Sleep Number Corporation

Welcome to Sleep Number's fourth quarter and full year 2025 earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this call is being recorded today, Thursday, March 12, 2026. This conference call will be available on the company's website, ir.sleepnumber.com. Please refer to today's news release to access the replay. On today's call, we have Linda Finlay, President and CEO of Amy O'Keefe, 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 January 3rd, 2026. 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 10-K 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 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. I will now turn the call over to Linda Finley, Sleep Numbers CEO.

Thank you, Rob, and good morning, everyone. Before I begin, I want to welcome Amy O'Keefe, our new CFO. After an extensive search, she joined us in December and brings with her decades of experience leading operational and financial transformations across public and private companies. Her focus has been on streamlining our business operations and strengthening our capital structure to support our turnaround strategy. You'll hear more from her shortly. In today's call, I will cover three things. First, how we're executing on our strategy both for growth and cost cutting. Second, why we believe that our new marketing and product strategies are working, And third, what we were doing to manage liquidity and the capital structure. First, on delivering our strategy. 2025 was a pivotal year for Sleep Number as our reshaped team drove big turnaround changes at every level of the company, from retail and corporate operations to marketing strategy and the rapid development of our new product line. Importantly, we delivered on the guidance we provided in our last call. Full year net sales were $1.41 billion in line with our guidance, despite reduced marketing spend and lower traffic throughout the year. Adjusted EBITDA was $78 million, exceeding our guidance of $70 million. Our use of cash for 2025 was $18 million, compared to the $50 million guidance. For the full year pro forma adjusted EBITDA margin was approximately 9%, and Amy will discuss how we plan to improve margins further in 2026. The long-term benefit to adjusted EBITDA margin comes from two places. First, the renewed growth from our product line redesign, and second, the significant cost savings we have already done and will continue to do this year. We radically reset the business by lowering our fixed cost structure and built a leaner, more nimble organization. We removed more than $185 million of annualized costs and have identified another 50 million of annualized fixed costs that we are executing on now. We are still in full turnaround mode, and our progress in 2025 doesn't change the fact that we still have hurdles to clear in 2026. We saw the same pressures as the rest of the industry in January and early February from severe weather and macroeconomic impacts. We had 236 stores that were closed for at least one day in the month of January, and therefore sales at the start of the year were significantly down. We adjusted our marketing spending strategy to lean in when things improved, and we have seen sequential improvement into February and March driven mostly by our product launch. That brings us to our next point about why we believe our product and marketing strategies are working and will carry us through the next phase of the turnaround. We launched our first new bed and a new adjustable base in January, and the response from customers has been fantastic. The comfort mode mattress priced under $1,600 gives us access to a new group of customers while maintaining personalized comfort as the core of the experience. As of the end of February, sales are three and a half times what we expected and nearly twice all the sales of all three C-Series beds that this bed replaces. In addition, we are seeing very strong attach rates for adjustable bases and bedding. The success of the first comfort mode bed is an important indicator for the rest of the portfolio we announced this morning, as it's built off the same principles and the same value proposition. We listened to both current and prospective customers and built a product line that addresses their most critical needs of comfort, durability, and value. We also remember the core of what only Sleep Number can offer, personalized comfort, adjustability, smart technology, and temperature benefits, the only bed in the industry that bed owners can fully control whenever they want. It's comfort that shifts with you night after night. With four new beds available in-store and online starting March 23rd, Fleet Number beds will now reach a broader set of consumers in the premium category. We are leveraging years of innovation and experience surfacing luxury materials, features, comfort, temperature management, and adjustability at better price points than ever before. This enabled us to build more value per dollar in each bed, protecting our margins while also achieving a lower price point for today's premium customer. In addition to these innovative new beds, we are also making it easier to find the right bed for you by simplifying the buying experience in-store and online. With this launch, we are reducing our core lineup from 12 mattresses to seven, organized into three clear collections. First, Comfort Mode is our new entry point to the brand. It delivers personalized comfort and temperature management, controlled without an app, all at an accessible price. In January, we launched the 10-inch comfort mode bed, and now we're adding an 11-inch model called Comfort Mode Luxe with three zone comfort layer and advanced temperature materials, starting at just $2,099 for a queen. Second, the Comfort Next line, starting at $2,999 for a queen, is our biggest innovation in the launch, with three all-new beds, including two that feature our new tribrid design. We are the first company to combine foam, advanced temperature materials, and microcoils on top of air adjustability to deliver improved comfort, pressure release, and durability with the personalized comfort we are known for. These exceptionally luxurious beds will be the start of our smart technology in our portfolio and will track and improve your sleep at incredibly competitive price points. Third, we have our climate collection, starting at $5,499 for a queen And it includes our existing Climate Cool and Climate 360 beds that differentiate with true active temperature management. This category represents the ultimate in luxurious comfort. When combined with a base, it remains the only line of mattresses on the market that offers personalized firmness, smart technology, adjustability, and active temperature control all in one bed. In fact, our temperature programs on Climate 360 result in up to 52 more minutes of restful sleep per night. But the new product alone isn't what gives us confidence. The marketing changes we have made are substantial. As I've said before, we can do more with the dollars we spend, and that is happening. First, we rebuilt our marketing foundation and modernized how we identify and attract customers. As a result, we saw meaningful improvements throughout 2025 in our funnel metrics. Our marketing in Q4 maintained this improvement, and we're seeing accelerated year-over-year improvement in cost per acquisition so far in 2026. Second, we also started refreshing our creative and messaging last year in social and digital channels. We also recently launched our first new commercial in more than two years with a dedicated comfort mode spot where recent performance has now surpassed our prior campaign and current competitive benchmarks. The combination of this work is showing up in our annual brand tracker that we completed in January, just before we announced our partnership with Travis Kelsey. Despite overall pressure in the industry, we saw significant increases in every aspect of Sleep Member's brand. Brand consideration among premium shoppers grew 10% and achieved the highest consideration in the premium category. We also saw the highest levels in six years of critical consideration drivers, including value, quality, aspirational fit, comfort, and individualized comfort. Now it's up to us to build on that success and turn that brand's strength into sales growth. The marketing challenges are still underway, and you will continue to see new creative, new strategies, and our partnership with Travis Kelsey come to life. Finally, let's talk about liquidity and capital structure. It isn't news to anyone that we need to fix our capital structure. I knew that when I joined the business less than a year ago, and it remains our top priority. Three things hit us particularly hard in the end of 2025 and beginning of 2026. The industry-wide softness we already spoke about our work to clear out inventory as we roll out the new product line, and our continued careful management of marketing spend as we lap a very high inefficient spend of Q1 last year. This puts pressure on our liquidity, and we are implementing a plan to address this. As part of that plan, we hired Guggenheim Securities to evaluate the inbound interest we have received and advise on other opportunities to refinance our credit facility as we shape Sleep Number back into a profitable, growing company. Amy will talk about this in more detail. Before I turn the call over, I want to thank our team members. Delivering a product reset of this scale in just 10 months, work that typically takes more than two years, reflects a new level of speed, collaboration, and execution across the company. Our work is focused on delivering better value for our customers, shareholders, and team members, and on bringing Sleep Number back to profitable growth. With that, I'll turn it over to Amy.

Thank you, Linda, and good morning. I joined Sleep Number in mid-December because I view it as a company whose intrinsic value far exceeds its market capitalization. While Sleep Number is in the midst of a turnaround, the value of its underlying assets is undeniable, leading brand recognition, differentiated product, and the tens of billions of hours of sleep data that validate the benefit our beds have on the quality of your sleep. We have a lot of work ahead of us, but fortunately for me, Linda and the team have already done a significant amount of the hard work to put the company on a path to profitable growth. One, right-sizing the cost structure to a lower revenue base by executing on $185 million of annualized cost reductions with line of sight to an incremental 50 million to be executed in 2026. Two, executing in record speed for sleep number on a completely new line of products that Linda described, which we are launching on March 23rd. And three, modernizing our marketing engine with new leadership, new creative, new channel specific media strategies, and a new partnership with Travis Kelsey to strengthen the brand and drive top line growth. This is a pivotal time for the company, and I'm excited to partner with Linda and add my deep turnaround experience to unlock value for our shareholders. I want to thank the team for their very warm welcome and efforts to get me up to speed quickly. Now let's get into Q4 results, which were better than expected. Net sales were $347 million in Q4, or 8% below the same period in the prior year. As a reminder, fiscal year 25 benefited from a 53rd week, which favorably impacted year-over-year results by approximately 660 basis points. Notably, the performance trend across the year improved sequentially, while the number of stores decreased by 40, exiting the year with 600 stores. And as Linda noted, the impact of our improved marketing offense continues to drive efficiencies. Gross profit margin was 55.6% in the quarter, a 430 basis point decline versus the prior year, primarily driven by a $9.6 million non-recurring inventory obsolescence charge associated with our new product launch and the impact of unit deleverage and higher tariffs. Excluding the impact of the inventory charge, adjusted gross profit margin was 58.4%. Operating expenses in the quarter were $197 million, down 9% year over year, excluding restructuring and other non-recurring costs. The reduction was driven by ongoing cost savings initiatives to right-size the fixed cost base and lower variable selling expenses. Media investments were comparable to the fourth quarter of the prior year, despite a 53rd fiscal week. Adjusted EBITDA was 19 million, down 7 million versus the same period last year. For the full year, net sales were 1.41 billion, consistent with our expectations, but down 16% versus the prior year. Full year gross margin was 59%, down 60 basis points year over year, and aligned with the guidance of 60% that we shared last quarter, when excluding the impact of the fourth quarter inventory charge. Operating expenses for the full year were $824 million, a $136 million reduction from the prior year, excluding restructuring and other non-recurring costs. On an annualized basis, we've executed approximately $185 million of cost savings initiatives which gives us an estimated $50 million tailwind as we head into 2026. As Linda mentioned, 2025 adjusted EBITDA was $78 million, exceeding our most recent outlook of $70 million. Importantly, for the full year, pro forma adjusted EBITDA margin was approximately 9%, a 200 basis point improvement versus the prior year. Turning to the balance sheet and cash flow, we ended the year in full compliance with our credit agreement and debt covenants. Total liquidity, including cash and revolver capacity, was $58 million at year end, well above the amended $30 million covenant floor. Full year free cash flow was a use of $18 million, which was just over $30 million favorable to expectation. However, it was unfavorable by 21 million compared to the prior year, primarily due to top line pressure at non-recurring cash restructuring costs. Capital expenditures of 14 million were down 9 million compared to the prior year. Looking ahead to 2026, as Linda mentioned, January demand was soft versus last year in our internal expectations. As we planned, the media investment in January was down significantly year over year and reallocated to after the launch of our new products, when the return on investment is likely to be much higher. Moving into February, we saw a sequential improvement in performance during the President's Day event as we launched Comfort Mode. Not only were we pleased with Comfort Mode sales performance, but gross margin is well above our legacy opening price point beds. This provides another proof point that we can regain competitive positioning in the premium opening price point as we planned. We're excited to launch the rest of our product line in late March. Given the magnitude of the change that we are executing in 2026 as part of our turnaround plan, we will not be providing guidance today. However, I will provide some indications of our performance expectations for the balance of the year. I will also note that we are planning cautiously to ensure that our cost base and our liquidity planning are set appropriately as revenue ramps sequentially over the balance of the year. While we expect Q1 net sales to decline in the high teens because of the softness we saw at the beginning of the year, with the full impact of the new product launch in the second quarter, along with an increase in year over year media spend, we expect a significant improvement in year-over-year revenue performance in Q2. We further expect double-digit sales growth in the second half with a full benefit of one, new products, two, new creative assets, and three, marketing reach with our new strategic partner, Travis Kelsey. As a result of cost savings initiatives and the expected ARU improvement from new products, Adjusted EBITDA for the full year is expected to increase in the high teens to mid-20s percent range year over year, and we expect free cash flow to be positive. Lastly, but importantly, and as Linda mentioned, while we are seeing improvement in the business, the softness from the start of the year and the clearance of our existing products have put pressure on our liquidity and covenants. We are actively implementing a plan to address this, as further detailed in our Form 10-K, and have engaged an advisory bank, Guggenheim Securities, to help us. We will continue to monitor our liquidity position and covenant compliance, and we'll work with our advisors to address our credit facility and evaluate inbound interest and other opportunities to improve the company's liquidity, balance sheet, and financial flexibility. With that, I will turn it to the operator for Q&A.