Sleep Number Corporation Q1 FY2025 earnings call

• Leadership and organizational changes: Created new executive and senior leadership structure to consolidate capabilities, align product innovation with customer value, centralize technology teams, and optimize supply chain. Reduced corporate management by 21%. - Marketing: Reshaping marketing and advertising approach to prioritize efficiency, appointed Amber Minson as Chief Marketing Officer to drive sustainable demand generation, brand visibility, and media efficiency. - R&D: Redirecting focus to core technologies, deprioritizing adjacent opportunities with uncertain returns, and driving costs out of products while maintaining innovation. - Cost reduction: Anticipate annualized cost reductions of $80 million to $100 million, with 35% fixed costs, 50% structural marketing changes, and 15% volume-driven. Already reduced Q2 operating expenses by approximately 10% compared to Q1 2025 cost structure.

Net sales for the first quarter were $393 million, a decrease of 16% compared to the prior year. Despite challenges, the Climate Series beds helped expand ARU by approximately 4%. Gross profit margin expanded to 61.2% in the first quarter, up 250 basis points versus last year, driven by supply chain and manufacturing efficiencies and product mix. First quarter operating expenses, excluding restructuring and onetime costs, totaled $237 million, a $23 million or 9% improvement over last year. Adjusted EBITDA for the quarter was $22 million, a decrease of $15 million from the prior year. Adjusted EBITDA margin was 5.6%, 230 basis points lower than prior year.

• Short-term: Expect continued top line pressure due to uncertain consumer environment. - Cost: Prepared for demand not to improve significantly for the rest of the year, expect to maintain gross profit margin improvements through material cost reductions, supplier partnerships, and logistics efficiencies. Tariffs could pressure gross profit margin by approximately 100 basis points. - Timing: Immediate impact in Q2 and increasing benefits in the back half of the year as cost structure is optimized.

• Tariffs: Unmitigated impact to be approximately $30 million for 2025, with uncertainties in mitigating the remainder. - Macroeconomic: Consumer sentiment uncertainty impacting people's willingness to spend, which affects the business.

Q: On a high level, what do you see are the low-hanging fruit for improvement that we should start to see in 2025?

A: Linda Findley said it's divided into three areas: marketing for new efficiency and benefits-based messaging, organizational structure change to speed decision-making and innovation, and R&D to refocus on customer needs with existing innovation history at a lower cost base.

Q: Can you provide any color on quarter-to-date demand?

A: Francis Lee said since February, consumer confidence decline has impacted spending, and they're focused on rightsizing organization and controlling costs. Linda Findley added they're focused on preparing for Labor Day and have activated around Memorial Day.

Q: What do you view as the biggest opportunities to strengthen the brand and the messaging to consumers? Any opportunity to add new dimension with partnerships?

A: Linda Findley said there's opportunity to add new dimension, including leveraging new technologies and digital processes in marketing, and recognizing benefits from existing partnerships like the large sleep study data.

Q: You mentioned the company got away from its core value proposition. How do you think about where the company got away from that?

A: Linda Findley said they maybe added too many bells and whistles and looked too far into the future, getting further from explaining the core value of sleeping better to customers.

Q: How are you thinking about stores, openings versus closures and reviewing the portfolio base?

A: Francis Lee said they've maintained current strategy of store openings and closures, and as part of holistic strategy review, will look at store fleet and base as part of go-to-market review.