Sleep Number Corporation

Welcome to SLEE members Q3 2021 earnings 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 now like to introduce Dave Schwante, Vice President of Finance and Investor Relations. Thank you. You may begin.

Good afternoon and welcome to the Sleep Number Corporation third 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 third quarter earnings call. My Sleep IQ score was 87 last night. The value of our sleep number purpose to improve the health and well-being of society through higher quality sleep is evident in our record third quarter top and bottom line performance. We improved more than 225,000 lives during the quarter. Before sharing greater performance detail, I'll highlight three key takeaways for today's call. First, we continue to drive sustained demand and market share gains for our life-changing smart beds, including delivering our fourth consecutive third quarter of double digit demand growth. Second, global supply chain shortages continue to challenge our business. I'll discuss how we navigated this disruptive environment in Q3 and the implications going forward. And third, robust demand and operating leverage are producing record financial results as we continue to advance key initiatives within our proven strategy to deliver sustainable, profitable growth. Third quarter results exceeded our expectations. Net sales were up 21% versus prior year and were 35% higher than 2019. and earnings per share were $2.22, 24% higher than our record 2020 third quarter and up 136% from 2019. Our third quarter performance was particularly gratifying given the significant global supply chain disruption. Our team's dedication, tenacity, and agility once again made a meaningful difference, enabling Sleep Number to service the growing demand for our life-changing 360 smart beds. The year-to-date financial performance results demonstrate the power of our Advantage Business Model in our team's stellar execution. Earnings per share of $5.63 for the first nine months of 2021 is greater than our record 2020 total year results and more than double our 2019 annual EPS. We are driving strong leverage across our business with a year-to-date net operating profit rate of 10.6%, up 200 basis points from prior year, and up 430 basis points versus 2019. Year-to-date cash from operations was a record $293 million, with a trailing 12-month ROIC of more than 34%. These results are being driven by heightened levels of consumer demand, a deep affinity for our brand, and clear operating efficiencies associated with our strategy, business model, and execution. With our unique competitive positioning at the intersection of well-being and technology, the worldwide shortages semiconductors in other electronic components became a problem in Q3 and continue to be a challenge for us. Our performance in this unpredictable environment is a testament to the years of investment in our vertically integrated exclusive direct-to-consumer business By utilizing multiple levers across our sourcing, product design, fulfillment, sales, and service operations, we are mitigating the impact of the current supply chain constraints. Our business model has also enabled us to shape demand fulfillment and manage supply even with minimal inventory. And with our team's dedication to our mission, we have earned our customers' trust and built enduring relationships. As a result, we generated impressive net operating profit leverage during the third quarter, despite input cost pressures and freight inefficiencies. Over the years, we have built strong partnerships with an increasingly diversified set of suppliers, These relationships have contributed to additional supply sources and help align our tight inventory with scheduled delivery, but haven't reduced the risk of electronic component shortages in the near term. We have aggressively pursued a range of solutions, including working directly with third-tier suppliers, employing market brokers, bots, and other digital tools, and expediting shipping, including air freight. In addition, we have quickly qualified new component suppliers, certified alternative components, and developed, validated, and applied product changes. We have shaped demand through promotional planning and our selling process. implemented additional price increases, and thoughtfully managed customer delivery and expectations through increased communication, home delivery staffing, and overtime. We have also partnered top to top with large global electronic and technology companies for the near and long term, integrating our work and sharing resources as we strive for sustainable outcomes. We continuously advance key initiatives and use multiple levers within our proven strategy for consistent demand creation. Our digital ecosystem drives relevance and engagement, which leads to a lifelong brand relationship. Automation and personalization are also improving the quality of our customers' experience, which builds trust. Both new and existing customers are actively engaged at record levels. Levers include digital storytelling to attract and engage. NFL media and ads are driving record digital traffic. In-house digital capabilities to personalize message by media, audience, and platform in real time. Sleep IQ technology advancements to strengthen engagement and improve customers' wellness, and customer advocacy, which is driving record referral and repeat sales growth. Results produced by our innovations and initiatives include four consecutive third quarters of double-digit demand growth, and two-year demand growth versus 2019 of nearly 30% for the quarter, as we last year's robust 16% demand increase. Our teams are highly engaged and passionate about improving life for all our stakeholders. In our annual engagement survey, our team's performance intensity, which is a measure of effort, and their commitment intensity, which measures their intent to stay with sleep number, were at best in class level. This shows up in how we continue to overcome the many challenges associated with this global pandemic. We are targeting full-year 2021 earnings per share of $7.25, reflecting our strong demand and leverage and the impact of supply chain constraints. We continue to employ and refine the strategies that were effectively used in the third quarter to fulfill demand and deliver exceptional performance. However, the timing of receiving electronic components could ultimately elongate when we can deliver our customer smart beds. As a result, it's still possible that we will have a shift of expected fourth quarter deliveries into the first quarter of 2022. Well, global supply chain issues will likely continue through next year. There are indications that supply will improve from current levels. Suppliers have made stronger commitments for electronic component deliveries in Q1 than we've had in the back half of 2021. In addition, supplier scaling initiatives are expected to favorably impact their output as the year progresses. Longer term, the necessity of understanding the customer in their purchasing behavior is essential to supply chain management. This is already a hallmark strength of Sleep Number. Operational decisions and scenario planning are informed by real-time data and analytics. Digitization enables both immediate action and our ability to be more responsive in the future. Moving from connected to intelligent speeds end-to-end orchestration from manufacturing to customer delivery. Regional assembly allows fast action. Relationships with suppliers through multiple tiers are essential to weathering disruption. As we prioritize our customer-centric supply chain designed for a dynamic global environment, we are adding two directors Bill Eiler and Angel Mendez will join our board effective January 2nd. Their experience in transformational global supply chains and purpose-driven leadership will augment our board's strategic capabilities. We are leaning into our purpose and utilizing the levers of our vertically integrated business to deliver sustainable superior value for all stakeholders. I am grateful for our team's ongoing resilience and passion for improving life and extremely proud of their exceptional accomplishments while navigating high uncertainty and rapidly changing conditions. The strength of our demand drivers continues to support mid to high single-digit demand growth in 2022, driven by our life-changing innovation, pricing action, advancement of our digital ecosystem initiatives, retail expansion, including 40 to 50 incremental new stores, and online evolution. Now David will provide additional financial details on our third quarter 2021 performance in Q4 outlook.