Sleep Number Corporation

Welcome to Sleep Numbers Q4 and full year 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 like to introduce Dave Schwantes, Vice President of Finance and Investor Relations. Thank you. You may begin.

Good afternoon and welcome to the Sleep Number Corporation fourth 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 year-end earnings call. My Sleep IQ score was 96 last night. In 2021, our 360 smart beds drove double-digit demand growth and record earnings for the third consecutive year, even with pandemic-induced global supply chain disruptions. The fourth quarter proved to be the most challenging, as we ultimately did not receive a semiconductor component soon enough to fulfill our planned deliveries in the quarter. Electronic supplies remain constrained near-term, as semiconductor demand is still overwhelming global supply capacity. The suppliers are adapting as they enter the third year of difficult operating conditions. As we navigate the disruptive constraints from this industry, we have been agile in retaining our customers and generating demand. Strong demand for our smart beds reflects the life-changing wellness attributes of our innovations. As evidenced by the events of the past two years, our purpose to improve the health and well-being of society through higher quality sleep has never been more urgent or important. Highlights of our 2021 performance as compared to 2020 results adjusted for the 53rd week include net sales growth of 20% to $2.2 billion. Earnings per share rose 34% to $6.16. Cash from operations increased to a record $300 million. And our return on invested capital was nearly 28%, more than three times our cost of capital. Over the past five years, we have delivered an EPS CAGR of 41%, nearly four times the 11% compounded average sales over that timeframe. We also generated a five-year EBITDA CAGR of 14%, further demonstrating the superior cash-generating ability of this business. Now let me elaborate on the capabilities that are enabling us to navigate supply chain challenges while driving demand growth. We are utilizing numerous levers of our vertically integrated business model to anticipate and respond to dynamic business conditions and drive sustained demand. Digitization efforts are enabling real-time inventory visibility, scheduling, communication, and customer fulfillment. For example, we can adjust first available delivery date for customers based on when a constrained component has left a supplier's overseas factory. As a result, delivery windows are easily adjusted and aligned with the soonest smart bed availability, reducing the risk of waiting too long to schedule or needing to reschedule. Currently, more than 60% of our smart beds are available for delivery in one to two weeks, while others are requiring a six to 11-week lead time due to a semiconductor delay related to FlexFit adjustable smart bases. Our individualized communications delivered digitally via our customer engagement platform and personally by our sleep professionals are building trust with customers and increasing retention. We continue to advance our digital tools such as self-scheduling and self-service that simplify our customers' experience. In addition, by the end of 2022, we expect to complete the migration of our outbound distribution network, which will enable us to operate with a single enterprise-wide manufacturing and assembly supply chain. This network design enables scale and agility to support volume expansion and market share gains. Temporary supply shortages are not unique to Sleep Number. Our ability to navigate the complex dynamics fuel continued demand growth and retain customer trust and loyalty are strengths of our vertically integrated model and support the long-term sustainability of our consumer innovation strategy. A great example of this is the sales and marketing advancements we've made since the onset of the pandemic. Our digital ecosystem is driving efficient demand creation, including nearly 400 basis points of leverage, which we see as sustainable. Our 2021 performance includes record retail productivity with average sales per store of $3.6 million, including a 13% contribution from online sales. Nearly half of our suite member stores average over $3 million annually, with eight stores generating sales of more than $7 million, including two stores at the $9 million mark. We expect average sales per store in 2022 to approach $4 million while adding 35 net new stores. In addition, our metrics, including customer engagement, high-quality traffic, conversion, referrals, cancels, and returns, signal continued strong demand growth. More than 40% of consumers surveyed indicate they intend to purchase a new bed within the next 12 months. Our digital ecosystem, which broadens consumer engagement and deepens our smart sleeper engagement and referrals, is a growth flywheel. Sleep numbers consideration has increased since September, and referrals are at record levels. Innovative, life-changing sleep solutions are the ultimate driver of sustained performance. At the International Consumer Electronics Show in January, we revealed our newest, most dynamic 360 smart bed technology platform, which will provide advanced monitoring, personalized insights, and be capable of health evaluations, all from the comfort of your home. We plan to introduce the climate 360 smart bed near the end of 2022, followed by introductions of our all new 360 smart beds and smart furniture throughout 2023. As we navigate in an inflationary marketplace, we remain focused on actions, including pricing that offset higher input costs without dampening demand. Benefited by our vertical model with exclusive direct-to-consumer distribution, examples include managing price elasticity as we communicate the value of our smart beds with different promotional offerings, leveraging the entire P&L, and continuing to find efficiency gains from our digitization efforts and actions. and applying our discipline, capital, and liquidity management, including contingency preparedness, metric-driven decisions, and steady investment in our near and long-term growth drivers. While there is no doubt that Sleep Number, like nearly every other business, is operating in a challenging and dynamic environment, we are addressing the temporary disruptions while advancing our long-term strategy. In the near term, we will create value with our new innovations that are designed to support smart sleepers' changing needs at every life stage and provide the highest quality sleep. through efficiencies from our single enterprise supply network and by capitalizing on opportunities as the global supply chain improves. Longer term, we are positioning Sleep Number for continued market expansion through new sleep health and wellness revenue streams, including subscription programs. We are also continuing to augment and accelerate our strategic progression into connected health. At the heart of our purpose is our remarkable Sleep Number team, with a dedication to our mission that is unmatched. Our strong retention and staffing are driven by a workplace culture that celebrates individuality and prioritizes well-being. Every day, this team finds smart ways to increase consumer value, manage risk, and utilize our Advantage business model to effectively navigate the ongoing global challenges. Because of their efforts, we have improved nearly 14 million lives and are improving the health and well-being of society through higher quality sleep. Now, David will provide additional financial details on our 2021 performance and 2022 outlook.