Sleep Number Corporation

Welcome to Sleep Number's Q1 2023 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 2023 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 Chair, President, and CEO, and Chris Kruzmark, 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 first quarter 2023 earnings call. My sleep IQ score was 88 last night. Agility, resilience and ingenuity continue to be hallmarks of our sleep number team as we navigate macro economic challenges. These traits help us execute in the current environment while also advancing our long term strategy. We have strategically maintained our focus on innovations that strengthen our competitive advantages. This includes evolving our smart bed ecosystem into a progressive, adaptive health and wellness technology platform that generates a high level of engagement from our community of more than 2.5 million smart sleepers. Their monthly average engagement with our SmartBed ecosystem is greater than 80%, a best-in-class metric for digital products, and a strong driver of future revenue potential through referrals, products, and services. Our first quarter performance was consistent with our expectations. Through our team's exceptional execution, we overcame incremental demand pressures late in the quarter as consumer sentiment dropped five points in March versus February. We leveraged our fulfillment network to deliver incremental smart beds from our existing backlog. As a result, we delivered 90,000 smart beds and net sales of $527 million for the quarter. After nearly two years of supply disruption, the consistent and steady flow of microchips has enabled us to return to more efficient operations. First quarter gross margin of 58.9% was up 160 basis points from a year ago as we benefited from pricing actions, modest easing in commodity prices, and our newly unified, more flexible supply network. Our Q1 gross margin rate also represented a 350 basis point step-up from the back half of last year. Net operating profit of $26 million was up $22 million over prior year, and earnings per share were 51 cents versus 9 cents in last year's first quarter. We are intently focused on driving improved demand in Q2 and beyond in what remains a challenge backdrop of historically low consumer sentiment. A couple of weeks ago, we kicked off a sequence of new demand drivers, starting with the pre-sale of our next generation i10 and M7 smart beds, our new Flexbit 2 and 3 smart adjustable bases, and new lifestyle furniture. These innovations are designed to help sleepers achieve their next level of sleep and realize their full potential through every stage of life. This first phase will be set in all stores by mid-May. Phase 2, planned for early Q3, includes the remainder of our smart beds. This cadence enables us to optimize the closeout and introduction cycle with our selling process while also being fully transitioned well ahead of Labor Day. Our next-gen smart beds have advanced from our original award-winning Sleep Number 360 smart beds by using insights from more than 19 billion hours of proprietary longitudinal sleep data. These groundbreaking innovations use embedded research-grade sensors to learn each sleeper's biometrics and sleep patterns, and then automatically adjust to support sleepers' changing needs. All our new smart beds will also feature ceramic gel-infused foam layers that help balance temperature to stay comfortably cool all night. In addition, the next gen smart beds benefit from our new health and wellness technology platform, which was introduced in October 2022 with our climate 360 smart bed. The integration of physical and digital technologies creates our smart bed ecosystem by combining AI and machine learning algorithms to support future digital products and services. We are introducing these innovations with a new sleep next level advertising campaign that showcases one of our smart sleeper couples, award-winning actress Gabrielle Union Wade and her husband, MBA Hall of Famer Dwayne Wade. With more than 80 million social media followers, they bring authenticity, and credibility to the SmartBed features and benefits highlighted in this campaign. Our consumer research indicates strong alignment between benefit messaging, relatability, and consumers' heightened interest in their improved well-being. New campaign highlights can be viewed on our investor relations site. While the macroeconomic environment remains challenging, Innovation is a proven demand driver. The stronger-than-expected sales of our Climate 360 smart bed since its introduction is a great example. We're building on that success with our next-gen smart beds, new creative, simplified online experience, and the power of more than 2.5 million smart sleepers, our most loyal customers who drive referral and repeat sales. With these integrated initiatives and the strong execution by our purpose-driven team, we expect year-over-year demand trends to improve the balance of the year as we lap easier prior year comparisons, especially in the third and fourth quarters. Now, Chris will provide additional details on first quarter results and our outlook for second quarter and full year 2023.