Sleep Number Corporation

Welcome to Sleep Numbers Q1 2022 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 first quarter 2022 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 Shelley for her comments.

Good afternoon and welcome to our 2022 first quarter earnings call. My sleep IQ score was 74 last night. I want to start by expressing our deep concern for the devastating impact that the war in Ukraine is having on so many lives. We are driven by our purpose to improve the health and well-being of society through higher quality sleep. As always, our primary focus is the safety and well-being of our team, serving our customers, and ensuring business continuity. Since the onset of the pandemic more than two years ago, external factors have elevated business complexity and volatility. In this dynamic environment, we remain focused on deepening consumer relationships, and innovating for broad relevance while taking decisive actions to address near-term pressures. Our teams are highly engaged and resilient. Our competitive advantages are strong, and we have ample cash generation and liquidity to support the execution of our strategy. we remain steadfast in our commitment to fulfilling our purpose and creating long-term shareholder value. While we expected Q1 results to be significantly below last year due to supply constraints and related cost pressures, performance was additionally affected by other external factors in the quarter. The start of the war in Ukraine in late February, combined with a sharp increase in gas prices and broad-based inflationary pressures, affected consumer shopping behavior in March, including demand for our smart beds. While our team promptly leveraged risk mitigation plans to stimulate demand and reduce costs, first quarter performance was lower than expected. Demand for the quarter was down 3% year over year. Net sales declined 7% to $527 million, and earnings per share were 9 cents. Customer preference for the features and benefits of the Sleep Number smart bed was at the high end of our line, and that led to a 20% increase in under-delivered backlog in the first quarter. Reflecting these results and greater macro pressures, we are revising our full year 2022 EPS guidance to a range of $5 to $6. This outlook assumes flat to low single-digit growth for demand for the balance of the year and benefit from deliveries against our excess backlog. David will elaborate on our financial performance shortly. I will highlight how we are keeping consumers engaged as we service our large backlog and prioritize important strategic advancements. We are utilizing the operational levers of our advantage model to engage consumers effectively in this inefficient marketplace. With our vertical model and integrated demand planning, we are able to rapidly test, learn, apply, and refine our actions. As a result, we are adjusting website and digital messaging, media promotions, and financing. Recent media changes are showing improved digital traffic and we are reallocating our investments to drive even more impactful outcomes. Our brand leadership and growth flywheel based on the advocacy of lifelong relationships with our smart sleepers remains strength. Our insiders are highly engaged with our brand. We've adapted and pivoted quickly. and continue to gain new insights as we respond to changing consumer shopping behaviors. I have great confidence in our passionate Sleep Number team and their tenacious pursuit of solutions that reach and serve our customers in this and all environments. In addition to demand-generating tactics, we immediately reduce media and other planned spending by $10 million in the quarter. We continue to pursue additional contingencies to further drive demand and adjust costs in support of a broad range of macro scenarios. We also continue to deploy creative solves to fulfill our demand on a timely basis while retaining customers' trust and loyalty. As we shared during our year-end earnings call, the global impact of the Omicron variant in January resulted in chip delays that constrained deliveries at the high end of our line. For the first quarter overall, our supply allocation was in line with expectations. The global supply environment remains fluid and challenged with minimal electronics inventories. These conditions require us to maintain constant focus and real-time agility across our business. For example, in April, our digital tools flagged a signal from a large third-tier global supplier affected by China's highly restrictive COVID lockdown in Shanghai. They are currently operating at about 60% of capacity, which has resulted in a delay of chips used in our smart bed firmness control systems. While we were not able to avoid business disturbance entirely, our vertically integrated digital capabilities enabled us to immediately adjust customer smart bed delivery times to align with the new expected timing of chip receipts. In this way, our integrated business model and our real-time supply visibility enable us to discern and respond quickly to external challenges. As a result, we can continue to generate demand, manage customer expectations and retain their trust and brand love. This is a significant competitive advantage. Our initiative to build a scalable, flexible, and responsive supply chain that prioritizes customer experience is essential to our speed and agility in overcoming customer disruptions. We now have completed the migration of nearly 75% of our outbound logistics network. By the end of this year, we expect to complete our multi-year transition to an enterprise-wide manufacturing and assembly supply chain. This is fundamental to improving our efficiency and customers' experience. Though external challenges are creating near-term complexity and significant inefficiencies, our innovative sleep solutions continue to gain relevance with consumers. The health and wellness benefits of sleep are increasing in value. Sleepers using our 360 SmartBed and FlexFit technology are benefiting from almost 30 minutes more restful sleep per night or up to 170 more hours of restful sleep per year. We are excited to share this exclusive Sleep Number benefit with consumers. Last month, we also achieved another significant milestone on our roadmap to connected health. We published findings from a recent study that confirmed that our 360 smart bed technology is comparable to the gold standard polysonography for sleep tracking and measurement. Because of this data reliability, our Smartbed could, in the future, be used for early risk detection purposes and long-term monitoring. This validation underscores our data's value to the medical and research community and strengthens our brand reputation. Later this year, we plan to implement our newest, most dynamic 360 smart bed technology platform with the introduction of the Climate 360 smart bed and subsequent new line of 360 smart beds. While the external environment is certainly more challenging than we expected, we are effectively managing near-term risk and simultaneously creating long-term value by capitalizing on our competitive advantages, including introducing new innovations that support smart sleepers' changing needs and provide the highest quality sleep, Sustaining sleep numbers sleep innovation health and wellness and sleep science and research leadership position Completing the transition to our more responsive and flexible enterprise supply network strengthening our digitization efforts to improve operating efficiency and customer experience and managing price elasticity in an environment with rising costs and promotional intensity, and proactively managing our capital and liquidity with disciplined, metric-driven decisions. Our team's perseverance, resilience, and unwavering commitment to our purpose has resulted in more than 14 million lives improved. and we are building a future where your Smartbed will play an increasingly important role in your overall health and well-being. Now, David will provide additional financial details on our 2022 first quarter performance and outlook for the remainder of the year.