Sleep Number Corporation

welcome to Sleep Number's Q4 and full year 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 objections, you may disconnect at this time. I would like to introduce Dave Schwanes, Vice President of Finance and Investor Relations. Thank you. You may begin.

Good afternoon and welcome to the Sleep Number Corporation fourth 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. I will now turn the call over to Shelly for her comments.

Good afternoon, everyone. My Sleep IQ score was 84 last night. As noted in our press release, the independent directors of our board have unanimously selected Linda Finley as the company's new president and CEO. She will join Sleep Number in that role on April 7th. The independent directors and I are confident that Linda is the right leader to guide the company through its next phase of growth. She will conduct the next earnings call and will share more about her background, perspectives on Sleep Number and the path forward. During today's call, I'll share highlights of our 2024 performance, including important progress we made during the year to restructure the business and position it for accelerating returns as the industry recovers. Then Francis will provide further details on our fourth quarter and full year 2024 financial results. The mattress industry faced an extremely challenging demand environment throughout 2024, a trend that has persisted into the first quarter of 2025. US mattress volumes for 2024 were estimated at 24 million units, which is the lowest level since 2015. Historically low consumer sentiment and high interest rates have led to the lowest housing turnover in 30 years. Inflation and economic uncertainty continue to suppress discretionary spending. Since initiating our operating model transformation in the back half of 2023, we have implemented structural changes to reduce fixed expenses, enhance margins and cash flow, and strengthen financial resilience across market cycles. Driven by our team's high level of commitment and disciplined execution, we further advanced our operating model transformation throughout 2024 delivering a 43% year-over-year increase in fourth quarter adjusted EBITDA. For the full year, adjusted EBITDA was $120 million in line with the midpoint of our most recent guidance. Key drivers of this performance included gross margin rate improvement and operating cost reductions in 2024 that were nearly double our initial targets. Q4 gross margin reached 59.9% at the top end of our internal expected range, resulting in a full year gross margin of 59.6%, 190 basis point increase over 2023 and nearly double our improvement target of 100 basis points that we communicated at the beginning of the year. The ongoing improvements in operational efficiency resulted in a $28 million year-over-year reduction in fourth quarter operating expenses, with a 2024 full-year cost reduction of $88 million. Q4 net sales declined 12% year-over-year to $377 million, slightly below our expectations. We remain focused on maximizing EBITDA and generating cash, which requires demand-driving trade-offs in this difficult consumer environment. We reduced our media spend by 18% year-over-year in the fourth quarter and 9% for the full year, bringing us back to 2019 levels. Despite these pressures, this disciplined approach enabled us to reach the midpoint of our EBITDA guidance, highlighting the financial resilience we've enabled in this weak market. The consumer environment took a sharp downward turn in late January 2025, with consumer sentiment dropping further in February. Consumer sentiment is now 12 points lower than it was a year ago. Consumer purchasing power also weakened after the Fed held interest rates flat, potential tariffs were announced, and inflation concerns returned. Declines were seen across all consumer metrics and demographics with a significant 19% drop in buying conditions for durables. As key macroeconomic factors like consumer sentiment, housing, and purchasing power worsened over the past month, So did search interest in the mattress category impacting our President's Day event, the largest sales period in the first half of the year. In response, our teams have implemented contingency actions throughout the business to protect margin and cash flow, leveraging the robust transformational mechanisms we established over the past year. We remain disciplined in managing cost of acquisition, cost to serve, cost of goods, and G&A R&D leverage. Additionally, we have proactively worked with our bank group to amend our 2025 financial covenants to ensure flexibility in navigating ongoing industry pressure. Frances will share further details shortly. While we are certainly not satisfied with our top-line performance in this challenging consumer landscape, We remain focused on optimizing our media and promotional strategies to drive demand and maximize returns. Our new leaders in brand segmentation, creative, and media are rapidly advancing initiatives that leverage our strong brand equity and loyal customer base. Using deep consumer analytics, our teams are refining strategies to optimize engagement, traffic and consideration. We have seen green shoots in the following key initiatives. First, we are expanding data-driven efforts to reach consumer segments most likely to purchase now by using personalized content and messaging for higher conversion. Second, We are leveraging smart sleeper loyalty. Our repeat customers are strong advocates who deeply understand the value of Sleep Number smart beds and are quick to embrace our innovations. We are refining our messaging to amplify their voices, enhancing credibility and engagement with new customers. Third, we are strengthening our relationship-based selling execution. We have recertified all sleep professionals on our selling process and customer relationship management strategies, supporting a more personalized customer experience and improved conversion. In summary, over the past 18 months, we've transformed our operating model to enhance financial resilience in this persistently weak market. These sustainable actions position our premium brand and vertically integrated business model for long-term profitable growth once the market recovers. We remain disciplined in executing our strategy, focusing on improving efficiency, eliminating waste, and driving innovation to deliver value to our customers. We are constantly striving for greater agility in response to market conditions and are taking decisive actions to prioritize cash manage costs, and maintain flexibility, ensuring Linda has a strong foundation in place to lead the company forward. As I prepare to retire from my role as President and CEO of Sleep Number, I am filled with gratitude for the passion and commitment of the Sleep Number team, partners, and customers who have supported our company's transformational journey over the past 18 years. We've built a beloved brand with industry-leading innovations and store experiences that have positioned the company for sustained success. Sleep Number will always be in my heart, and I know this great team will continue to build a competitively advantaged company. Thank you for your unwavering dedication to our shared purpose and relentless focus on serving our customers. It has been an honor to build our culture together and improve nearly 16 million lives through higher quality sleep. Now Francis will provide additional details on our 2024 results.