Sleep Number Corp Q2 FY2024 earnings call

• Implemented transformative initiatives to improve financial resilience and profitability, including cost reductions in material, logistics, cost of goods sold, and G&A. - Launched the ClimateCool Smart Bed, which cools over 20 times faster than competitors, with queen size priced at $54.99 and expected to boost Q4 gross margin. - Reduced operating expenses through outsourcing, media optimization, and process improvements. - Mattress industry demand remains challenging, but second quarter demand showed a slight sequential improvement, with focus on holiday promotions and media efficiency.

Second quarter net sales were $408 million, down 11% vs last year. Delivered units decreased 8% with ARU down 3%. Gross margin rate was 59.1% in Q2, up 150 basis points year-over-year. Adjusted EBITDA in Q2 was $28 million, down from $35 million last year. For the first half of 2024, operating expenses were reduced by $44 million, gross margin rate expanded by 60 basis points, and $9 million of free cash flow was generated. Product segments include the c1 Smart Bed, Climate360, and the new ClimateCool Smart Bed, with ClimateCool expected to contribute to gross margin expansion in Q4.

• Full-year adjusted EBITDA guidance remains $125 million to $145 million. Free cash flow expected $50 million to $70 million. Gross margin rate expected to approach 60% in the back half. - Q3 net sales expected down low to mid-single digits, adjusted EBITDA $25 million to $30 million. Q4 expects ClimateCool to contribute 20-30 basis points to gross margin rate. - Debt-to-EBITDA ratio at 4.4x in Q2, expected to improve to below 3.75x by year end, with covenants expected to be met in 2025.

• Continued low consumer sentiment, home sales decline, and purchasing power pressures impacting demand. - Uncertainty around media spending and consumer behavior during the election period. - Competitive pressures from other mattress companies' products.

Q: Talk about higher media spending and election impact A: Media spend was down 8% in the first half, plans to be flat to prior year in the second half, prioritizing efficient media using tech tools, and agile response to consumer behavior Q: 3Q EBITDA and 4Q guidance A: Back half adjusted EBITDA flat with full-year guidance, driven by gross margin improvement and increased media spending, with Q4 expected stronger due to Labor Day demand Q: Strength across pricing bands and demand trend A: Higher-priced items benefiting from margin initiatives, demand similar to Q1 with strong months around holiday promotions, weak shoulders Q: Stores and profitability A: Progressing on store closures, net transfer sales rates exceeding plans, ongoing real estate review for healthy portfolio Q: Industry recovery and operating expenses A: Expected return to long-term unit growth, operating expense savings mostly fixed with some variable investment as industry recovers Q: Media spend and new products A: Media spend impact on industry, c1 and Climate360 performing well, ClimateCool expected to resonate with consumers