Sleep Number Corp Q4 FY2024 earnings call

• The mattress industry faced challenging demand in 2024 and into 2025, with low consumer sentiment, high interest rates, and suppressed discretionary spending.
• Implemented operating model transformation since late 2023, reducing fixed expenses, enhancing margins, and cash flow. Adjusted EBITDA increased in Q4 and full year.
• Q4 gross margin 59.9% (top end of internal range), full year 59.6% (190 basis point increase). Operating expenses reduced by $28M in Q4 and $88M full year.
• Key initiatives: Data-driven efforts, leveraging Smart Sleeper loyalty, strengthening relationship-based selling, recertifying sleep professionals.
• CEO transition: Linda Findley to join on April 7, 2025.

Fourth quarter 2024 net sales were $377 million, down 12% year-over-year. Full year 2024 net sales were $1.68 billion, down 11% versus prior year. Q4 gross margin reached 59.9%, up 330 basis points year-over-year, and full year gross margin was 59.6%, a 190 basis point increase over 2023. Fourth quarter adjusted EBITDA was $26 million, a 43% year-over-year increase. Full year adjusted EBITDA was $120 million, in line with the midpoint of guidance. Revenue contribution: Q4 net sales contributed $377M to the total, full year $1.68B, with gross margin improvement and cost reductions driving performance.

• No 2025 financial outlook provided yet, to allow Linda Findley time to evaluate strategies.
• Focus on generating cash to pay down debt and reduce leverage.
• Amended bank agreement provides covenant flexibility through end of 2025, with specific covenant maximums for each quarter in 2025.
• Exploring debt restructuring options in 2025.

• Macro environment challenges: Low consumer sentiment, high interest rates, economic uncertainty suppressing discretionary spending.
• Mattress industry volume at lowest since 2015.
• Tariffs impact: Uncertainty and potential cost increases related to tariffs.
• Store performance: Store count changes and lease obligations impacting sales and costs.
• Demand volatility: Fluctuations in consumer purchasing behavior and buying conditions for durables.

Q: Could you help think about the runway for improving margins and levers pulled?

A: Robust program examining material cost reductions, supplier negotiations, cost efficiencies; Q4 benefited from product mix; will continue pursuing cost efficiency in 2025.

Q: Any road map on store leases, products hitting floor?

A: Climate series outperforming expectations, expected to benefit first 3 quarters of 2025 before lapping 2024 fourth quarter.

Q: How much of COGS subject to tariffs and pricing plans?

A: Largest exposure from Mexico (about 1/3 of materials), cost of goods sold ~70% material costs; pricing actions will be decisive, considering impact on top line.

Q: Carryover impact of store count rationalization on 2025 top line and recapture rate?

A: Store evaluations include openings, repositions, remodels, closures; 2024 store changes totaled a couple points of pressure, will continue maximizing store transfer for profitability.

Q: What's needed to get online channel back to parity with store?

A: Pressure on low end, recent test promoting c1 Smart Bed at $799 had impact; driver is higher margin Climate series, focusing on benefit-driven products for higher income customers.

Q: Did you give demand comp for Q4? Outlook on pivoting back to spend more?

A: Q4 demand down double digits, similar to net sales; waiting for more efficient market; organic category traffic metrics used to gauge efficiency for spending decisions.

Q: Expectations on industry demand and further expense savings?

A: Industry demand expected to have pressured front half, easier comparison in back half; cost reductions over past 2 years totaled $173M, will continue operating with contingency plans for additional actions.