Sleep Number Corp Q3 FY2024 earnings call

Key Points - Shelly Ibach announced her retirement as Chair, President, and CEO no later than the 2025 annual shareholders meeting, to be followed by a strategic advisor role. - Ongoing operating model transformation drove broad-based efficiencies, resulting in a gross margin rate improvement to 60.8% and adjusted EBITDA of $28 million in Q3. - Introduced the ClimateCool smart bed, addressing temperature challenges for sleepers. - Deepened audience segmentation in marketing strategies and streamlined cost structure across various areas including manufacturing, fulfillment, and R&D. - Achieved $17 million in operating cost reductions in Q3 year-over-year before restructuring costs, with year-to-date operating expense reduction of $60 million.

Third quarter net sales were $427 million, down 10% versus the prior year. Gross margin rate was 60.8% for the quarter, up 340 basis points versus the prior year. Year-to-date gross margin rate was 59.5%, up 150 basis points versus the same period last year. Adjusted EBITDA for the third quarter was $28 million, up 11% versus the same period last year. Net sales for the quarter included a high single-digit demand decline, headwind from backlog changes, and pressure from fewer stores. Operating expenses were down $17 million year-over-year in the third quarter before restructuring costs, with year-to-date operating expense reduction of $60 million.

Forward-Looking Statements - Lowered full year adjusted EBITDA guidance to a range of $115 million to $125 million. - Net sales expected to be down approximately 10% for the year. - Full year free cash flow expected to be $10 million to $20 million, with $15 million to $25 million negative in the fourth quarter. - Expect at least 150 basis points of gross margin rate expansion in 2024. - Leverage ratio expected to end the year around 4.1x, well below covenant maximum.

Risks - Persistent weakness in consumer demand, particularly in the bedding industry which has been in a recession for three years. - Macro-economic uncertainties including ongoing impacts from the election and geopolitical conditions. - Media spending pullbacks and delayed consumer decision-making affecting sales outside of holiday periods. - Potential negative impact of store underperformance and ongoing store portfolio evaluation. - Minimal but potential impact of incremental tariffs on inputs from China.

Q: Bobby Griffin asked about how the quarter played out, specifically consumer spending outside holiday weekends and media spend pullbacks.

A: Shelly Ibach responded that consumer spending outside holiday weekends was weak, with minimal activity and delayed decision-making, and media spend was pulled back after Labor Day due to lack of consumer response.

Q: Bobby Griffin inquired about the store portfolio and potential further closings.

A: Shelly Ibach stated the store portfolio is healthy, with selective closures focusing on underperforming stores, and transfer rates exceeding expectations.

Q: Brad Thomas asked about consumer weakness, promotional activity, and China tariffs.

A: Shelly Ibach mentioned focus on innovative products like Climate series, media spend efficiency, and minimal China tariff impact.

Q: Peter Keith asked about industry backdrop and gross margin guidance.

A: Shelly Ibach and Francis Lee responded that Q3 was in line with first half demand, and Q4 gross margin expected to be around 59%-60%.

Q: Dan Silverstein asked about Q4 sales guide and debt covenants.

A: Dave Schwantes and Francis Lee replied that Q4 sales trends were similar to first nine months, and leverage covenants are expected to be met due to cost efficiencies and improved cost structure