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spk05: 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.
spk04: 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.
spk00: 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.
spk08: Thanks, Shelly. Today, I'll focus on three areas. First, our financial results. Macro factors affecting performance and mitigating actions we're taking to offset pressures and risks. Second, the importance of supporting our innovations and demand drivers for the long term in the face of near-term adversity while taking actions to maintain maximum flexibility. And third, a review of key assumptions underlying our revised 2022 EPS guidance for $5 to $6, given the dynamic and challenging macro and consumer environments. Let's start with a review of macro factors that changed since our Q4 earnings call on February 23rd and implications on our performance. Russia's invasion of Ukraine the day after our earnings call triggered international sanctions and significant spikes in the cost of petroleum, adding risk for derivative commodities like foam and plastics. This has led to approximately $20 million of additional input cost pressures this year from commodities, fuel, and inefficiencies caused by the uneven flow of chips. Consumer confidence has been impacted by the rapid inflation in gas and food prices pressuring demand in March. This, coupled with Omicron-affected demand in January, resulted in a 3% year-over-year decline in Q1 demand. We are managing the business through changes in consumer behavior, challenges of inefficient supply flow, and higher input costs while navigating geopolitical events and low consumer confidence. As a result, we have lowered our expectations for 2022 demand growth and our EPS guidance. However, our differentiated strategy is more relevant than ever, and Sleep Number teams are highly engaged in our mission to improve lives. We remain committed to long-term shareholder value creation through our highly differentiated strategy. Now let's review first quarter net sales and financial details. Net sales in the first quarter of $527 million were down 7% versus the prior year on constrained electronic supply and lower than expected demand. While supply constraints in the quarter were largely as expected, The mix of sleep number smart beds ordered in the quarter, which we call demand, was significantly more profitable than the mix of smart beds delivered. This dynamic meaningfully impacted our Q1 financials as seen in our metrics. We delivered 108,000 smart beds in the quarter, down 5% versus the prior year, with ARU of $4,905.00 which was down 2%. Contrast this with the ARU of our Q1 demand, which increased nearly 10% versus the prior year. That is a 12-point swing in these ARU measurements, most of which is in our undelivered backlog. During the quarter, we added approximately $50 million of net sales equivalents to our excess backlog, bringing that total to approximately $200 million. Q1 gross margin of 57.3% exceeded internal plans by more than 100 basis points as deliveries were level-loaded throughout the quarter and benefited from pricing actions taken to date. Pressures causing the 530 basis point decline versus the prior year included the absorption of $140 million of annualized cost increases, lower overhead absorption on 5% fewer smart beds delivered, and 25% fewer adjustable bases delivered in the quarter than the prior year due to current year chip supply constraints. Q1 operating expenses increased nearly 7%, reflecting the challenges of operating a business in this fast-changing environment. In the face of worsening macro challenges in March, we curtailed Q1 planned spend by about $10 million, while prioritizing near- and long-term growth drivers. Despite these cost-cutting actions, the efficiency of our Q1 demand-driving spend was negatively impacted by Omicron in January and by geopolitical events and low consumer confidence in March. Still, demand in the quarter exceeded deliveries due to constrained chip supply, leading to a 20% increase in backlog since December. Constrained deliveries of our most profitable sales resulted in EPS of 9 cents for the quarter compared with expectations for 30 to 40 cents. We have responded to the changed macro environment by trimming our spending plans and being conservative with capital deployment as we continue to support our innovations, brand support, and market expansion initiatives. Our commitment to drive long-term performance is evident in the 23% increase in R&D as our teams create game-changing innovations to be launched later this year and next. We expect these new sleep solutions to fuel future demand and improve future supply by using newer chip technology and fewer components. Our differentiators plus efficiency-driving digitization and an evolved logistic network lay the foundation for superior shareholder value creation in the years ahead. However, the current operating environment is dynamic and challenging. Our updated guidance reflects lower demand, additional cost pressures, and service of our backlog as we continue to chase electronics supply. let's review key assumptions supporting our updated 2022 EPS guidance. The $5 to $6 range is based on flat to low single-digit demand growth balance of the year, sufficient chip supply to service a portion of our excess backlog within the year, resulting in low double-digit net sales growth, and commodity and inefficient operating cost pressures arising from the uneven flow of chips that prevent us from level loading deliveries. This will be particularly challenging in Q2 when the delayed supply of chips due to the Shanghai lockdown will constrict weekly deliveries the first seven to eight weeks to about half the volume expected the final weeks of the quarter. In total, we expect to deliver fewer smart beds in Q2 than Q1, but with a much stronger profit profile, which will be partly offset by the inefficient flow of deliveries. As a result, we now expect Q2 gross margin of 57% to 58%, with improvements in the back half to 58% to 60%. We also expect to generate approximately $200 million of cash from operations in 2022 as changes in demand, backlog, and working capital are less favorable than the prior year. Year-end debt leverage is expected to be approximately three times EBITDA. We are actively managing all the levers in our control to balance near-term financial risks with our opportunities to create superior value long-term. Our approach is to preserve maximum flexibility to move quickly as business conditions change. The fundamentals of our strategy and our balance sheet are strong. We continue to drive to improve lives through proven quality sleep as the means to create superior shareholder value. Operator, please open the lines for questions.
spk05: At this time, if you would like to ask a question, please press star followed by the number 1 on your telephone keypad. Your first question comes from the line of Peter Keith with Piper Sandler. Your line is open.
spk03: Hi, thank you. Good afternoon. To start off, I guess I had a fairly simplistic question just on the Q1 results. So you did miss the EPS guidance by a fair amount, but it sounded like the supply chain Played out as you expected. Demand got worse in March, but I would have figured you've been servicing the supply chain as sort of an offset. So what was, I guess, the reason for the EPS miss relative to mid-February when it was provided?
spk08: Thanks, Peter. A couple of things. One, the demand in March was less than we expected. We saw that change really starting February 24th, associated with the beginning of the war in Ukraine. The other factor was the demand that we did generate skewed very high end, and that ended up in the backlog and contributed to what I highlighted, the 20% increase in our backlog since December and the addition of $50 million net sales equivalent to our excess backlog at the end of the quarter.
spk03: Okay. So maybe next, just on the guidance, you're calling for demand growth of flat to low single digit for the remainder of the year, but you were negative three for Q1, I think with a pretty good February, so it implies March was worse than negative three. So why would you be expecting demand to be getting better for the balance of the year versus where you landed the last month or two?
spk00: Peter, thank you for the clarifying questions around demand. We've made good progress in a rapidly evolving marketplace since the onset of the war. Immediately following the start of the war, we were experiencing sales that included down double digits versus prior year. And we took actions in response to the change consumer marketplace. And with the last couple of weeks of March, we had moved that trend to down 3% to prior year and continue to make advancements and improvements as a result of the adjustments to support this particular consumer environment where the consumer is so challenged with inflation. So, you know, April is a small sample size, but we feel our guidance of flat to low single-digit growth for the balance of the year is appropriate based on what we've seen and the actions we've taken and the response from the consumer to the actions.
spk03: Kelly, as a follow-up to that, could you provide maybe an explicit example of an action you've taken where the consumers reacted positively here?
spk00: Yeah. You know, we did a significant amount of testing and iterating and adjusting throughout the month of March. And one thing that, you know, we clearly see is drink from our insiders as well as are the premium consumer being less affected but yet wanting an extraordinary value. So the activation is there with a strong value to the premium consumer. And, of course, we play broadly in the good, better, best. Now, I don't want to share exactly the specific tactics, obviously, for competitive reasons, but yet I've given you some good color there in the adjustments. And then I would also say, you know, the media adjustments that we've been making, moving to more productive media in this marketplace. And we're seeing, you know, strong conversion, higher conversion than prior year on some of the tactics that we've been advancing and then, of course, you know, the improvement in our demand.
spk03: Okay. Very good. Thanks so much.
spk00: You bet.
spk05: Your next question comes from the line of Bobby Griffin with Raymond James. Your line is open.
spk09: Good afternoon, everybody. Thanks for taking my questions. Just wanted to quickly, you know, maybe understand a little bit more of the earnings guide for the year better. The top line stayed unchanged, but obviously we're going to service more of the backlog with the change in demand. But even excluding the first quarter miss, there's still a pretty big cut of over a dollar plus to the earnings number for the year. And I know you called out $20 million of incremental commodities, but just any other big buckets that you can help size for us of what's driving that change in profitability?
spk08: For sure, Bobby. Glad to do it. Q1. was softer than we expected, both from a net sales perspective and lower EPS, as you saw. So that's contributing partly to the change in the full year. We also do expect lower net sales for the year. but the benefit of backlog will help support that to be low double-digit growth over the prior year, whereas in our previous guidance we were expecting high enough demand during the year that we wouldn't actually use the backlog to benefit the current P&L. You've highlighted, again, the $20 million of cost pressures that we talked about. There are a bunch of inefficiencies that are new in terms of the timing of when chips arrive and are able to support deliveries. I highlighted that in the weekly delivery schedule that we expect here in the second quarter. That's an expensive way to run the business. but it's necessary and it is appropriate to prioritize serving the customers in the kind of market that we're in. So those all-in impacted our thinking for the balance of the year.
spk09: Okay. And then, David, maybe just help us understand how servicing the backlog – drives the difference in profitability? I mean, I was looking back, I mean, the net sales guidance was still up double digits in the prior report versus now. You're getting more from the backlog versus demand. But how does letting the backlog flow in end up impacting profitability more than just having organic demand?
spk08: Well, it's a couple points lower, a few points lower, double-digit growth, first of all. So the actual number has come down. the growth rate is lower than what we were talking about previously, Bobby.
spk09: Okay, that makes sense. Okay, yeah, I was just looking at double-digit versus double-digit, but I understand those can mean two different things by a few points. Yeah, there's a range. Yeah. Okay, that now makes sense. I get what you're saying. Sorry about that. I got two other follow-ups then. One, you know, Shelley or David or whoever, you know, does the supply chain challenges potentially delay the launch of Climate 360 and kind of the big launch that we were talking about in 2023? And then my second question, I'll just go ahead and ask you now and I can jump back off, but this is David. I mean, we're looking at gross margins in the 57-ish range versus the old range of 61 to 62. Clearly a lot going on in the numbers, but can you maybe size in a few buckets what's What, in your view, is temporary pressure? And then what should we consider as more long-term pressure that will take time to gain back? Very good.
spk00: Bobby, I'll start with the response on Climate 360 and then the subsequent new 360 line. We remain on track targeting late this year for Climate 360. This is an important move both strategically, in all aspects strategically, for us getting to this new expanded platform with really a game-changing innovation for the consumer. It also enables, as we fully move to the new platform, a reduction of the number of components and moving to more advanced semiconductor chips. So there's a lot of benefit to moving to our new innovations, and we're working very hard to stay on track with those innovations, and we are at this point.
spk08: And, Bobby, on the gross margin question, this is fundamental to where we're headed longer term. and fundamental to how we thought about the pricing adjustments that we've taken to date. You know, we identified last year $140 million of annualized cost pressures and took about $140 million of pricing. That alone, just the math, you know, that pressures gross margin rate by about 400 basis points. But the components of those cost pressures, and then we added an incremental 20 million-ish that we're seeing about this year. So about 30% of that 160 we think of as temporary. And within that bucket, you'd be things like using brokerage services to find components. That's a very expensive way to buy components, and that's not something that's a permanent part of our cost structure. There is expediting costs across both getting it into the country and then to get it around the country to get it to the customers timely. That's been very inefficient. The operations from our manufacturing operations, logistics operations, and our home delivery operations are highly inefficient in a market where the flow of chips is uneven and you can't level load your business. And so those are also contributing to the temporary elements. Things like labor are going to take us longer. I call them quasi-permanent. Over time, we will gain efficiencies through our major strategic initiatives and find ways to offset those as well. We believe that getting back into the 60s is definitely a priority and will happen, I think, as an exit rate even this year
spk09: Thank you, David. I appreciate the details. Best of luck.
spk05: Hey, thanks a lot, Bobby. Your next question comes from the line of Seth Basham with Wedbush Securities. Your line is open.
spk07: Hi, this is Matt McCartney on for Seth. We're just wondering a couple quick questions here. We're wondering how you plan on managing advertising expense and personnel costs in a slower demand environment. And then... Also wondering, with leverage at 3.4 times and worsening from the end of last year, this seems to suggest you don't have as much room to buy back stock at this point. With that in mind, should we expect muted repurchases here in the near to medium term?
spk08: Well, Shelly, do you want to handle the advertising?
spk00: Sure. You know, we've taken actions here in the first quarter, you know, rapidly and pretty decisively around, you know, aligning our media dollars to the demand environment that we're in. And then, of course, you know, testing, you know, in different ways, how to utilize the media differently for higher productivity and have found some good solutions to be able to move to more productive actions in this environment. So it's a combination of cutting back but also changing and reallocating what we're doing. to the more productive ways and then as a Also as a result of where the demand was we made adjustments to our staffing overall Working to continue to optimize, you know for both our team members as well as our shareholders Very good in Matt.
spk08: I'll add on, you know I just want to remind you to go back in time and look at how we acted in at the onset of the pandemic back in March of 2020, our strategy at the time was to take actions to protect the business and also have a bias toward being able to rebound with pace. And had we not done that, we would not have been able to accelerate growth and profitability the subsequent six quarters the way we did. we are approaching the current situation in a similar kind of way in the sense that we know that our innovations are game-changing and that consumers really are drawn to sleep number 360 smart beds. And so we want them to have improved quality sleep, and our mission is to improve lives. So our bias is to protect the future and to invest in solutions our long-term and near-term growth drivers to go there. At the same time, we also have layers of contingency actions that we will activate as needed as we progress through the year. This is all part of that whole leverage conversation as well because You know, it all starts with demand creation for this business model. Cash comes from, cash is an outcome of that as well. And we suspended share purchases when we saw a tougher demand environment in March. In fact, March, you know, early on in March, it was down double digits. And so that was an appropriate response to the metrics that we were seeing at the time. As we said, we're expecting to end the year with three times EBITDAR leverage and generate about $200 million in cash from operations. We have a substantial amount of liquidity available on the revolver, and so there is room within that guidance for share purchases, and we will keep you updated as we progress through the year.
spk05: Thanks. That's really helpful.
spk08: You bet.
spk05: Your next question comes from the line of Atul Maswari with UBS. Your line is open.
spk02: Good evening. Thanks a lot for taking my questions. Dave, I think, and please correct me if I'm wrong here, but I think demand was up around mid single digit quarter to date when you guys had reported the first quarter. So really for you to end the quarter at down three would imply March was down low double digit or even worse. So is that a right estimate of where March was on a demand basis?
spk08: Yeah, Tool, let me just set the record straight. We had, you know, double-digit declines pretty much immediately following the invasion of the Ukraine and the pressure on consumers. We finished March with an exit rate of minus three for the last couple weeks, and that's in line with where we ended the quarter.
spk02: Got it. And are you able to share how you're tracking in April thus far on a demand basis?
spk00: Yeah, it's cool. April is a really small sample period with inclusive of an Easter shift as well. But we feel our guidance of flat to low single-digit growth for the balance of the year is appropriate.
spk02: Okay. So then my follow-up question is really – One of the key questions that really folks in the investment community have when trying to figure out for sleep number or some of the peers is what's really a reasonable floor for earnings? So basically the question is with the new guidance card and the lower end of $5, how do we get confidence that this does not get revised further in the next few quarters? So have you assumed in your expectation of demand being flat to slightly up going forward, have you assumed an improvement in the macro? Or do you expect to get there even if macro stays where it is? And then B, what have you seen for the supply chain backdrop in this guidance? Have you built in some slack over and above what your suppliers are saying right now, given all the uncertainty?
spk00: Yeah, well, Atul, certainly this is a challenging environment to operate in, and we recognize that and have been working on finding ways to overcome all the external challenges. We've made good progress in a rapidly evolving marketplace, We've made the progress necessary in our demand that gives us the confidence in flat to low single-digit growth for the balance of the year. So much of this is how to make the adjustments to be able to reach and activate the premium consumer interest. in this new environment and that's how we have viewed it and we continue to test and learn and we're a few weeks, less than two months into this new environment and we're looking forward to applying our tactics in a bigger demand period like the Memorial Day period as we move forward. The Q1 had really two acute external events. It had the Omicron variant in January, and then, of course, it had the onset of the war late in February. And, you know, we delivered a demand of, you know, down 3% in January. in the first quarter. So thinking about the remainder of the quarters, we don't expect two acute external events to start within another quarter in the balance of the year. But we do consider the current environment as prolonged. The second part of your question was how we're thinking about supply. Clearly, we have been dealing with different delays in supply. But thus far for the year, we have been steady on the allocation, although the challenges have been timing, have been different, which of course drives some inefficiencies in the business. But yet we're still, you know, staying close with our customers who are, you know, loyal and steady. And our cancels and returns remain steady. The overall brand sentiment and brand leadership is strong. And we continue to navigate those delays well. with pretty strong outcomes, very strong outcomes, based on the advantages of this vertical model. What we contemplate in the guidance is the allocation that we were given for this year. We're not baking in more than that, but we also recognize that there are delays and thus a fairly wide range in our guidance.
spk08: The tool I will add on a little bit, there's another way to think about our growth expectations as well, and that is you know pricing and new distribution new stores combined would add normally you know mid single digits type of growth so we're actually thinking about this in terms of having negative units lower unit volumes this year than last and so that's that's something that you should you know be aware of and And then the benefit of coming into the year with a significant backlog helps us stay steady and, in fact, helps us with our financial results for the year. We've mentioned in the past that we have the equivalent of about we came into the year with the equivalent of about $150 million worth of net sales in our excess backlog. As we get through the year, as long as we are able to get the supplies we need, that would – you know, we have that as a backstop against our performance for the year as well.
spk02: Got it. That's all very helpful. Just one quick question on –
spk08: the pricing when was the latest round of price increases uh taken and uh what was the amount of the increase if you can share please yes so we've taken you know last year we we took about call it 140 million dollars worth of annualized price increases the last one was based in october but we took a smaller one uh at the beginning sometime in in the middle of q1 as well very focused one so in total it's about 150 call it a million dollars worth of annualized price increases and those will those are being actualized now as as we create new demand those are all at the new pricing of course got it thank you very much and good luck with the rest of the year thank you thank you your next question comes from the line of Brad Thomas with KeyBank your line is open
spk06: Hi, good afternoon, Shelley, David, and Dave. Just to follow up on some of the recent demand trends, you know, the timing where you've had some weakness does seem to also coincide with the big month last year for stimulus payments. Have you all had a chance to look at that more closely, and how much do you think that's been an issue for you?
spk08: Well, we certainly looked at it, Brad, and with our demographic of our customer, We didn't really see a big benefit. You know, it's hard to discern, frankly. When somebody comes in and they're buying a sleep number smart bed, they're not necessarily telling you that they're doing it because they got a stimulus check. But we don't, you know, we don't typically see activity surrounding when those checks got issued, just like when, you know, around... April timeframe when people start getting their refunds from the IRS, we don't tend to see a lot of spike in our performance.
spk00: Brad, what we did see was a very acute change in the consumer behavior that timed perfectly with the start of the war. And that progressed. And then it also showed up in the consumer sentiment and the inflation numbers in March. And that did improve slightly at the start of April in the overall consumer sentiment. But that correlation was the strongest we could see.
spk06: It's helpful. Just along a similar vein, are you seeing anything different of late in terms of the interest in or the uptick of your financing options with synchrony? And can you talk a little bit about if there's been any change in approval rates and how perhaps the cost of that financing may change for you with interest rates being higher?
spk08: Well, Brad, it's certainly on our mind. As LIBOR goes up or the Fed financing costs go up, obviously that will affect the discount rate that we share with Synchrony. However, we have a wide range of offerings in terms of the tenure of the timing of our financing offers, and we generally look at financing and promotions as a collective bucket and manage that. them accordingly. We also have a great relationship with Synchrony and are coming up with creative ways to offset some of those pressures. In terms of changes to approval, either dollars or rate, we have not yet seen any impacts on either.
spk00: Brad, I'll add one more thing, just some color, some specific color on March for our total bucket of promotion dollars and financing dollars was very similar year over year. in total, we utilize this bucket as a conversion tool versus an attract in our business, which is different than most of our competitors. Keep that in mind. If you look at our year-over-year specific promotions or financing offers, they actually look pretty different than prior year, but yet the total is the same. And that's one of the advantages of our business model and the rapid testing and learning and adjusting that we make, that we reference so often. So just a little additional color there.
spk06: That's very helpful, Shelley. Maybe just one last one for me. With the delays that we're seeing, I mean, we're really still at some pretty long levels while much of the industry that doesn't have the complexity that your products have, you know, is pretty widely available today. When you talk to your customers and store personnel, do you get the sense that we're seeing any demand destruction or sales loss just because the customer doesn't want to wait right now?
spk00: Well, this is such an important question, Brad, and obviously with our model and direct relationship with the consumer, we stay very close to this. And if you asked a few weeks ago, we were one to two weeks And then with the signal of the delay with Shanghai being shut down, we did extend that, and our current delivery window is five to eight weeks. And yet, you know, in a couple of weeks when – well, probably closer to three weeks or four weeks when we have – when we know and see the day these chips – come to us through air freight, the moment they leave China, we will make the adjustment back to one to two weeks. So it does fluctuate quite a bit. For the most part, we can service a customer who's in immediate need with a solution that is closer in. So I'm talking the majority of our smart beds are right now, five to eight weeks, but there still are some you know, shorter, closer in delivery dates to service customers. Our team members do such a great job of developing that relationship, understanding our customers' needs and servicing them that we have a lot of confidence that we're, you know, continuing to service the customers in the way they need to.
spk06: That's very helpful. Thank you, Shelly. Thank you, Shelly.
spk05: Your next question comes from the line of Curtis Nagel with Bank of America. Your line is open.
spk01: Curtis Nagel Good afternoon. Thanks. Just wanted to dig in again on the question on, I think it's a 12-point delta in pricing between the delivered and the ordered in one queue. I guess it's a little surprising given an environment where demand was lower, people were worried about the economy. What drove that, Delta? I guess the new sales tactics or promotions or whatever it might be that led to higher unit conversion or higher price conversion. Could you talk on that?
spk08: For sure, Curtis. And you're talking about the 12-point swing in our ARU metrics. So the metrics that I highlighted was the two-point decline in delivered ARU versus the nearly 10% increase in the demand area. And so what you're seeing is folks wanting the full gamut of our features and benefits that come with the higher end of the line. And as a result, you know, they are willing to wait a longer period of time to get that delivered because we knew coming into this quarter, into Q1, excuse me, that we had some constraints on chips that were needed for our FlexFit adjustable base. It's FlexFit number three, which comes with foot warming and other benefits that consumers really embrace. And so that's what's happening. Consumers that are out shopping, want value, and they're shopping at the higher end of the line.
spk01: Okay. And then in terms of the negative two ticket, is it just because you couldn't deliver the beds that, not the belabor point here, I just want to make sure I understand it, but you couldn't deliver those very high-end beds with the flex three or, I'm just trying to figure out why there's a difference between the two. Okay. All right. That's fair.
spk08: Yeah, that's exactly right. I mean, our units were down 5% and our ARU is down 2% on the delivered side. At the same time, we added $50 million worth of net sales benefit into our undelivered backlog.
spk01: Okay. Understood. And just focusing on some of your other commentary, I don't know. I was a little surprised to hear higher gas prices called out as a potential problem. headwind or a headwind in the quarter. You guys sell a bed that retails for many thousands of dollars. I think, you know, a more premium consumer. So why would that be a headwind for, I guess, a more premium consumer? I'm just not sure how I square that.
spk08: Well, there are a couple of elements where I highlighted that in my remarks. One was the impact on consumers and in terms of what they're seeing at the pump and the inflation impact that they're seeing on food prices. And so I called that out as those were triggers that were highlighted in the consumer sentiment surveys that inflation was causing them to be more cautious. And so we saw that for sure in March in the consumer sentiment side. On our cost structure side, we absolutely have gasoline prices as an input cost for our business. You know, we have 1,000 home delivery technicians around the country that are using vehicles to deliver our smart beds to customers' homes. And, of course, fuel is a component that, you know, is part of that process.
spk01: Okay. Maybe I'll follow up offline. Okay.
spk08: Maybe I'm missing it. So I'm happy to talk about it after. Okay, Josh, any other questions? Operator, are you there?
spk05: Sorry, yes, we do have another question. We have a question from Bobby Griffin with Raymond James. Your line is open.
spk09: Thank you. Let me sneak in one more. Just one quick follow-up. Dave, understanding and showing that the predicting demand right now is pretty tough, but When you think about, you know, you guys are assuming flat to kind of slightly up demand. We ended the quarter a little bit lower. Is the EPS guide more dependent on demand snapping back to where you want it to go, or is it more dependent on just these cost side of things that are also hard to predict? And I guess said another way, if we get to the end of the year and demand is down 3% or 5%, you know, kind of in line with 1Q trends, can we still hit the guide of $5 to $6, or would that be enough to drive below the guidance?
spk08: Bobby, there are a lot of levers to drive performance and we're going to use them all. So if demand is lower than what we expect, obviously we have backlog to cushion some of that. We also have the opportunity within the business to control our spending differently and all those levers are within the gamut of what we will do. So yes, even if demand is down, I think you said low single digits, we believe we can still get to the low end of the guidance range.
spk09: Thank you. That's very helpful, exactly what I was asking. Best of luck here in a tough environment.
spk08: Thanks a lot, Bobby.
spk05: Your next question comes from the line of Peter Keith with Piper Sandler. Your line is open.
spk03: Thanks. Dave, if I could follow up on that. So the guidance does include servicing significant excess backlog. So you're running, I think it's around 200 million right now. Where would the midpoint of guidance land you for servicing excess backlog? Is that being about half of it?
spk08: It depends. Sorry, I'm not trying to be elusive, Peter, but like I just said to Bobby, a lot of different things can go different ways, meaning demand could ebb and flow. Our cost structure will certainly ebb and flow. Supply has certainly shown that it can be positive and challenging sometimes. You know, the midpoint of the guidance, I would say, is the midpoint of our, you know, that demand is in that positive territory for the year, and that would include less use of the backlog to get to the total, which we are saying, you know, low double-digit net sales growth for the year. Did that make sense? I can help you with modeling in the after call if that's helpful. Okay.
spk03: Yeah, maybe just one last one while we're in a public forum. You know, the sales are difficult to model for us right now. How should we think about Q2? I mean, are we negative? Are we positive? I have no idea.
spk08: Yeah, very good. Yeah, I agree. It is hard, and you probably – look i expect our units to be less than they were in q1 by call it you know up to uh we did 108 000 units in in q1 we'll do you know call it i don't know 90 to 100 and 100 call it 90 to 100 000 units in q2 but our aru will be significantly higher based on the comments that we said earlier so our our sales and our profitability is going to be much bigger than what we've had in a normal Q2. When we get to 2023 modeling, we'll have to remind you of that so that you bake that into your thinking then as well. But because of backlog service this year and the flip of having now the chips that we needed for our FlexFit 3 adjustable bases, that will benefit us in Q2 deliveries. So you should model Q2 sales higher than you would have otherwise thought.
spk00: For net sales.
spk08: For net sales.
spk03: Very good. Very helpful. Thanks so much.
spk00: You bet. Thank you.
spk08: All right, Josh, I think that takes us to the end.
spk05: Yes, there are no further questions. We'll turn the call back to you for closing remarks.
spk04: thank you for joining us today we look forward to discussing our second quarter 2022 performance with you in july sleep well and dream big this concludes today's conference call thank you for joining you may now disconnect
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