Press Release: Sleep Number Announces Record Third Quarter 2019 Results and Raises Earnings Outlook

Sleep Number Announces Record Third Quarter 2019 Results and Raises Earnings Outlook

-- Third quarter net sales grew 14%, with a 10% comp gain and diluted EPS
growth of 81%

-- Year-to-date net sales increased 12%, operating income grew 46% and
diluted EPS increased 63%

-- Generated a 41% increase in year-to-date operating cash flows and a
trailing twelve month ROIC of 18.4%

-- Full-year outlook raised to a range of $2.45 to $2.75 per diluted share,
$2.60 at the midpoint
MINNEAPOLIS--(BUSINESS WIRE)--October 15, 2019--

Sleep Number Corporation (Nasdaq: SNBR) today reported record results for the third quarter and year-to-date period ended September 28, 2019.

"Our revolutionary Sleep Number 360(R) smart beds are delivering life-changing sleep and drove double-digit demand growth on top of double-digit demand growth the prior year. Our multi-year initiatives are resulting in the sales and profit growth we anticipated," stated Shelly Ibach, President and CEO. "We are creating a future where our 360(R) smart bed will be the hub for consumers' health and wellness with individualized digital health as core to our business."

Third Quarter Overview

-- Net sales increased 14% to a record $475 million, including a 10%
comparable sales gain

-- Prior year's reported results were impacted by one week of deliveries
($24 million of net sales and 23 cents of EPS) which shifted from the
third to the fourth quarter; refer to the Reconciliation of Non-GAAP
Financial Measures tables on page 10 of our fourth quarter 2018 earnings
press release

-- Gross profit rate increased 200 basis points to 62.4% of net sales
compared with 60.4% for the same period last year

-- Operating income increased 55% to $39 million, or 8.2% of net sales, up
210 basis points versus the prior year's third quarter

-- Earnings per diluted share increased 81% to $0.94, compared with $0.52
for the prior year

Cash Flows and Liquidity Review

-- Generated $190 million in net cash from operating activities year to date,
up 41% versus the same period last year

-- Invested $47 million in capital expenditures year to date of the $60
million expected for 2019

-- Returned $121 million to shareholders year to date through share
repurchases, out of approximately $145 million expected for 2019

-- Announced replenishment of $500 million share repurchase authorization
effective the beginning of the fiscal fourth quarter

-- Ended the third quarter with a leverage ratio of 2.6x EBITDAR; continue
to operate with a targeted range of 2.5x to 3.0x EBITDAR with seasonal
fluctuations expected

-- Return on invested capital increased 470 basis points year over year to
18.4% for the trailing twelve month period

Financial Outlook

The company raised its 2019 earnings per diluted share outlook to a range of $2.45 to $2.75. The outlook includes up to 10% net sales growth for the full-year and a 25% effective income tax rate for the fourth quarter.

Conference Call Information

Management will host its regularly scheduled conference call to discuss the company's results at 5 p.m. EDT (4 p.m. CDT; 2 p.m. PDT) today. To listen to the call, please dial 800-593-9959 (international participants dial 517-308-9340) and reference the passcode "Sleep." To access the webcast, please visit the investor relations area of the Sleep Number website at http://www.sleepnumber.com/eng/aboutus/InvestorRelations.cfm. The webcast replay will remain available for approximately 60 days.

About Sleep Number Corporation

As a purpose-driven company, Sleep Number's mission is to improve lives by individualizing sleep experiences. Our revolutionary Sleep Number 360(R) smart beds deliver proven, quality sleep through effortless, adjustable comfort. Our integrated SleepIQ(R) operating system captures over nine billion biometric data points every night and delivers actionable insights to improve your overall sleep health and wellness. Sleep Number ranked #1 in J.D. Power's 2018 Mattress Satisfaction Report*.

To experience proven quality sleep, visit SleepNumber.com or one of over 600 Sleep Number(R) stores. More information is available on our newsroom and investor relations site.

*Sleep Number received the highest score in the J.D. Power 2015, 2016 and 2018 Mattress Satisfaction Reports of customers' satisfaction with their mattress. Visit jdpower.com/awards.

Forward-looking Statements

Statements used in this news release relating to future plans, events, financial results or performance are forward-looking statements subject to certain risks and uncertainties including, among others, such factors as current and future general and industry economic trends and consumer confidence; the effectiveness of our marketing messages; the efficiency of our advertising and promotional efforts; our ability to execute our company-controlled distribution strategy; our ability to achieve and maintain acceptable levels of product and service quality, and acceptable product return and warranty claims rates; our ability to continue to improve and expand our product line; consumer acceptance of our products, product quality, innovation and brand image; industry competition, the emergence of additional competitive products, and the adequacy of our intellectual property rights to protect our products and brand from competitive or infringing activities; the potential for claims that our products, processes, advertising, or trademarks infringe the intellectual property rights of others; availability of attractive and cost-effective consumer credit options; pending and unforeseen litigation and the potential for adverse publicity associated with litigation; our manufacturing processes with minimal levels of inventory, which may leave us vulnerable to shortages in supply; our dependence on significant suppliers and our ability to maintain relationships with key suppliers, including several sole-source suppliers; the vulnerability of key suppliers to recessionary pressures, labor negotiations, liquidity concerns or other factors; rising commodity costs and other inflationary pressures; risks inherent in global sourcing activities, including tariffs and the potential for shortages in supply; risks of disruption in the operation of either of our two primary manufacturing facilities; increasing government regulations; the adequacy of our and third party information systems to meet the evolving needs of our business and existing and evolving risks and regulatory standards applicable to data privacy and security; the costs, distractions and potential disruptions to our business related to upgrading our management information systems; the vulnerability of our and third-party information systems to attacks by hackers or other cyber threats that could compromise the security of our systems, result in a data breach or disrupt our business; and our ability to attract, retain and motivate qualified management, executive and other key employees, including qualified retail sales professionals and managers. Additional information concerning these and other risks and uncertainties is contained in the company's filings with the Securities and Exchange Commission (SEC), including the Annual Report on Form 10-K, and other periodic reports filed with the SEC. The company has no obligation to publicly update or revise any of the forward-looking statements in this news release.

SLEEP NUMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited -- in thousands, except per share amounts)


Three Months Ended
----------------------------------------------------
September 28, % of September 29, % of
2019 Net Sales 2018 Net Sales
------------- ---------- ------------- ----------

Net sales $ 474,778 100.0% $ 414,779 100.0%
Cost of sales 178,388 37.6% 164,262 39.6%
--------- ------ --------- ------
Gross profit 296,390 62.4% 250,517 60.4%
--------- ------ --------- ------

Operating
expenses:
Sales and
marketing 213,133 44.9% 188,458 45.4%
General and
administrative 35,098 7.4% 29,385 7.1%
Research and
development 9,007 1.9% 7,353 1.8%
--------- ------ --------- ------
Total
operating
expenses 257,238 54.2% 225,196 54.3%
--------- ------ --------- ------
Operating income 39,152 8.2% 25,321 6.1%
Interest expense,
net 3,131 0.7% 1,836 0.4%
--------- ------ --------- ------
Income before
income taxes 36,021 7.6% 23,485 5.7%
Income tax expense 7,967 1.7% 5,228 1.3%
--------- ------ --------- ------
Net income $ 28,054 5.9% $ 18,257 4.4%
========= ====== ========= ======

Net income per
share -- basic $ 0.96 $ 0.53
========= =========

Net income per
share -- diluted $ 0.94 $ 0.52
========= =========


Reconciliation of
weighted-average
shares
outstanding:
Basic
weighted-average
shares
outstanding 29,085 34,231
Dilutive effect
of stock-based

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October 15, 2019 16:01 ET (20:01 GMT)