Sleep Number Corporation

Welcome to Sleep Numbers Q2 2022 Earnings Conference Call. All lines will be 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 second 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 Shelly for her comments.

Good afternoon, and thank you for joining our earnings call today. My Sleep IQ score was 80 last night. As we operate in a global business climate that is unpredictable and economically challenged, our mission and purpose provide the clear path to deliver long-term superior value creation for all stakeholders. Overall consumer sentiment and sleep number demand continue to be highly correlated. Economic conditions for consumers have deteriorated throughout the year. The annual inflation rate accelerated to more than 9% in June, the highest level since 1981, and nearly half of U.S. consumers now say that inflation is eroding their standard of living. Consumer sentiment plummeted to record low levels in May and June, with declines across all demographic segments. Correspondingly, our demand for the second quarter declined 12% versus the prior year. Our performance during the second quarter reflects our team's incredible agility in navigating the challenges of operating in this business climate. As we discussed on our Q1 earnings call, the composition of our excess backlog was heavily skewed to the high end of our line. As a result, during the second quarter, our delivered smart bed units represented a stronger than average profit profile. Net sales in the quarter grew 13%, to $549 million as we benefited from servicing a portion of our profitable excess backlog while being again constrained by new delays in electronic components and weaker demand. Q2 net operating profit was $50 million, up 68% from 2021. Net operating profit rate was 9.1% up 300 basis points from a year ago during what is historically our softest financial quarter. Second quarter earnings per diluted share were $1.54, a 75% increase compared with $0.88 a year ago, and trailing 12-month ROIC was 21.8%. External business conditions worsened in the second quarter. and the global environment remains fraught with ongoing challenges, including record low consumer sentiment, measurably weaker consumer demand, higher input costs, and disruptions in semiconductor chip flow. These pressures are reflected in our updated 2022 EPS outlook of $3 to $4. Assumptions include unchanged consumer sentiment and timely electronic supply allocation and flow to support our planned deliveries in the second half. We remain focused on maintaining a strong liquidity position and preserving our financial flexibility as we prioritize advancements in our long-term strategy. Accordingly, we have removed more than $100 million of annualized costs compared to our original expectations and are taking pricing actions as appropriate. We have built a strong foundation of life-changing sleep innovations and sustained connectivity with our customers. As we move forward, we expect to benefit from continued innovation advancements and differentiation. Our smart bed platform with 15 billion hours of longitudinal data, the ongoing engagement of millions of smart sleepers, and our vertically integrated exclusive direct-to-consumer business model with robust cash flow generation. We continue to progress our strategic initiatives through investments that strengthen our competitive advantages while being prepared for a range of macro environments. Today I'll provide an update on the actions we are taking to generate demand, sustain our strong brand health and manage continued supply chain dynamics. Supporting all our actions is our team's capability and capacity to quickly adapt while continuing to prioritize our customers' experience and the progression of our strategic initiatives. Demand-driving actions include adjusting our messaging, spending, and selling approach to drive conversion among a smaller, audience of consumers who are ready to buy now. We are leveraging content that directly links health and wellness benefits to proven quality sleep from our 360 smart beds. Specifically, our smart sleepers benefit from 28 minutes of more restful sleep per night, and science proves that quality sleep is vital. It enhances our mental, physical, and emotional health. We are also leaning into the effectiveness of our NFL partnership as their official sleep and wellness partner, and we are optimizing media mix and value solutions for the current business climate. We also continue to advance our life-changing innovations. The Climate 360 smart bed to be introduced in October is designed to help reduce core body temperature throughout the night to deepen your sleep. Nearly 80 percent of Americans report being too hot or too cold when they sleep. First, this innovative smart bed gently warms your feet to help you fall asleep faster. Then it uses ambient air to create a personalized microclimate that works with your body's natural sleep cycles. Sleep Number initial in-home test results show 90% of Climate 360 smart bed sleepers are now sleeping at a comfortable temperature. Importantly, with Climate 360, we are also implementing our new smart bed platform with technology that supports our entire new portfolio in 2023. This platform design requires fewer SKUs and electronic components and uses newer, more readily available semiconductor chips. As we transition to the smart bed platform in 2023, we expect to restore our full assortment of smart bases and improve availability of our smart beds. Sleep Number's brand interest and consideration remain healthy in this challenging environment. Our June brand tracker survey results highlight that there are a record number of intenders in the market looking to buy a mattress in the next 12 months, with more than half seeking a premium solution. Yet, there is a reduced number of consumers who are ready to buy now. Sleep Number continues to lead other brands in innovation, sleep science, and research, which broadens our relevance. In fact, our unaided awareness is stronger than a year ago and our brand affinity measures of quality, trust, value, and aspirational fit have all increased. Our brand health and new innovations support strong growth potential as sentiment recovers and we will continue to position ourselves to win with the consumer. Meanwhile, Global supply chain constraints and disruption in the flow of electronic components persist, and costs have increased. For the second quarter, our electronics supply quantities were largely in line with expected allocations, though the timing was later than anticipated due to unexpected disruptions from suppliers' pandemic closures in Asia with related labor shortages. While our team pivots quickly and effectively when faced with these supply issues, the disruptions impact customers' delivery experiences and increase short-term costs. In addition, our teams continue to overcome potential shortages and find solutions with real-time agility across our business, including developing qualifying and producing alternative parts to reduce impacts. And we are encouraged by the expected availability of electronics supply with our new platform, beginning with Climate 360 later this year. We also continue to advance digitization across our operations for rapid recovery, efficiency, and effectiveness. We are making strategic investments to strengthen our supply chain flexibility, resilience, and responsiveness. The flow of goods from suppliers through our assembly and distribution for holistic management of scarce resources represents a fundamental long-term opportunity and advantage for Sleep Number's business model. We are on track to complete our multi-year initiative to 100% preassembled smart beds by the end of the year. Our purpose to improve the health and well-being of society through higher quality sleep combined with our culture of individuality and well-being drive team member engagement, commitment, and effort. Our teams are adapting and innovating as they execute our pivots to overcome the challenges associated with this macro environment. Their courage and dedication to our mission has enabled us to navigate the current uncertainty and business disruption with speed and agility while continuing to advance our long-term strategic and financial initiatives. While this business environment is challenging, our prospects remain compelling. The power of our purpose, life-changing sleep innovations, connected smart sleepers, and vertically integrated business model position us to capitalize on profitable opportunities when consumer sentiment improves and electronic supply recovers. Now, David will provide additional detail on the second quarter and outlook for the remainder of the year.