Sleep Number Corporation

No matter if you want to track your sleep data like me or just wake up refreshed because our beds effortlessly adjust to you night after night without ever looking at your device, our years of innovation meet your needs. With the only bed backed with 33 billion hours of sleep data and counting, we are ahead of the curve, and that allows us to focus our resources on the here and now of our customers' needs. Specifically, we will deprioritize adjacent opportunities where returns are uncertain or will take longer to realize. Instead, we will focus our resources on maintaining and improving our core technologies and introducing additional advancements while driving costs out of the product. Together, these initial efforts are the first steps to creating a more efficient and focused company for shareholders, team members, and customers. We expect the collective actions to reduce expenses by about $80 to $100 million before restructuring costs on an annualized basis as compared to our Q1 2025 cost structure. Since I joined earlier this month, we have already reduced our Q2 operating expenses by approximately 10% compared to the Q1 2025 cost structure. We are also thinking long-term and are evaluating more fundamental changes to position Sleep Number for future success. Now is a natural time to challenge assumptions and question all aspects of our business. Over the coming weeks, we intend to take a closer look at our strategy and operations. Everything is on the table. We are looking at our supply chain, distribution strategy, product selection, and geographic reach. As I mentioned, our goal is to create a flexible cost structure that will set us up for growth and expansion. This is just the beginning. We are approaching this work with an open mind and a bias towards bold and rapid action. I look forward to sharing more details about our long-term plan over the coming quarters. I'm energized to lead this company through the necessary reset, We are already making positive changes and we have a lot of work ahead of us. It will take time and effort. By putting the customer at the center of everything we do and leaning into the things that make us great, I believe that we can strengthen Sleep Number to its number one position as the leader in sleep wellness. I see a path to drive long-term sustainable growth and profitability. We have helped people get a better night's sleep for nearly four years by delivering superior products that address tonight's problem. Before we turn to questions, I want to take a moment to thank the entire team. Sleep Number's advantage is more than our product. From the team of talented designers who craft each bed to the experts in our stores and support who genuinely care about customers' sleep needs, our team members are ready for change, and I'm looking forward to their future partnership. With that, let's open the call to questions. Operator?

At this time, if you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again. We do ask that you please limit your questions to one question and one follow-up. And your first question comes from the line of Bobby Griffin with Raymond James. Please go ahead.

Good evening. This is Alessandra Jimenez on for Bobby Griffin. Thank you for taking our questions. First, welcome, Linda, and we look forward to getting to know you. First, I just wanted, you know, you've only been in the role for about three weeks, but maybe just on a high level, what do you see are the low-hanging fruit for improvement that, you know, we should start to see in 2025? You know, I understand everything's on the table, but some of these aspects will take longer to realize.

Sure. Thank you very much for the question, and I'm excited to be here. I would say it's really divided into three areas. One is in the marketing space. I feel like there's a huge amount of opportunity for new efficiency in marketing that would actually help us reduce the costs and reduce marketing as a percentage of revenue, while also increasing the productivity of marketing and the efficiency of marketing. But the thing that excites me most about this change is actually that I also think we can deliver more benefits-based messaging as part of this change that will help customers see the value within the sleep number bed. Again, whether or not they're looking for all the bells and whistles and the top of the line, or if they're looking for something in more of the mid-price range, we want to make sure that we have something for every customer that truly demonstrates value. So that's really the marketing side. The second thing that I've observed is this organizational structure change. Being able to unleash the talent of the team and being able to make decisions faster through a more streamlined organization not only saves cost, but also improves our ability to function quickly and innovate quickly. Because people will have clearer authority and the ability to make decisions faster, that should speed the organization. And then the third piece is this key point on R&D. Fleet Number has an incredible innovation history. The original product itself is one of the most innovative products out there. And so the ability to take advantage of all the innovation that's been built up over the years, really apply that to customer needs and rethink, as you were sort of alluding to, we mentioned that everything is on the table. That innovation that's happened in the past lets us really refocus and say, okay, how do we apply it to today's customer in this environment and make sure we're bringing the right product to the right person at the right time. It's going to be an innovation story still going forward, but that innovation story can be on a much smaller cost base from where it was before and take advantage of all that history of everything that's been built up to really excite customers with true differentiated products.

That's really helpful, and we look forward to learning more as you guys progress. And then I understand you're not providing guidance at this time, but I wanted to see if you could maybe provide any color on quarter-to-date demand so we can kind of level set our models for the near term.

Yeah, thanks for the question. As you know, the Q1 results are out, and it's been a challenging environment that we've seen, not just in our industry, but overall. across many sectors. Since February, we've seen consumer confidence decline. And that's impacted people's willingness to spend, again, not just in our industry, but across the board. So we're focused right now on right-sizing our organization, controlling our costs, and really positioning ourselves to create a stable business that can perform no matter what the market conditions are. And we're not simply cutting costs. We're positioning our organization to be more efficient.

I'm just going to follow up on that a little bit with some additional color, which is obviously Memorial Day is a very big thing for us, and we've already activated around Memorial Day. Our big focus right now, though, is focusing on preparing for Labor Day and kind of getting the organization reset to that.

Okay, that's helpful. Best of luck here moving through the year.

Thanks. Your next question comes from the line of Michael Lasser with UBS. Please go ahead.

Hi, good evening. This is Dan Silver, sign-on for Michael. Thanks for taking our questions, and Linda, look forward to meeting you. Same. Thank you. Just on the overhaul, the marketing engine, what do you view as the biggest opportunities to strengthen the brand and the messaging to consumers? And just as a part of that, You know, Sleep Numbers used this partnership model, you know, with organizations like the NFL and others in the past. Do you see any opportunity to add some new dimension there? Any caller would be greatly appreciated.

I definitely see opportunity to add new dimension there. I think that there's a couple of things to note. So, first of all, from a brand and overall product perspective, again, there really isn't a product out there like Sleep Number. And the sort of rabid customer base that you see engaging with the Sleep Number product is really pretty powerful. And if you follow our marketing, you notice that we've already made a strong move into more and more real-world customer stories that tell that story from the firsthand perspective. So I think from a marketing and branding perspective, there's a few different opportunities. One, of course, is leveraging as much as we can on new technologies, new digital technologies, processes in order to make sure that our marketing is as effective as possible. And that includes thinking differently about maybe where we place spend and how we think about placing spend in order to drive true audience targeting and also true benefits messaging. sleep numbers had a long history of technical innovation. And so you've seen a lot about our features and our functionality, but translating that into a benefits mindset is really what's next on the docket. So that's kind of number one on the marketing side. On the partnership side, I think the partnership side is extremely interesting. There's been some incredible partnerships over the years. I think there is opportunity to look at all of our partnerships and think about how we might want to continue to optimize them and use them to their maximum benefit. But the most positive aspects about those partnerships, we have some really unique partnerships that have actually contributed quite a bit to the bottom line of the company and to the innovation side. And what I mean by this is we are actually technically the largest sleep study in the world. with 500,000 active sleepers constantly sort of as an ongoing nightly sleep study. And that data is incredibly powerful because that allows us to improve our products on a regular basis, and we can also use that in our marketing messaging and our other benefits messaging to make people understand how positive that is. So while we will be looking at every partnership and also potential new partnerships, We also will be recognizing where we're getting benefit from some of those partnerships already and make sure that we're actually maximizing that.

Very helpful. And maybe just one more before we pass it along. You spoke to nothing being off the table strategically. You know, with several changes in the competitive landscape in the betting industry the past few years, is there an increased appetite to explore wholesale distribution at this point? And any other growth levers you think, you know, the new leadership with fresh eyes might take a look at?

All I can say is our eyes are very, very fresh and everything is on the table. Okay. Thank you.

Your next question comes from the line of Peter Keith with Piper Sandler. Please go ahead.

Thanks. Good afternoon, Linda. Nice to meet you. Congratulations on the new role. um you had mentioned earlier in the call that you think the company got away from its core value proposition and i was hoping you could flesh that out with a few more specifics on how you think about where the company got away from that sure i i think the primary thing that i think about when i say that is when you sleep in a sleep number bed you just simply wake up feeling great um it

It helps with aches and pains. It helps you get more quality sleep. It's the combination of the fact that you have the adjustability on both sides from a firmness perspective, plus temperature control, plus the ability to adjust the base. There's just a lot about the core of the sleep number innovation that really just makes you more comfortable. And I think in the process of thinking through the future of the business, There are times where maybe we have added a lot more bells and whistles around the product and thinking very far into the future. And I'm talking like 10, 15 years into the future of what is next, which I think is an incredible place to be. And we've done a lot of great work there. But what I mean by that is I think that we have maybe gotten a little bit further away from really explaining the value of the core sleep number proposition to the customer. and making sure they just understand they're going to sleep better. Like that is just the truth. And so that's a bit of what I mean. Obviously, again, innovation is still a key part of that. That is how we got to that point of having that ability to just create a better night's sleep. But really what I mean by that statement is we have an opportunity to go back to our customer needs, what they're asking for the most, what they're looking for in our products, and make sure that we are both offering that at the right price point, offering it in the right place and time where they want to buy it, and also making sure that we're being really clear with them about what those benefits are so that they can see them, you know, regardless of where they are on that spectrum of what they're looking for. So that's really what I mean by that statement.

Okay. That's extremely helpful. And just to follow up on that, as you talked about, the team is very focused right now on Labor Day. Should we expect that there are maybe some product changes or some of this customer feedback that you're taking in? Can you move that quickly by Labor Day? Is that what you mean by the team being focused on that holiday that's a little further out?

Again, I think that everything's on the table, and we're not ready to talk about that yet. But again, everything is on the table. That's all I keep saying. Fair enough. Clearly, we're already moving very quickly, so we plan to continue to do so.

Okay. I want to make sure I get a question to Francis so he doesn't feel lonely. The tariff quantification is helpful. You mentioned, so it's $13 million of impact right now. I'm guessing that'll all be second half, and you can confirm that. And then what tariff level are you baking in for that $13 million impact? Is that, you know, China at a full 145% or just frame up what's embedded in the $13 million impact?

Yeah, so I'll answer your first question around, will it be second half? And the answer is yes. As I stated in my prepared remarks, the impact on Q2 will be limited primarily due to the pause on the tariffs going in effect through July 8th. As we look at the balance of the year, we've looked at the totality of where all our materials come from at the various rates. And that's all calculated in that $30 million unmitigated. And then we have 17, which we believe we can be offset through the, you know, some of the actions we're taking. And there's $13 million left, which we are going to tackle and address all our levers inclusive of potentially strategic pricing as we go forward. You asked about China at 145%. Yes, that is the assumption within the China portion of our business. So we've tackled a bunch of it. We know there's some left, and we're going to continue to go after it.

Very good. Thanks so much, guys. Good luck.

Thank you. Your next question comes from the line of Brad Thomas with KeyBank Capital Markets. Please go ahead.

Good afternoon. And Linda, let me add my congratulations and welcome to Sleep Number. Thank you. I want to follow up on the advertising initially. It seems like certainly in this current environment, there's probably some real opportunities for efficiency there. One thing that we have seen over the years with Sleep Number is it has been a pretty well-oiled machine from an advertising perspective. And when it's been changed or dialed back, sometimes that's had a negative impact on sales in the short term. I was wondering if you could just help us think about how you test and learn on this, what impact, if any, you're thinking there might be if you're reducing total dollars being spent in terms of the sales impact from this.

So the way that we're looking at the marketing spend right now is to really focus on true efficiency. So I totally agree on past levers when it comes to marketing, but I think this is actually sort of a rethink of the approach in how we would actually think about media spend and creating a little bit of less reliance on the actual dollar amount of media spend and more on focusing on core audiences and the right channels. So I would say that while there are going to be some bumps in the road, obviously there's transition time media is bought fairly far out in advance. We're not looking at it from a term of just cutting. We're actually looking at it from a term of reset and thinking about how we also leverage our digital property, meaning the e-commerce site, to help drive additional efficiency. So we can deviate from some of the trends of the past where a cost cut would actually automatically result in a lower customer number. And I think when you look at our numbers overall and you look at the industry numbers, you can see clearly that there's opportunity to increase efficiency and be able to bolster the marketing program and marketing return on ad spend effectively compared to the rest of the industry. So I think there's still headroom there in order to do that.

That's, that's really helpful. Um, and if I could follow up on that, just thinking about pricing and promotions over the years, obviously speak numbers on very good, good job, driving up ticket with innovation. Um, you know, how do you think about the level of promotion that might be necessary in the short term and in the long term, you know, and, and how you navigate tariffs, do you need to raise prices because of tariffs, or do you want to get more promotional because that's. you know, what this industry may require of you right now. How are you thinking about some of that?

Yeah, I think we have a pretty well-oiled promotional machine, and so we understand how to pull those levers at the right time and in the right way. So that, I think, overall is in pretty good shape, and we can think about pulling those levers as need be. I think the most important thing when we look at tariffs, as Francis was talking about, we've looked at a lot of different ways to manage the tariff impact. across the business and that includes looking at other costs that includes looking at our overall sort of process of how we produce where we produce using the flexibility that's already been built in our supply chain to try to manage that at the same time we also have a very good understanding price understanding of pricing of our product and um and really think carefully about where we want to leave core pricing the same for some of our core products and then if we need to take pricing take it within the right products that are at the right level of margin and, frankly, customer price point in order to make sure that we're balancing the portfolio where every customer can get what they need at the right price.

Really helpful. If I could squeeze in one more on stores. I don't think I heard any commentary on stores. How are you thinking about openings versus closures and refueling the portfolio base, you know, at this time?

Yeah, right now, incoming into this call, we've maintained our current strategy of store openings and closures, which we've described to you in the past as a very organic and kind of living process where we look at the total DMA and profitability. I think going forward, as Linda mentioned, everything's on the table, and so As a part of the holistic review of our strategy and operations, we will look at our store fleet and base and what makes most sense with respect to how we go to market along the lines of our distribution channels.

All very helpful. Thank you, Francis. Thanks, Linda.

Thank you. As we have no further questions, ladies and gentlemen, this will conclude today's question and answer session. I'd like to turn the conference call back over to Linda for any closing remarks.

Thank you so much. We appreciate everybody joining the call today and I look forward to meeting a lot of you as we execute our plans in the coming quarters. In the meantime, if you have any additional questions, please don't hesitate to reach out to us directly. Thank you. This concludes today's call.

Thank you all for joining. You may now disconnect.