Sleep Number Corporation

Welcome to Sleep Number's first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this call is being recorded today, Tuesday, May 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 Findley, President and CEO, and 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 April 4, 2026. This call including 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. where applicable, and for additional 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 Findley, Sleep Numbers President and CEO.

Good morning, and thank you for joining us. I'll start with a brief update on our capital position. On April 27th, we reached an agreement with our existing lenders that provides near-term relief from certain financial covenants adding $55 million of incremental liquidity, including a new $25 million term loan. This matters for two reasons. First, we believe it allows us to continue executing our turnaround plan for the business and actively market and sell our new products without disruption. Second, it gives us time to focus on a longer-term solution for our capital structure, including evaluating a range of strategic and financing options best for the business. Amy will walk through the details shortly. Turning to the quarter. As we said in our last call, we saw a significant impact on sales in early January and February based on weather and macro conditions. However, demand improved as the quarter progressed. March demand increased approximately 6%, marking our first year-over-year demand growth on a comparable basis in two years. That improvement was driven by the launch of comfort mode, updated marketing, and promotions to clear legacy inventory. We delivered net sales of $319 million in line with our expectations and adjusted EBITDA of $6 million ahead of our internal plan. While we just discussed the March demand metric, we recognize revenue when the bed is delivered. Since the majority of new product launched on March 23rd, most of the net sales will be reflected in Q2 rather than in Q1. Now let me talk about the progress we're seeing across the business and why we're encouraged by the early results. Let's start with the product. We completed a full product reset across all of our stores in less than four weeks. At the same time, our manufacturing and home delivery teams transitioned to the new lineup seamlessly and without disruption. The rollout also gave us an early read on product success. During the launch period, stores set with the new lineup saw 12% higher ARU than stores with previous product. Given the product rollout happened at the end of Q1, I'm going to share some metrics we are seeing in Q2 that help us determine progress. First, we have a success of comfort mode, the first best bed we launched in January. We are seeing 15 points of improvements in overall net promoter score, and when we compare to our prior entry-level mattresses, the C-series, net promoter score improves by 27 points. With this improvement in NPS and with more than 100 days in market, we are seeing this flow through to our financials with 100 bps reduction in return rate for comfort mode versus historical return rates of the product it replaces. Second, across the full portfolio, we are seeing a strong attach in our premium comfort next line, which features our unique tri-grid technology. More specifically, Comfort Next Lux is now our top-selling bed at approximately $4,000 for a queen size at a healthy margin and representing an early shift into the planned product mix. To be clear, the new beds have a better average margin profile than the beds they replaced, and the planned mix of the new line should return us to historic growth margin levels once we get past all one-time launch and clearance cost pressures. We also conducted in-home user testing during the rollout and saw the direct and measurable impact of our beds. Compared to their original mattresses, 9 in 10 people slept better, 8 in 10 people got more sleep, and 8 in 10 people experienced less pain on a sleep number bed. Shifting to marketing. We continue to drive improvements in our website experience. This has improved organic search visibility and simplified the purchase process. E-commerce demand grew year-over-year by approximately 5% in April, partly because of this work. In addition, our ongoing work in AI discoverability has improved AI citations by approximately 25% year-to-date. To support the product launch, we introduced a new integrated brand campaign, To a Good Life Sleep, which features brand spots along with product-specific creative. These reinforce what differentiates sleep number, a personalized bed that adapts to your life and sleep needs as your life and sleep needs change. The early response is positive and is trending above benchmarks in the category. Lastly, we launched our first Travis Kelsey content last week alongside expanded influencer activity, both designed to drive awareness and store traffic. We continue to see high engagement on our social content. For example, the Travis Kelsey video garnered over 7 million views, and high-value engagement, especially in shares and saves. We continue to expand distribution in a disciplined way. A recent example is our test with Costco. We launched an exclusive online bet at Costco.com, and early indications are encouraging through both direct sales and increased visibility in our stores. We also remain focused on cost discipline. Since the start of 2025, we've identified over $235 million of annualized savings $200 million of which has already been executed. With the cost savings implemented, we expect to stay on track for our EBITDA plan. Looking ahead, we are measured in our outlook, consistent with what we said on our last earnings call. April demand was in line with our internal expectations and seasonal trends. We continue to plan conservatively given ongoing consumer uncertainty and macro volatility. That said, we're encouraged by customer response to the new beds and the performance of our refreshed marketing, which reinforces confidence in our plan. As I reflect on my one-year anniversary as CEO, I want to step back for a moment. When I joined Sleep Number, I saw a powerful brand, a compelling mission, and a deeply committed team. I also saw a cost structure, product offering, marketing approach, and balance sheet that limited long-term performance. Over the past year, we've taken meaningful steps to address those challenges, reducing costs, modernizing our marketing, and executing the most significant product reset we've had in years. We're confident in our marketing and product execution, and our capital structure is the final major piece of the turnaround that we're focused on solving. Finally, I want to thank our sleep member team members. None of this progress happens without your focus, dedication, and commitment to quality sleep. I'm grateful for your work and proud of the resilience you show every day. With that, I'll turn it over to Amy.

Thank you, Linda, and good morning. We are pleased to have finalized negotiations with our lenders that resulted in approximately $55 million of near-term incremental liquidity through covenant relief and $25 million of new capital. As we disclosed in the 10-K, our plan to alleviate the risk to continuing operations was threefold. Number one, Execute on the turnaround strategy centered on product, marketing, and distribution while right-sizing the fixed cost base. Two, engage in negotiations with lenders with the goal of amending or waiving financial covenants. And three, engage financial advisors to identify and secure additional capital and other comprehensive solutions to address the capital structure for the creation of long-term value. We are progressing well against that plan. As Linda described, the turnaround strategy is well underway. As we head into Memorial Day, our new lineup of products has launched. The stores were fully reset as of April 17th. A new marketing creative is live, with significantly increased investment in Q2 compared to last year. Additionally, we are executing against our $50 annualized cost savings plan, having executed approximately 30% on a year-to-date basis. Related to the recently executed credit agreement amendment, we were able to alleviate the near-term pressure on liquidity and covenants. The agreement provides for the following. One, a new senior secured term loan facility of $25 million due June 30, 2026. Two, relief from the $30 million minimum liquidity covenant through June 30, 2026. And three, forbearance by the agent and lenders from exercising their rights under the credit agreement for specified covenant defaults as of April 4th. With respect to a long-term solution to our capital structure, we have work to do over the next few months using the short-term relief we receive from our lenders. Along with our advisors, we continue to progress plans to finalize the strategic transaction designed to maximize stakeholder value. Now let's get into Q1 results. Net sales were 319 million in Q1, which was 19% below the same period in the prior year. Note that in Q1, consistent with our plan, investment in media was down 21%. In addition, as Linda mentioned, and as we discussed on our last call, demand performance in January and early February was soft. However, we did see sequential improvement across the quarter, culminating with year-over-year demand growth in March. aided by discounting to move legacy SKUs in advance of the launch of new products on March 23rd. Gross profit margin was 57.9% in the quarter, which was ahead of plan, but 329 basis points below last year, primarily driven by a shift in mix to the new comfort mode bed and discounting of legacy inventory. As the full line of products are now in the market and as supply of legacy inventory diminishes, We expect that gross margin will improve to at or above historical levels. Adjusted operating expenses before restructuring and other non-recurring costs were 195 million, down 42 million or 18% year over year. The reduction was driven by ongoing cost savings initiatives to right-size the fixed cost base and lower variable selling expenses. Adjusted EBITDA was 5.8 million. down 16 million versus the same period last year turning to the balance sheet and cash flow total liquidity including cash and revolver capacity was 40 million dollars at the end of q1 above the 30 million dollar covenant floor which remained in place until the execution of the amendment to the credit agreement on april 27th free cash flow in the quarter was a use of 13.2 million which was just over 20 million dollars favorable to expectation However, it was unfavorable by $6 million compared to the prior year, primarily due to top line pressure partially offset by favorable working capital. Capital expenditures in the quarter were $5.4 million. Looking ahead to Q2 and the balance of fiscal year 2026, starting with Q2, The demand improvement in March has translated to sequentially improved year over year performance in net sales for the month of April, despite a promotional comparability headwind versus prior year. I expect that our media investment in Q2 will be roughly flat to Q1, but up significantly versus the prior year, which was a trough. Consistent with the indications of performance expectations that we provided on our last earnings call, For the quarter, we expect net sales to be down in the range of low single digits to flat versus the prior year. Given our previously announced engagement of Guggenheim Securities to evaluate strategic and financing options, we will not provide any further financial guidance at this time. But I will say that my expectations of performance are consistent with the indications that we provided on the last earnings call. And with that, I will turn it back to the operator for Q&A.