving consumer demand and performance. Sales demand in the fourth quarter accelerated. It exceeded our Q4 net sales growth and contributed to double-digit demand growth for the full year. This momentum continues in the first quarter. Full year net sales of $1.9 billion grew 9%. Net operating profit increased 65% to 10% of net sales. Earnings per share were $4.90, 81% stronger than our $2.70 record EPS in 2019 sales. and we generated record cash from operations of $280 million of 48%. Our breakthrough performance is being driven by our revolutionary 360 SmartBeds and investments which sustainably leverage our competitive advantages. As consumers increasingly prioritize their health and well-being and recognize its link to quality sleep, Demand for our revolutionary 360 smart beds has accelerated. Since transitioning to all smart beds in Q3 2018, 10 quarters ago, demand for our beds has grown an average of 12%. Our new I and M series smart beds with their temperature balancing features are increasing consumer interest. We will introduce the P and C series smart beds in the coming months with a new digitally led marketing campaign focused on their health and wellness benefits. Sleep IQ technology optimizes the smart benefits of the bed, continually improving restful time of sleep through sense and do technologies and individualized sleep data. This high-impact content is amplified by our advocates and NFL partnerships. In the fourth quarter, digital traffic to our brands was up 50%. Considerations and conversions are at record levels. Our health-related advancements, including circadian rhythm, insights, and nighttime heart rate variability directly link and individual sleep quality to daytime productivity and overall well-being. Our next Sleep IQ progression will link sleep quality to daytime alertness. These highly relevant personal metrics increase engagement and retention of our smart sleepers, which in turn provides the foundation for scaling innovation. Now, with more than 1 billion sleep sessions and 9 billion hours of longitudinal data, we are extending our sleep leadership into connected health. Our work is informed by our Sleep Number Scientific Advisory Board. In our collaboration with Mayo Clinic and other partners such as Oxford Pharma Genesis, an award-winning independent global health science consultancy, We will publish new research using our proprietary data and insights, illuminating the impact of sleep on health in the coming months. In keeping with increased consumer adoption of digital products and services, our digital ecosystem is also enabling Sleep Number to efficiently acquire new customers and build lifelong relationships. We continue to benefit from internal digital capabilities. Through automation, machine learning, and proprietary data, we are more quickly identifying the highest potential consumers. This real-time intelligence and relevant content led to a 29% unit increase in Q4, while maintaining strong average revenue per unit and leveraging our media investments. By deepening customer engagement and scaling our smart sleeper community, we are amplifying their advocacy of our connected, life-changing sleep experience. Our digital capabilities also enabled us to adapt cost structures and help manage inventory to support a more customer-focused supply chain. These ongoing advancements in our digital ecosystems continue to widen our competitive advantages and provide a compelling source of future growth. Our agile go-to-market approach leverages our sweet professional skills in building customer relationships and aligned with how our customer wants to shop in-store, online, or by phone. our approach seamlessly integrates promotions, financing, selling process, media, and proprietary innovations. Our online and phone sales grew 93% in the fourth quarter and increased 104% for the full year, a strong contribution to our 6% comparable sales gain for the year despite the sales decline in Q2 from the onset of the pandemic. We continue to strengthen our online customer journey and expect it to be an important source of future growth. Our well-honed market development strategy is continuing to deliver higher profitability and market share gains. We surpassed our long-term target of $3 million per store in 2020. Ten suite number stores exceeded $6 million each. and one store eclipsed $7 million in annual sales. As we continue to take market share by advancing our integrated initiatives, we expect revenue growth from all touch points in 2021, including new store growth, which will be a greater driver in the second half. We also expect growth in bulk units and average revenue per unit for the full year. Finally, With heightened focus on corporate responsibility, stakeholders are engaging with our mission-driven team, culture of individuality, company purpose, and long-term orientation. Improving the health and well-being of society through higher quality suites remains our guiding light. Throughout 2020, our purpose sustained us. inspired us and informed our business decisions and actions, including gifting a smart bed to all of our team members, partnering with Make-A-Wish to support critically ill children with life-changing sleep, and joining the United Nations Global Compact. As we look to the future, we will continue to strengthen our corporate stewardship by making this a better world through higher quality sleep. In our second annual corporate responsibility and sustainability report, we will provide details of our ongoing social, environmental, and governance efforts. With continued exceptional consumer demand in the first quarter and strong growth initiatives in place, we are driving towards another year of breakthrough performance. For the full year of 2021, we expect to deliver at least $6 of EPS compared to $4.90 in 2020, and more than double our 2019 EPS of $2.70. Our results are propelled by the convergence of our growing sleep innovation leadership and brand relevance, revolutionary new 360 smart beds, digitally connected ecosystem, exclusive direct-to-consumer distribution, and lifelong customer relationships. In a year of challenge and change, Sleep Number delivered exceptional results by leveraging the power of vertical integration, digitization, and a mission-driven team. Our unwavering focus on doing what is right for our customers, team, community, and partners has made a difference in this challenging time. We have continued to lean into the competitive advantages inherent in our differentiated strategy. As a result, our brand reputation, customer and team member engagement, and our financial performance are all at high. We remain positioned to generate sustainable, profitable growth in 2021 and beyond. Our Sleep Number team is grounded in our resolute belief in individuality and the life-changing impact of quality sleep, which translates to superior shareholder value. Thank you, team, for your devotion to our stakeholders. You inspire me every day. Now David will provide additional financial details on our fourth quarter performance and outlook for 2021. Thank you, Shelly.