Sleep Number Corporation

Week numbers Q2 2021 earnings conference call. All lines have been placed in 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 now like to introduce David Schwantes, Vice President of Finance and Investor Relations. Thank you. You may begin.

Good afternoon and welcome to the Sleep Number Corporation second 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. I will now turn the call over to Shelly for her comments.

Good afternoon and welcome to our 2021 second quarter earnings call. My Sleep IQ score was 84 last night. As a company with purpose, Sleep Number is keenly focused on innovations and long-term investments that improve the health and well-being of society through higher quality sleep. Every night, our life-changing 360 smart beds with Sleep IQ technology deliver an effortless, individualized sleep solution that benefits millions of smart sleepers. As consumers continue to prioritize their health, we are driving exceptional demand for our Sleep Number 360 smart beds. And even as consumers increase their travel and entertainment activities, we are deepening and broadening our brand relevance. Our unprecedented demand growth, combined with global supply chain disruption, limited our Q2 deliveries. Our mission-driven team's relentless focus on our customers' experience has led to the acceleration of key initiatives that scale our capabilities, increase our efficiency, and contribute to superior stakeholder value creation. As a result of exceeding our internal expectations, we are again raising our full-year 2021 EPS guidance. Our new outlook of at least $7.25 compares with EPS of $4.60 for full year 2020, excluding the 53rd week, and is nearly three times our 2019 EPS of $2.70. Our first half performance represents another sales and profit record demonstrating the power of our competitive advantages and benefits of our vertically integrated business model. Specifically, consumer demand for our smart beds in the first half of 2021 was up more than 40% versus 2019, reflecting an acceleration in the second quarter. In fact, since transitioning to all SmartBeds 12 quarters ago, our average quarterly demand growth accelerated to 18%, significantly outperforming the market and further increasing our market share. Net sales for the first half grew 39% to more than $1 billion and were up 35% over the first half of 2019. Net operating profit grew to a rate of more than 10% of net sales, up 161% from 2020's first half and 166% from 2019. EBITDA was $148 million, up 88% versus the first half of 2020. And EPS was $3.44 for the first half. compared with 93 cents a year ago and 95 cents in 2019. We generated year-to-date cash from operations of $161 million, up 86%, and our trailing 12-month return on invested capital was a record 33%, as we continue to realize tremendous value from our disciplined capital deployments. We delivered these exceptional results while absorbing the inflationary impacts of a global supply chain that remains challenged by labor and material shortages. Our ability to effectively manage the related challenges is a key benefit of our vertically integrated business model. To better align inventory availability with our accelerated demand, We extended customer delivery windows in late May to four to six weeks. Working closely with partners across our supply and fulfillment chain, we have made significant progress in addressing temporary component shortages. First available delivery dates are now three weeks, and we expect robust delivery volumes for the balance of a year. our conversion and customer metrics remain strong and steady. We are clearly realizing the benefit of synergies across our purpose, culture, strategy, and business model. In our brand relevance and reach, consumer demand and engagement, development of new sleep health innovations, our smart sleep digital ecosystem, and investment in key strategic initiatives. Together, these synergies are perpetuating sustainable, profitable growth and creating substantial value for stakeholders. It starts with emotional digital storytelling, which is amplified by in-house digital capabilities that tailor our message by media type, audience, and platform in real time. This strategy is driving double digit increases in high quality digital traffic and engagement. And we are converting this strong consumer interest at record levels across all our touch points. Trailing 12 months online and phone sales are now 13% of total sales, up from 7% two years ago, while sales per store now average over $3.5 million on a trailing 12-month basis, up 27% from two years ago. Our Sleep IQ health and wellness features, which link quality sleep to daytime well-being, increase engagement with our customers. Our 360 smart bed monthly active usage rate is over 90%, up from 84% a year ago. Here are two examples in our customer's voice of the sleep health benefits provided by our innovations. Martha from Columbus, Ohio shared, as an allergy sufferer, I can share this data with my doctor to show the effects of recent treatments on my sleep. Without having this technology and sleep data, I would not have noticed important trends or been able to get at the root cause of my issues. And Bill from Denver, Colorado said, my favorite sleep IQ feature is the circadian rhythm tracker. It helps me adjust my bedtime and awake time routines for better sleep and daytime energy. This is also my favorite feature. This passionate engagement drives brand advocacy. bolstered by our loyalty program known as Inner Circle Rewards, which is resulting in referral and repeat sales approaching 50% of net sales. This level of loyalty is a clear indicator of the relevance of our brand and sustainability of our growth. It has been exciting to see the ongoing impact of this growth flywheel We continuously invest in, test, and refine incremental initiatives to drive performance. Here are some highlights for the back half of 2021. We are extending digital capabilities across our operations, including our supply chain. The advancements strengthen fulfillment, responsiveness, reliability, and data analytics. We are already seeing customer experience and efficiency gains. We're on track to benefit from approximately 50 net new suite number stores, which will contribute about five points of growth in the back half. We just introduced a 360 innovation limited edition smart bed with temperature balancing technology. We're capturing the benefit of additional price increases across our entire line, which took effect last week. And we're advancing our brand campaign and launching a new ad featuring Dallas Cowboys quarterback Dak Prescott during the NFL season opener against Tom Brady and the Tampa Bay Buccaneers. The campaign will be supported by our most robust NFL media package to date. On a final note, we are paving the way into the future of sleep health as we extend sleep numbers leadership in sleep science and research. In the coming months, we'll introduce a sleep health feature to more easily link sleep quality to an individual's overall health. We continue to build our sleep database, which now includes nearly 11 billion hours of sleep data. This longitudinal data strengthens our partnership with the world's leading sleep health researchers, physicians, and institutions. The outcome is a long-term data-driven revolution in sleep science and health. The insights we are garnering are not only improving lives, they also have the potential for meaningful positive impact and health at the population level Last month, we presented the results of two new studies based on real-world sleep number data that shows a potential model for identifying respiratory illness. Research like this demonstrates the value of our data, progresses our understanding of sleep on health, and informs the development of innovative new sleep solutions that further increase brand relevance, customer loyalty, and stakeholder value. The highlights I've shared demonstrate the power and the cumulative benefits of our strategy and our vertically integrated business model. We are on pace for another year of exceptional performance in 2021 and are extremely well positioned for superior long-term growth. The driver behind all of this is our team's dedication to our mission of improving lives by individualizing sleep experiences. Their passion for our customers' well-being is unwavering and unparalleled. Now, David will provide additional financial details on our second quarter performance and outlook for the remainder of 2021. Thanks, Shelly.