Sleep Number Corporation

Welcome to Sleep Number's Q1 2024 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 Sleep Number Corporation first quarter 2024 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 Frances Lee, 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. We also want to refer you to the latest version of our investor presentation, which is available on the investor relations section of our website. I will now turn the call over to Shelly for her comments.

Good afternoon, everyone, and thank you for joining us. My Sleep IQ score last night was 90. Since our last earnings call in February, Our team members throughout the company have consistently demonstrated resourcefulness while executing our three strategic imperatives, competing effectively, restoring margins, and increasing cash generation to pay down debt. As this work to transform our operating model continues, the industry-wide challenges that we have faced over the last two years also persist. Our actions are positioning Sleep Number for greater resilience across a range of macroeconomic and industry environments. First quarter results are largely as we expected, and we are reiterating our full year adjusted EBITDA guidance. During today's call, I'll provide brief context on the consumer environment, share our first quarter performance highlights, and describe ongoing actions we are taking to deliver on our commitments. Following my remarks, Francis will provide further details on our performance. The mattress industry remains in a historic recession with demand for the category likely down mid single digits for the first quarter after incurring two previous years of double digit mattress unit declines. While consumer sentiment is showing signs of improvement The consumer's purchasing power is limited due to elevated interest rates and record high credit card debt. As a result, consumers continue to scrutinize their spending and make near-term decisions based primarily on need, price, and perceived value, and they are deferring higher ticket durable purchases. These factors contributed to consumer purchasing volatility throughout the first quarter. We experienced our strongest demand in February, driven by the President's Day selling period, and the weakest demand in January, impacted by weather. For the quarter overall, our demand was down mid-single digits. In the first quarter, we generated net sales of $470 million down 11% from the prior year compared to the 10% decline we expected. Despite the pressured sales climate, our strong execution resulted in better than expected first quarter adjusted EBITDA of $37 million. Against this backdrop, we prioritize actions that efficiently activate consumer interest and demand while lowering our customer acquisition costs compared to prior year. These precise real-time adjustments to our marketing and selling strategies led to improved adjusted EBITDA margin performance. We have focused our efforts on three areas. First, consumer-attitudinal segments to optimize our media strategy and lower our costs while maintaining impressions and increasing traffic. marketing messaging to convey more clearly the differentiated benefits of our smart beds. Our new Why Choose Sleep Number campaign highlights our leadership in adjustable firmness, active individualized temperature benefits, the value of our smart beds for every budget, and claims of high customer satisfaction with our smart beds including our J.D. Power number one ranking for mattresses purchased in store. The campaign is resonating with consumers, and our brand health metrics are strong on consideration, value perception of the affordability of Sleep Number smart beds, and brand trust, particularly among premium and tenders. And finally, Actions that drive conversion by helping customers select the right smart bed for their budget before they consider the additional benefits of a smart adjustable base. By continuing to test, learn, and adjust our online experience, promotional strategy, and selling process, we are generating a more profitable sales mix across all our digital and in-store touch points. These actions drove a lower promotional spend and a higher mix in the first quarter, resulting in a gross margin rate that was better than we expected. The efficiency improvements we have implemented over the past two quarters are meeting the revenue and margin targets established in the different tests. With this validation, we are now beginning to scale these actions for accelerated impact. We will accomplish this goal by leveraging our current econometric model used to inform media channel mix and investment levels and the predictive capabilities of our new elasticity model used to guide our promotional strategies in a range of consumer environments. Our teams have also developed a new smart bed that we plan to launch by the third quarter. The C1 smart bed will be priced at $999 every day. We expect a strong value equation of smart adjustability starting under $1,000 to resonate with the scrutinizing consumer. In addition, we will be taking $200 in pricing on our C2 smart bed. These actions strengthen our competitive position and support more efficient demand generation, particularly among value conscious consumers. Our second strategic imperative is restoring margins. We are continuing to target operating cost improvements of $40 to $45 million in 2024 on top of the $85 million we realized in 2023. As a result, we expect 2024 operating expenses to be $125 to $130 million below 2022 levels. We also remain intently focused on returning our gross margin rate to our historical average in the low 60s and expect our actions to restore our adjusted EBITDA margin to mid-double digits as industry demand normalizes. To deliver on these operating expense and margin improvements, we are driving sustainable change across the organization in four principal areas. Cost of customer acquisition, cost to serve customers, cost of goods sold, and G&A R&D leverage. During the first quarter, we made tangible progress in each of these categories, including reductions in customer acquisition costs through the advancement of our predictive analytics, reductions in our cost-to-serve customers through self-service offerings, outsourcing strategies and component sustainability efforts, and reductions in our cost of goods through structured sourcing strategies with additional flexibility in product and logistics. These actions will drive improved 2024 results as well as process-changed new capabilities that will enable performance improvements in future years. Increasing cash generation to pay down debt is our third strategic priority. In the first quarter, our adjusted EBITDA performance led to free cash flow generation of $24 million compared to $3 million for the same period last year. As we realize the benefits of our operating model transformation through 2024, we expect to generate $60 to $80 million of free cash flow. Despite the persistent near-term headwinds, our long-term growth opportunity remains intact, as illustrated in the investor relations deck we posted to our website last month. Sleep remains one of the top health and wellness priorities of consumers and also one of the areas in which they have the most unmet needs. Sleep Number is uniquely positioned in the industry to address consumer barriers to quality sleep, help solve critical sleep health challenges, and improve lives through proven quality sleep. Company culture is an important contributor to performance, and Sleep Number's exceptional culture is the result of our 4,000 team members' purpose-driven commitment. Thank you to our teams and partners for your passion, teamwork, and innovative mindset as we find new ways to compete effectively, restore margins, and generate robust free cash flow. We continue to focus on delivering value for our shareholders as we capitalize on the implementation of our durable operating model, the industry's gradual recovery, and our strategic progression as a sleep wellness technology company. With that, I'll turn the call over to Francis, who will provide more details on our first quarter results and full year guidance.