Sleep Number Corporation

Welcome to Sleep Number's Q1 2021 earnings conference call. All lines have been placed in a listen-only mode until question and answer session. Today's call is being recorded, and if anyone has any objections, you may disconnect at this time. I would like to introduce Dave Schontes, Vice President of Finance and Investor Relations. Thank you. You may begin.

Good afternoon, and welcome to the Sleep Number Corporation first quarter 2021 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. We also want to refer you to our recently updated investor presentation, which can be accessed on our website at sleepnumber.com. I will now turn the call over to Shelly for her comments.

Good afternoon and welcome to our first quarter earnings call. My Sleep IQ score was 88 last night. Through continuous innovation across our enterprise, Sleep Number is winning consumers' hearts, minds, and share of wallet. We are improving lives through better quality sleep while delivering exceptional value for all stakeholders. First quarter demand was more than 30% higher than prior year. which reflects broader and deeper brand relevance as we build on the accelerated shift in consumer trends towards prioritization of their health, faster adoption of digital products and services, and increased preference for brands with an authentic purpose. We see these trends continuing to benefit performance during the balance of this year and beyond. Our strategic investments in leadership in sleep science are propelling the advancement of 360 smart bed features that improve sleep health and drive customer engagement. And Sleep Number's culture of individuality and well-being provides the foundation for our mission-driven team who passionately innovate with agile learning and exceptional execution. Our first quarter performance was driven by a significant acceleration in both consumer demand and profitability. We are raising 2021 EPS guidance to at least $6.50 compared to reported EPS of $4.90 in 2020 and $2.70 in 2019. Net sales increased 20% to $568 million, with demand growth accelerating from previous quarters to more than 30% year-over-year and over 40% on a two-year basis. Greater than $50 million of smart bed delivery shifted out of the first quarter due to temporary foam supply constraints. Operating income grew 45% to $76 million. EBITDA grew 39% to $97 million, and EPS increased 85% to $2.51. We also had record return on invested capital of 27.6%, up 850 basis points from prior year. as we continue to realize compelling value from disciplined capital deployment. To support our expanding business, we have increased our credit revolver to $600 million. Our purpose to improve the health and well-being of society through higher quality sleep is resonating with consumers through our brand positioning. With sleep science-based innovation brand accelerators in our digital ecosystem, we continue to build momentum. Our strong first quarter demand growth represents a sequential acceleration from each of the past two quarters on a one-, two-, and three-year basis. By leveraging extensive research and insights from more than 9 billion hours of sleep data, We constantly advance the smart bed experience to help individuals improve their quality sleep. Early last month, we introduced the new performance and classic series 360 smart beds with a digitally-led marketing campaign. Each ad is deepening customer engagement with the Sleep Number 360 smart beds by connecting the health and wellness benefits of proven quality sleep. With the knowledge from our proprietary sleep data, we recently introduced My Daytime Alertness feature. This new capability provides advanced real-time insights that pair a sleeper's personal data with self-reported information in sleep science to deliver individualized recommendations for how to improve sleep. In addition, the Sleep IQ update includes simplified navigation for customers to access other wellness features, such as circadian rhythm insights, nighttime heart rate variability, and monthly health IQ wellness reports. These sleep experience advancements, including relevant personalized health metrics, are driving increased customer engagement, brand advocacy, and referrals. Lifelong relationships remain an important source of ongoing efficient growth through referral and repeat sales, which represent about half of our demand. In addition, our digital ecosystem is enabling Sleep Number to efficiently acquire new customers. We are optimizing digital content, which is tailored by audience and platform, in real time for efficiency and scale. Results include highly qualified digital traffic growth of over 40% in the quarter and record levels of conversion. Since transitioning to all smartbeds, Nearly three years ago, we have driven average demand growth of 14%. Fleet members' agile go-to-market strategy and exclusive direct-to-consumer distribution model also remain strong drivers of sustainable growth. Our sell-from-anywhere model directly aligns with how customers want to shop. in-store, online, or by phone, delivering a seamless value-added experience across all touchpoints. Average sales per store for the first quarter grew 9% to nearly $3.2 million on a trailing 12-month basis. One-third of sweep number stores now average more than $3 million. In 16 stores, exceeded $6 million in sales, with one store over $8 million. Online sales also remained strong, growing 116% in the quarter to nearly 14% of total sales, compared to approximately 8% last year. We are benefiting from the cumulative impact of Sleep Number's strategic initiatives within our mission-driven culture. Like most businesses, we continue to navigate supply chain costs and availability pressures related to the ongoing global impact of the COVID-19 pandemic. Our unique business model in high sales growth and gross margin rates give us great flexibility as we manage for total operating margin. We have taken $20 million of pricing for 2021 and will adjust offers to drive favorable total margin through discounts, financing, mix, and attach. Our vertical structure affords optimized solutions as we remain focused on demand, business leverage, and capital efficiency. Raising 2021 guidance reflects the strength of our first quarter performance and underscores the value inherent in the convergence of our growing sleep innovation leadership, pioneering 360 smart beds, digital ecosystem, and lifelong customer relationships. More sleep data leads to better consumer insights and advancement of sleep health innovations. Broadening relevance drives accelerating demand and increases customer acquisition, retention, and referrals, resulting in higher revenues and profit margins. Growing scale improves operational efficiency and effectiveness across our core infrastructure, which is increasing profitability and cash generation as we expand our smart sleep ecosystem. The remarkable strength of our highly engaged, solution-orientated team and vertically integrated business model demonstrates compounding benefits. Thank you, Sleep Number team, for your ongoing courage, resourcefulness, and passion to innovate for an exceptional customer experience. And thank you for continuing to champion a kinder, more just society for all. As our performance indicates, we have built a compelling, synergistic strategy with increasing consumer relevance. The outcome supports our commitment to create and sustain superior shareholder value. Now, David will provide additional financial details on first quarter performance in Outlook for 2021. Thank you, Shelly.