Sleep Number Corporation

Thank you for standing by and welcome to the Sleep Numbers second quarter 2025 earnings conference call. At this time, all participants are in a listen only mode. As a reminder, this call is being recorded today, Wednesday, July 30, 2025. This conference call will be available on the company's website, .sleepnumber.com. Please refer to today's news release to access the replay. On today's call, we have Linda Findlay, President and CEO, and Bob Ryder, Interim Chief Financial Officer of Sleep Number. Before handing the call over to the company, we will review the safe harbor statement. The primary purpose of this call is to discuss the results of the fiscal period ending on June 28, 2025. Commentary and responses to questions may include certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties outlined in the company's earnings news release and discussed in some detail in the annual report on form 10K and other periodic filings with the SEC. The company's actual future results may vary materially. In addition, any forward-looking statements represent the company's views only as of today and should not be relied upon as representing its views as of any subsequent date. The company specifically disclaims any obligation to update these statements. Please also refer to the company's news release and SEC filings for reconciliation of certain non-GAAP financial measures and supplemental financial information included in the news release or that may be discussed on this call. I will now turn the call over to Linda Findlay, LEAP members and CEO. Now, please go ahead.

Thank you, Janine, and thank you to everyone for joining today's call. I'll start first by welcoming Bob Ryder, our interim CFO. Bob joins us with extensive experience in public company turnarounds, which will be invaluable to us as we continue to focus on driving shareholder value. He is acclimating quickly. I'm confident that he'll be a great partner to our executive team as we navigate the work ahead. I'd also like to thank Francis for his contributions to Sleep Number over the past two years. We wish him the best in his future endeavors. When I joined Sleep Number in April, I challenged our team to question assumptions and think critically about every aspect of our business from the products we sell to the ways we sell them. My goal was to push for bold and rapid action, and I'm happy with the progress. When I started, I immediately took a look at what was and wasn't working. Marketing spend was outsized and highly inefficient, particularly in Q1. So we took the necessary actions to reset the marketing program with a 30% cut to Q2 year over year marketing spend. This was a big part of the drop in Q2 revenue. We brought in new marketing leadership and we started building back from there. The changes are starting to work as expected. We've already seen the efficiency of our marketing programs grow in Q2 and continue into the start of Q3. We were able to move fast to reposition the business and drive future better performance because of the organizational realignment we did in Q2. The current team is focused on creating a more cost effective business that will change the trajectory of the top line in the coming quarters. It will take time, but I'm confident we'll get there. To start, we are focused on controlling costs and building an ongoing discipline of cost management into everything we do. We originally targeted $80 to $100 million in annualized cost savings. We now expect to remove over $130 million in operating expenses in 2025 compared to 2024, exceeding the plan we shared last quarter. The reductions have been deep and broad across the entire organization because, frankly, they needed to be. We have streamlined G&A and R&D by reducing redundancy and layers without compromising on our innovation. Additionally, we reduced our full year selling expenses as well as marketing spend, but allowed for investment in the back half of the year to support our 2025 plans. Reducing expenses is not the limit of our ambitions, nor is it our only lever to increase profitability. I'll focus on three initiatives, optimizing our product portfolio value and distribution, enhancing the efficiency and effectiveness of our marketing, and managing our capital structure. Let's start with products. We are rethinking our position, price, and distribution. People love sleep number beds for their comfort and adjustability. However, the process of selecting and purchasing our beds is a bit more complicated than it should be. While many customers value choice, it's not always clear how our products are distinct from one another or how our different technology is translated to benefits for our customers. We are refining the experience by leveraging data to better understand consumer needs and what drives them to buy a sleep number bed. As part of this, we'll be enhancing the product line up to meet a broader customer base. This will include new price points, new features that drive comfort and durability, and simpler selection to help people find the right sleep number bed for them. You'll start seeing the results of these changes in 2026. In parallel, we are considering new distribution channels, including digital first, retail partnerships, and emerging platforms, while continuously evaluating our existing retail footprint to ensure that we have the right format and the right locations. As I mentioned in our first quarter earnings call, everything is on the table. Our goal is to build on the vertical model that we have and make every channel work harder together for the customer. As we pursue these changes, we are moving even faster on our marketing approach with a focus on efficiency and impact. We cut deeply and quickly in Q2 to reset the inefficient marketing strategy of the past. While we saw lower revenue in the quarter, because of that shift, we used this moment to adjust and rebuild our approach. We are sharpening our positioning and messaging with a focus on relevance and strengthening the connection with today's consumer. Importantly, we are opening new marketing channels that we were not leveraging in the past to reach more customers with a sharper value proposition. We are also improving how our potential customers can find us through AI and other technical implementations. We know what we need to do to get the next customer, and we're building the programs, infrastructure, and creative content that will set us up for strength in the future. So far, it's working. We're seeing early signs of significant improvements in cost per acquisition, including a 24% increase in conversion year over year in Q2. These metrics continue to improve through July, a trend we anticipate to carry on as we roll out new marketing programs. In short, we are resetting the business. We are moving these initiatives quickly while maintaining compliance with our debt covenants. That said, the pace at which we can move is somewhat limited and shaped by our capital structure. To get more flexibility and enable us to move even faster, we are in active dialogue with our lenders. Those conversations have been constructive, and we hope to have more news to share on that front in the near future. Regardless, we remain focused on managing our debt structure in a way that supports the business and shareholder value creation. To be clear, we are acting with urgency and discipline. As Bob will discuss further in detail, we are expecting roughly the same revenue in the second half as we saw in the first half, adjusted to the 53rd week this year. We are spending slightly less marketing in the second half based on the efficiency gains we've seen. This, combined with improved ARUs, we are seeing from product mix and promotional optimization drives our forecast for the balance of the year. Sleep Number remains a powerful brand with loyal customers and proprietary technology. When I joined the company, we needed to make dramatic and decisive changes as we reinvigorated our commercial and product strategies. We are implementing those plans now. With improved focus and by operating with greater simplicity, we will deliver against our goals and create value for our shareholders, our customers, and our team members. Before I turn the call over to Bob, I want to thank our team members for their continued focus during this period of change. Their commitment to our customers and to doing the hard work required to reset our business is what makes our progress possible. With that, I will now turn the call over to Bob.

Thanks, Linda, for the warm welcome and good morning, everyone. I want to start off by thanking everyone at Sleep Number. In my first week here, everyone's been incredibly gracious, professional, and helpful. I can also say that for my short time at Sleep Number, our team members are passionate about the company and are working diligently to improve the business. As the newest member of the team, I bring fresh eyes and an added perspective. I look forward to working with them, along with our other stakeholders, to drive shareholder value. As Linda shared, we're taking decisive actions to reset the business for long-term profitable growth. That reset is well underway. We're focused on commercial and product improvement, continued cost discipline, and better cash flow management. I'll walk through the company's Q2 financial performance and then speak about our progress on our cost structure, liquidity management, and expectations for the future. Let's start at the top of the P&L. Net sales for the second quarter were $328 million, down .7% from the prior year. As Linda noted, we cut marketing spend significantly in Q2, which partly drove the sales decline in the quarter. As we implemented our new marketing strategy throughout the quarter, we saw increased conversion, which has continued to improve into July. This is why we have confidence in our sales forecast for the second half of the year, which I'll touch on a little bit later. Gross profit margin was 59.1%, flat versus the prior year. Continued reduction in material costs and manufacturing of products and efficiencies were offset by unit volume de-leverage and a mix shift towards lower priced products as consumers prioritized value. That said, our gross margin profile remains strong relative to historical levels and is indicative of our underlying brand strength. Over the past several years, we've steadily expanded gross margin through product cost reductions, innovation and operational efficiencies. This will remain a focus as we move forward. Let's turn to costs. Operating expenses were $185 million before restructuring and non-recurring costs, down 21% year over year and $51 million lower than the prior quarter. These reductions are the result of our organizational redesign and cost saving initiatives implemented in the first half and reflect more savings than we shared on our last call. We recorded $8 million in restructuring costs in the quarter and expect approximately 8 million of additional restructuring costs to be incurred in the second half of the year. Adjusted EBITDA was $23.6 million, down 4.7 million from the prior year. Adjusted EBITDA margin was 7.2%, 30 basis points higher than the prior year. This margin rate expansion was driven by disciplined cost management partially offset by the sales decline. Our leverage ratio on a trailing 12-month basis was 4.56 times EBITDA at the end of the second quarter within the 4.75 times covenant maximum. I wanna briefly share an update on three key items. First, cost savings. We fundamentally reshaping our cost base. As you know, the company reduced costs significantly in 2023 and 2024. Since Linda joined, we have identified $130 million of cost reductions for the full year 2025 as compared to the full year 2024. This surpasses our original annualized target of 80 to $100 million. These reductions are the result of streamlining leadership layers, improving marketing efficiency, simplifying operations, and narrowing R&D to core platforms without compromising innovation. These changes contributed directly to the $51 million or 22% Q2 operating expense reduction as compared to Q1. And we're definitely not done. We will continue to look at the business to reduce costs, increase efficiency, and improve profitability and cashflow generation. While Q2 results are below where we want them to be, they reflect intentional strategic decisions as part of the reset. The pullback in marketing, while deliberate and necessary, weighed on demand in the early part of the quarter. However, the positive response during Memorial Day reinforces our strategy, and we're seeing signals that our revised approach is working. We acknowledge our sales results are not yet in line with the industry, but more recent trends are encouraging and give us confidence that we are on the right path. Second, we are acting with urgency to address our capital structure. We're actively engaged with our lenders in productive conversations. In parallel, we're exploring refinancing and other non-dilutive options that will provide us with more flexibility and allow us to reinvest in growth. In the meantime, we have improved our processes around working capital and capital expenditures. Importantly, our reset is expected to deliver break-even cashflow in the second half. Our first priority for any positive operating cashflow is to pay down debt. Lastly, we do not want to provide some visibility, we do want to provide some visibility into our expectations. As mentioned, we're managing the business to stay within our existing covenants as we engage with our lenders. We expect to see full-year net sales of approximately $1.45 billion, representing a 14% -over-year decline. Second half sales will be roughly comparable to first half sales. This anticipates second half moderation of our -over-year sales rate decline to 9%. This percentage change is partly driven by softer -over-year comparisons plus the 53rd week in 2025. We believe our top line expectations are supported by first, reduced marketing spending Q2 had a negative impact on sales. With our new strategy, we are already seeing improved cost of acquisition and conversion in Q2 with continued improvements through today. Our total marketing spend as a percentage of revenue in the second half will be slightly up when compared to the second quarter. Second, the promotional strategies we have implemented are driving a higher ARU while also improving our product mix, which also supports net sales. We see evidence of this improvement in July and expect those outcomes to continue for the balance of year. Turning to gross profit margin, we have seen positive trends for the past several quarters and we expect to deliver gross profit margin of approximately 61% for the second half of the year, including mitigation of the impact of tariffs. We've also talked a lot about operating expenses, something that is under our control. We now expect full year 2025 operating expenses, excluding restructuring and other non-recurring costs to be approximately $830 million, which is 130 million less than 2024. With these anticipated outcomes, we expect to be in compliance with our debt covenants. In closing, we are doing the hard work and we are committed to making changes necessary to ensure the company performs regardless of the consumer environment. With significant progress against our cost structure, we are actively resetting our strategy to drive demand. Our top priority is to make sure that our priority remains the generation of cash to pay down debt. We have and will continue to make bold moves to reposition the company to create shareholder value. With that, I'll turn it back to the operator for questions.