Sleep Number Corporation

Good day, everyone. Welcome to Sleep Number's Q4 and full year 2022 earnings conference call. All lines have been placed in 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 Schwantes, Vice President of Finance and Investor Relations. Please go ahead, sir.

Good afternoon and welcome to Sleep Number Corporation fourth 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 Chris Krusemark, our Interim CFO and Chief Human Resources 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 2022 year-end earnings call. My SleepIQ score was 83 last night. Before providing details about our 2022 results, I'd like to express my appreciation to David Callen for his many contributions to Sleep Number and wish him well in his future endeavors. Chris Krusemark, Sleep Number Executive Vice President and Chief Human Resource Officer, has assumed the role of Interim Chief Financial Officer as we conduct a search for a permanent replacement. Chris has been a Sleep Number team member since 2005 and has held a variety of financial and operational leadership roles during the past 18 years. Prior to joining Sleep Number, Chris served as a CPA in the assurance and advisory practices of EY and Arthur Anderson. During today's call, we'll review our 2022 financial performance, share early observations about the 2023 business climate and our outlook for the year, and highlight 2022 strategic milestones that underscore our long-term orientation and position fleet number to capitalize on profitable growth opportunities when the economic environment improves. Fourth quarter net sales increased 1% to $498 million. with an 18% decline in demand for the quarter, which was offset by the servicing of our excess backlog. Our Q4 loss per share was 24 cents. For the full year, results included net sales of $2.1 billion, down 3% year-over-year, and earnings per share of $1.60. Our 2022 performance reflects the sustained impact of external business and economic disruptions that began early in the year. Constrained microchip supply, the spread of Omicron, the war in Ukraine, and skyrocketing costs drove record low consumer sentiment, which significantly reduced demand and pressured profits. Yet, as we navigated a steady stream of macro challenges, commitment to our purpose galvanized our passionate team to find creative solutions to enhance our customers' experience. We completed two important milestones that strengthen our sleep health and wellness technology leadership for the future. We introduced the Climate 360 Smartbed with our new technology platform, the greatest innovation in our company history, and we completed our five-year transition to a single assembly and fulfillment network. With the start of 2023, we are experiencing early signs of improvement in our business associated with the following advancements. For the first time in 18 months, we have adequate chip inventory to support our full line of smart adjustable bases. including Flexbit 1 and Flexbit 2, which have been unavailable since September 2021. This enables us to offer our entire range of good, better, best to customers in an environment where price sensitivity remains high. And we are operating with normal delivery times thanks to improvements in our microchip inventory. In addition, we are seeing somewhat more favorable economic indicators, including improving consumer sentiment. Although still near historic lows, consumer sentiment rose to nearly 65 in January, a five-point sequential improvement versus December. With these improvements, we cautiously increased our planned media spend to capture near-term market opportunity. We are encouraged by the related improvements in demand, traffic trends, and media efficiency since taking this action. Our quarter-to-date demand is down high single digits against our toughest 2022 comparison period and represents a notable sequential improvement from the fourth quarter. While these Early 2023 trends are encouraging we remain prudent in our planning with assumptions for 2023 reflecting continued uncertainty in the environment. We are prioritizing demand and margin improvement initiatives that support both the short and long term while also controlling expenses. This combination positions us for a strong rebound when consumer sentiment improves although we are also prepared to execute additional contingency actions should conditions warrant. For the full year, we expect EPS in the range of $1.25 to $2, and at the midpoint of our range, net operating profit growth of at least 20%. We expect to generate more than $100 million of cash from operations in 2023, including positive free cash flow. Our recent strategic accomplishments directly contribute to our 2023 performance and benefit our business long-term, further strengthening our leadership in consumer innovation and wellness technology. For example, since its introduction last October, our Climate 360 smart bed has outperformed our sales expectations, and customers are raving about how the smart bed's temperature benefits comfort, and design are improving their sleep quality. Here are a few customer comments. One customer said, great first night, perfect bed for a couple with different sleep settings and temperatures. Another stated, Climate 360 has greatly improved my ability to fall asleep and stay asleep throughout the night. And a third noted, I bought this bed a month ago and it's so worth it. While the Climate 360 Smart Bed is still a small percentage of our total sales mix, better than expected demand is resulting in current deliveries being scheduled into late March. Our suppliers have increased component output to consistently support the higher Climate 360 sales volumes, and we expect to be on normal delivery times for this fabulous Smart Bed by the end of next quarter. Consumer response to the Climate 360 Smart Bed is encouraging ahead of our planned introduction of our NextGen Smart Bed line, which is on track for the beginning of the second quarter. These NextGen Smart Beds incorporate the new technology platform, which not only supports our customers' adaptive sleep experience and related health and wellness benefits, but it also reduces supply chain complexity due to utilization of more readily available components. In addition to our next-gen smart bed line, we plan to introduce our new lifestyle furniture collection in April, which extends our customers' sleep benefits. This furniture optimizes sleep and wake routines through ambient lighting designed to complement your circadian rhythm and embedded speakers that create a sound blanket to minimize noise disruptions. The collection also includes optional accessories that support changes in life stages and health conditions. Early in-home testing is showing very high satisfaction. And later this year, we will transition to our new Sleep Number app. This next evolution of our current Sleep IQ app will integrate all Sleep Number digital touch points for a simpler experience for our millions of smart sleepers and further advance our connected health strategy. We are supporting demand initiatives with strategic partnerships, new brand marketing, and media. Since restoring our full portfolio, we've seen sequential demand and media efficiency improvement. We also plan to introduce the next generation of smart beds with a new marketing campaign. World-class partnerships amplify the performance and recovery benefits of Sleep Number smart beds with impact and scale. At Super Bowl 57, we announced a five-year renewal of our partnership with the National Football League as their official sleep and wellness partner. The NFL is one of the world's largest audience engagement platforms. Our brand health and digital engagement metrics from the past five years underscore the benefits of this partnership, which include broadening our brand reach and deepening our brand relevance. Our partnership has built unparalleled product adoption with 80% of NFL players owning suite number smart beds. In addition to demand-driving initiatives, Improving gross profit is a top priority. We expect to begin realizing meaningful gross margin improvement in 2023 due to some easing in commodity costs, reduced cost premiums from using broker parts, and fewer expedited deliveries, and operating efficiencies from a more even flow of microchips. We will also begin to benefit from operating with a single more flexible and scalable assembly and fulfillment model. Our integrated network enables greater visibility and control of product quality that will contribute to improve service and gross margin through increasing delivery, reliability, and expanding opportunities for new in-home services, providing greater supply chain flexibility and disruption optionality, and more balance in our manufacturing and distribution process, which reduces waste and drives cost savings. Each of these strategic advancements strengthens our competitive advantages, supports profit margin improvement, and enables long-term value creation for all our stakeholders. Now, Chris will provide additional detail on fourth quarter in full year 2022 performance and our outlook for 2023.