Sleep Number Corporation Q2 FY2025 earnings call

• Linda Findley welcomed Bob Ryder as Interim CFO and thanked Francis for his contribution. She discussed resetting marketing with a 30% cut in Q2 marketing spend, bringing in new marketing leadership, and organizational realignment. The company aims to control costs, with over $130 million in operating expense reductions in 2025. Initiatives include optimizing product portfolio, enhancing marketing efficiency, and managing capital structure. - Bob Ryder discussed Q2 financial performance, cost savings exceeding initial targets, active engagement with lenders regarding capital structure, and expectations for the future including breakeven cash flow in the second half and full-year net sales expectations.

Net sales for the second quarter were $328 million, down 19.7% from the prior year. Gross profit margin was 59.1%, flat versus the prior year. Operating expenses were $185 million before restructuring and nonrecurring costs, down 21% year-over-year and $51 million lower than the prior quarter. Adjusted EBITDA was $23.6 million, down $4.7 million from the prior year. Adjusted EBITDA margin was 7.2%, 30 basis points higher than the prior year. The company expects full year net sales of approximately $1.45 billion, a 14% year-over-year decline, with second half sales roughly comparable to first half sales. Gross profit margin is expected to be approximately 61% for the second half of the year. Full-year 2025 operating expenses, excluding restructuring and other nonrecurring costs, are expected to be approximately $830 million, $130 million less than 2024.

• Full year net sales expected to be approximately $1.45 billion, a 14% year-over-year decline. - Second half sales will be roughly comparable to first half sales, with second half moderation of year-over-year sales rate decline to 9%. - Gross profit margin expected to be approximately 61% for the second half of the year, including mitigation of tariff impact. - Full-year 2025 operating expenses, excluding restructuring and other nonrecurring costs, expected to be approximately $830 million, $130 million less than 2024.

• Risks related to compliance with debt covenants. - Potential impact of macroeconomic factors on consumer spending affecting sales. - Uncertainties around execution of marketing and product strategy changes.

Q: Is just outside of the changes to the marketing model? Can you break down the composition of the additional cost savings you expect to harvest this year where are these coming from? And how are you balancing the longer-term impacts of these actions given the cumulative number of cost savings over the last 3 years is just very large?

A: Absolutely, Dan. And also congratulations on your new role. We are -- when you look at the breakdown of the $130 million of the cost savings, we're not giving an exact breakdown on this call. However, it roughly follows the same percentages that we announced for the $80 million to $100 million before. . So we're very focused on making sure that we're making structural changes to how we operate primarily through reductions in G&A and R&D to make sure that, that scales effectively as we grow the business in the future. Specifically, when you look at the marketing cost savings, a lot of those are structural changes. So while we did a hard reset in Q2 based on trying to reset the efficiency of marketing and reset the strategy there. A lot of those changes can bring scale through the efficiency that we're actually seeing going forward. So we anticipate that any future reinvestment in marketing would be done at a much higher efficiency level than in the past. But right now, we think we're focused mostly on structurally how do we redirect those dollars into more effective programs, more effective channels, many of which, frankly, are already industry proven long term. So a lot of what we're doing in the early days isn't necessarily rocket science. It's kind of -- it's a lot of just opportunities that we can drive for the business going forward while layering some more strategic marketing on top of that. Hopefully, that answers your question.

Q: A lot of really interesting things here that you're working on. The one that I'm most interested in is probably the changes to the product assortment and pricing. And I was wondering if you could share a little bit more about how you're going to come up with that strategy, how you might be able to test it, if at all, before you put it into place. And what the timing might look like for the refresh?

A: Sure. So I'll try to give you as much detail as I can. Obviously, we want to be cautious about revealing too much too early. But we've been doing a significant amount of consumer research to really understand the specific needs that our customers have, the benefits they're looking for, what they optimize for a purchase, which I think is important to do ongoing research on just because that constantly changes as you see macroeconomic environments as well as personal preferences change. . But we have a huge amount of data already, plus we're pretty lucky in that we have 30 billion-plus hours of sleep data from our existing customers already. so we can really understand more about what they're optimizing for, what benefits them when it comes to sleep quality and sleep improvement. And we can combine all of that together. Also, while we've done a lot of cost refinements on our R&D and G&A, as we mentioned before, we do have that entire history of R&D already that we can work on and implement some of the knowledge that we gained from that work in the past as well. And we can leverage that at a pretty great cost base because we already have it in the company. I guess in short, I would say that the most important thing we're doing in product is listening to the consumer. And we luckily have both a history of doing that and currently are conducting a lot of that work with our existing and potential consumer base to think about how we reach a broader TAM of consumers in the process of developing new products. We'll start rolling out some of this material in the beginning of 2026. So that's really where we are. We are moving very quickly in the physical product world, things usually move pretty slowly, but that's actually pretty fast. And so we're aggressively thinking about how we look at the assets we already have, the benefits of the product and how we can get that into the hands of customers. On the promotional and pricing side, I just want to emphasize that we have an incredibly valuable product and an incredibly differentiated product. And so really, that's just thinking about the structure of how we talk about the product, how we set the margin profile and how we bring value to the customer going forward in both price and promotion.

Q: Linda, first, I wanted to dive a little bit further kind of into the rebuild of the advertising strategy. I don't know if there's any more details you can offer. But I guess -- what I'm looking at like historically, this business was 13%, 14% of sales spent on ad. When you think about what a goal would be for the business on a go-forward basis with the dollars going the way you and the team feel they're most efficient. How do you think about that level and something for us to kind of greater look towards as we build out maybe what a new model for Sleep Number would look like?

A: So I think it's a really interesting question. And I think the way that we're approaching marketing as a percentage of sales is I think we look at industry best practices, and we want to continue to optimize in order to drive towards industry best practices. So what you're going to see probably is some volatility in marketing as a percentage of sales as we sort of work into this new efficiency that we're gaining and the new programs that we're gaining because again, it takes time for these things to take hold. But -- so you'll see some volatility, and you'll see some continued investment in the right way with efficient dollars based on driving our top line. But my intent would be that our percentage of marketing spend to sales should get more efficient and lower and more in line with industry expectations in the future. Again, you'll see some volatility in the near term, which is intentional of that percentage. But long term, I think it has a huge amount of opportunity based on what we're already seeing even into July to become a lower percentage of sales but far more effective.

Q: I was just looking at some of the guidance metrics that you provided, I guess you're moving towards now guiding for gross margin expansion in the back half. And I do think you have a little bit of tariff pressure. Maybe could you help us unpack the drivers that you expect and maybe reframe where the tariff pressure would stand in the back half?

A: Sure. So our guide really -- and again, part of the reason that when we put our outlook forward, we were really focused on trying to be as clear as possible with the dollar amount because with the 53rd week and the year-over-year comparisons, percentages are a little bit sort of different than what you might expect based on expecting the same revenue roughly in the second half of the year versus the first half of the year. . So we feel pretty confident in our plan going forward based on our marketing efficiencies based on what we're seeing in ARU as far as strength of mix and strength of profitability going into the third quarter. So all of that is a good foundation. I think that for us, specifically, when we look at tariffs through previous pricing changes that were made in the business, we've been able to completely mitigate tariffs within our margin structure and continue to find more opportunities for material cost reductions as well as optimizations based on our promotional strategy and based on how we're approaching the business. So we've been able to actually mitigate those tariffs through both negotiations with our suppliers and also through some previous pricing actions that we were able to apply to this pretty effectively, especially considering the new moderated plans of tariffs that we've seen to date. Obviously, that consistently changes. But at this point, it's no impact.

Q: Okay. And encouraging to hear on the improved marketing spend and the efficiencies. Obviously, Labor Day is coming up, and that's a big holiday weekend. The sales guidance is helpful, but there's kind of a lot of moving pieces with store closures and you get the extra week. Maybe could you frame up a ballpark of what same-store sales than in the back half? And then what that extra week contribution will be to Q4?

A: Yes. I don't think we're going to get into the extra week. Obviously, it helps. And one of the chances when Linda and I joined that it's the 53rd week year, right, which I was at a -- one of my former employers also had a 53rd week a year and it just -- it sends the whole place into a fluid because it just complicates everything. But I think we provided the sales. I mean the good thing is we're at the halfway point and provided the full year forecast. So you guys can figure out the growth for the first half and the back half, and we're just focused on executing against that sales forecast.

Q: Linda, first, I wanted to dive a little bit further kind of into the rebuild of the advertising strategy. I don't know if there's any more details you can offer. But I guess -- what I'm looking at like historically, this business was 13%, 14% of sales spent on ad. When you think about what a goal would be for the business on a go-forward basis with the dollars going the way you and the team feel they're most efficient. How do you think about that level and something for us to kind of greater look towards as we build out maybe what a new model for Sleep Number would look like?

A: So I think it's a really interesting question. And I think the way that we're approaching marketing as a percentage of sales is I think we look at industry best practices, and we want to continue to optimize in order to drive towards industry best practices. So what you're going to see probably is some volatility in marketing as a percentage of sales as we sort of work into this new efficiency that we're gaining and the new programs that we're gaining because again, it takes time for these things to take hold. But -- so you'll see some volatility, and you'll see some continued investment in the right way with efficient dollars based on driving our top line. But my intent would be that our percentage of marketing spend to sales should get more efficient and lower and more in line with industry expectations in the future. Again, you'll see some volatility in the near term, which is intentional of that percentage. But long term, I think it has a huge amount of opportunity based on what we're already seeing even into July to become a lower percentage of sales but far more effective.