Sleep Number Corporation (NASDAQ:SNBR) is a leading bedding and sleep technology company that has faced a challenging industry environment in recent years. The company reported annual net income of -$15,287,000, annual revenue of $1,887,482,000, annual operating cash flow of -$11,045,000, and annual free cash flow of -$68,101,000 in its latest fiscal year. Despite these headwinds, Sleep Number is working to transform its operating model to improve financial resilience and profitability.
Business Overview
Sleep Number is a wellness technology company that designs, manufactures, and distributes innovative sleep solutions. The company's smart beds combine physical and digital innovations, integrating advanced technology with exceptional comfort. Sleep Number's signature adjustable firmness feature allows each sleeper to customize their comfort, while embedded sensors and "sense and do" technology automatically adjust the bed throughout the night. The company's exclusive distribution model meets customers through digital and in-store touchpoints, providing an exceptional experience and lifelong relationship.Sleep Number generates revenue by marketing and selling its smart beds directly to new and existing customers through its vertically integrated, exclusive, direct-to-consumer retail channels, including Stores, Online, Phone, and Chat. The company partners with leading institutions to leverage its extensive sleep data and research to advance sleep science.
Financial Performance
In the latest quarter, Sleep Number reported net sales of $408.4 million, down 11% year-over-year. The company attributed the decline to a mid-single-digit demand drop and six percentage points of headwind from year-over-year backlog changes. Delivered units decreased 8% for the quarter, with average revenue per unit (ARU) down 3% versus the prior year.Despite the sales decline, Sleep Number was able to expand its gross profit margin by 150 basis points to 59.1% in the quarter. This improvement was driven by cost of goods sold reductions through product redesign, ongoing supplier negotiations, and efficiencies in home delivery and logistics operations. The company also made meaningful progress in reducing operating expenses, which were down $19 million versus the prior year's second quarter before restructuring costs.
Transformation Initiatives
Sleep Number is focused on transforming its operating model to improve financial resilience and profitability in a range of economic environments. The company has identified four principal areas to aggressively manage: cost of acquisition, cost to serve, cost of goods sold, and G&A/R&D leverage.In cost of acquisition, Sleep Number is benefiting from greater precision in media and promotional investment, leveraging AI-based models and targeted media strategies. In cost to serve, the company has outsourced select operational activities and further utilized third-party expertise in IT and services, providing additional flexibility in supporting peak volumes. For cost of goods, Sleep Number has driven efficiencies in procurement, manufacturing, and fulfillment through new best-in-class operating practices. Finally, in G&A and R&D expense management, the company has incorporated additional rigor to streamline its organizational design, remove inefficiencies, and increase productivity.
These transformation initiatives have contributed to Sleep Number's ability to achieve its 2024 EBITDA and cash flow targets, despite the challenging industry environment. In the first half of 2024, the company reduced operating expenses by $44 million versus the prior year and drove 60 basis points of gross margin rate expansion.
Outlook and Guidance
Looking ahead, Sleep Number expects the mattress industry demand environment to remain challenging in the near-term, with industry unit sales estimated around 25 million for 2024 compared to a normalized level of 32 million units. The company now forecasts its own demand in the back half of 2024 to be flat to down low single digits, a slight sequential improvement from the first half.To navigate this environment, Sleep Number is focused on leading with its differentiated smart bed innovations, including the new ClimateCool model launching in Q4 2024. The company expects ClimateCool to contribute 20-30 basis points of gross margin expansion in the fourth quarter. Additionally, the company is leveraging its analytical capabilities and media strategies to drive efficient demand generation.
For the full year 2024, Sleep Number is reiterating its adjusted EBITDA guidance of $125 million to $145 million. The company expects to generate $50 million to $70 million in free cash flow, which it plans to use to pay down debt. Sleep Number also anticipates at least 100 basis points of gross margin rate expansion for the full year.
Risks and Challenges
Sleep Number faces several risks and challenges, including:- Continued industry demand pressures and macroeconomic uncertainty
- Ability to effectively execute its transformation initiatives and cost reduction efforts
- Potential supply chain disruptions and inflationary pressures
- Competition from other bedding and sleep technology providers
- Reliance on its exclusive direct-to-consumer distribution model
Despite these headwinds, Sleep Number's focus on improving its operating model and financial resilience positions the company to capitalize on the industry's eventual recovery. With its innovative smart bed technology, loyal customer base, and transformation initiatives, Sleep Number aims to emerge as a stronger, more profitable player in the bedding and sleep solutions market.