Q1 2022 Sleep Number Corp Earnings Call

[music].

Welcome to sleep Number's Q1, 2022 earnings conference call.

All lines have been placed in a listen only mode until the question and answer session.

Today's call is being recorded.

Anyone has any objections you may disconnect at this time.

I would like to introduce Dave Schwantes, Vice President of Finance and Investor Relations.

You may begin.

Good afternoon, and welcome to the Sleep number Corporation first quarter 2022 earnings conference call. Thank you for joining us.

I am Dave Schwantes, Vice President of Finance and Investor Relations.

With me today are Shelly ibach, our president and CEO and David Callen, Our Chief Financial Officer.

This telephone conference is being recorded and will be available on our website at sleep number dot com.

Please refer to the details in our news release to access the replay.

Please also refer to our news release for a reconciliation of certain non-GAAP financial measures and supplemental financial information included in the news release or that May be discussed on this call the.

The primary purpose of this call is to discuss the results of the fiscal period. Just ended however, our commentary and responses to your questions may include certain forward looking statements.

These forward looking statements are subject to a number of risks and uncertainties outlined in our earnings news release and discussed in some detail in our annual report on Form 10-K , and other periodic filings with the SEC.

The company's actual future results may vary materially.

I will now turn the call over to Shelly for her comments.

Good afternoon, and welcome to our 2020 Q first quarter earnings call.

Thank you Carr with 74 last night.

I wanted to start by expressing our deep concern for the devastating impact that the war in Ukraine, and having so many lives.

We are driven by our purpose to improve the health and wellbeing of society through higher quality sleep.

Our primary focus is the safety and wellbeing of our team serving our customers and ensuring business continuity.

Since the onset of the pandemic more than two years ago external factors kept elevated business complexity and volatility.

In this dynamic environment, we remain focused on deepening consumer relationships.

Baby for broad relevance, while taking decisive actions to address near term pressures.

Our teams are highly engaged and resilient our competitive advantages are strong and we have ample cash generation and liquidity to support the execution of our strategy.

We remain steadfast in our commitment to fulfilling our purpose and creating long term shareholder value.

While we expected Q1 results to be significantly below last year due to supply constraints and related cost pressures performance was additionally affected by other external factors in the quarter.

The start of the war in Ukraine in late February combined with a sharp increase in gas prices and broad based inflationary pressures.

<unk> consumer shopping behavior in March including demand for our smart beds.

While our team promptly leverage risk mitigation plans to stimulate demand and reduced cost first quarter performance was lower than expected demand for the quarter was down 3% year over year.

Net sales declined 7% to $527 million and earnings per share were <unk>.

Customer preference for the features and benefits of the sleep number smart bed at that was at the high end of our line and that led to a 20% increase in under delivered backlog in the first quarter.

Yes.

Reflecting these results in greater macro pressures, we are revising our full year 2022, EPS guidance to a range of five to $6.

This outlook assumes flat to low single digit growth for demand for the balance of the year and benefit from delivery against our excess backlog.

David will elaborate on our financial performance shortly I will highlight how we are keeping consumers engaged as we service our large backlog and prioritize important strategic advancements.

We are utilizing the operational levers of our advantaged model to engage consumers effectively in this inefficient marketplace.

With our vertical model and integrated demand planning, we are able to rapidly test learn and apply and refine our actions.

As a result, we are adjusting website and digital messaging media promotions and financing.

<unk> media changes are showing improved digital traffic and we are reallocating our investment to drive even more impactful outcomes.

Our brand leadership and growth flywheel based on the advocacy of lifelong relationships with our smart sleepers remained drinks.

Our insiders are highly engaged with our brand.

We've adapted and pivoted quickly and continue to gain new insights as we respond to changing consumer shopping behaviors.

I have great confidence that our passionate sleep number team and Theyre tenacious pursuit of solutions that reach and serve our customers in this environment.

In addition to demand generating tactics, we immediately reduced media and other planned spending by $10 million in the quarter. We continued to pursue additional contingency to further drive demand and adjust costs in support of a broad range of macro scenarios.

Sure.

We also continue to deploy creative solved to fulfill our demand on a timely basis, while retaining customers trust and loyalty.

As we shared during our year end earnings call. The global impact of the Army crop variant in January resulted in ship delays that constrained deliveries at the high end of our line.

For the first quarter overall, our supply allocation was in line with expectations.

The global supply environment remains fluid and challenged with minimal electronics inventory.

These conditions require us to maintain constant focus and real time agility across our business for.

For example in April our digital tools lagged a signal from a large third tier global supplier affected by China's highly restrictive COVID-19 lockdown in Shanghai.

They are currently operating at about 60% of capacity, which has resulted in a delay of chips used in our smart bed firmness control system.

While we were not able to avoid business disturbance entirely our vertically integrated digital capabilities enabled us to immediately adjust customer smart bed delivery times to align with the new expected timing of chip receipts.

In this way our integrated business model and our real time supply visibility enable us to discern and respond quickly to external challenges as.

As a result, we can continue to generate demand manage customer expectations and retain their trust and brand love.

This is a significant competitive advantage.

Yes.

Our initiative to build a scalable flexible and responsive supply chain that prioritizes customer experience is essential to our speed and agility and overcoming customer disruptions. We now have completed the migration of nearly 75% of our outbound logistics network.

By the end of this year, we expect to complete our multiyear transition to an enterprise wide manufacturing and assembly supply chain.

This is fundamental to improving our efficiency and customer experience.

No external challenges are creating near term complexity and significant inefficiencies our innovative sleep solutions continue to gain relevance with consumers.

The health and wellness benefits of <unk>.

Fleet are increasing in value.

Sleepers, using our 360 smart beds and flex fit technology are benefiting from almost 30 minutes more restful sleep per night or up to 170 more hours of restful sleep per year.

We are excited to share this exclusive sleep number benefit with consumers.

Last month, we also achieved another significant milestone on our roadmap to connected health.

We published findings from a recent study.

It confirms that our 360 smart bed technology is comparable to the gold standard policy now griffey for sleep tracking and measurement.

Because of this data reliability, our smart bed could in the future being used for early risk detection purposes, and long term monitoring.

This validation underscores our data has value to the medical and research community and strengthened our brand reputation.

Later this year, we plan to implement our newest most dynamic 360 smart bed technology platform with the introduction of the climate 360, smart bed and subsequent new line of 360 smart beds.

While the while the external environment is certainly more challenging than we expected we are effectively managing near term risk and simultaneously, creating long term value by capitalizing on our competitive advantages including.

Introducing new innovation that supports smart sleepers changing needs and provide the highest quality sleep.

Sustaining fleet numbers sleep innovation health and wellness and sleep science and research leadership position.

Completing the transition to our more responsive and flexible enterprise supply network.

Strengthening our digitization efforts to improve operating efficiency and customer experience.

Managing price elasticity in an environment with rising costs and promotional intensity.

And proactively managing our capital and liquidity with disciplined metric driven decision.

Our team's perseverance resilience and unwavering commitment to our purpose has resulted in more than 14 million lives improved and we are building a future where your smart bed will play an increasingly important role in your overall health and wellbeing.

Now David will provide additional financial details on our 2022 first quarter performance and outlook for the remainder of the year.

Yes.

Thanks Shelly.

Today I'll focus on three areas first our financial results macro factors affecting performance and mitigating actions, we're taking to offset pressures in risks.

Second the importance of supporting our innovations and demand drivers for the long term in the face of near term adversity well.

Taking actions to maintain maximum flexibility.

And third a review of key assumptions underlying our revised 2022 EPS guidance for five to $6, given the dynamic and challenging macro and consumer environments.

Let's start with a review of macro factors that changed since our Q4 earnings call on February 23rd and implications on our performance.

Russia invasions of invasion of Ukraine. The day after our earnings call triggered international sanctions and significant spikes in the cost of petroleum, adding risk for derivatives commodities like foam and plastics.

This has led to approximately $20 million of additional input cost pressures this year from commodities fuel and inefficiencies caused by the uneven flow of chips.

Consumer confidence has been impacted by the rapid inflation and gas in food prices.

Pressuring demand in March.

This coupled with Amazon affected demand in January resulted in a 3% year over year decline in Q1 demand.

We are managing the business through changes in consumer behavior challenges of inefficient supply flow and higher input costs, while navigating geopolitical events and low consumer confidence.

As a result, we have lowered our expectations for 2022 demand growth and our EPS guidance.

However, our differentiated strategy is more relevant than ever and sleep number teams are highly engaged in our mission to improve lives.

We remain committed to long term shareholder value creation through a highly differentiated strategy.

Now, let's review first quarter net sales and financial details.

Net sales in the first quarter of $527 million were down 7% versus the prior year on constrained electronic supply and lower than expected demand.

While supply constraints in the quarter were largely as expected the mix of sleep number smart beds ordered in the quarter, which we call demand was significantly more profitable than the mix of smart beds delivered.

This dynamic meaningfully impacted our Q1 financials as seen in our metrics.

We delivered 108000 smart beds in the quarter down 5% versus the prior year with are you of $4905, which was down 2%.

Contrast, this with the ARU of our Q1 demand, which increased nearly 10% versus the prior year.

That is a 12 point swing in these ARU measurement most of which is in our undelivered backlog.

During the quarter, we added approximately $50 million of net sales equivalents to our excess backlog.

That total to approximately $200 million.

Q1 gross margin of 57, 3% exceeded internal plans by more than 100 basis points as deliveries were level loaded throughout the quarter and benefited from pricing actions taken to date.

Pressures, causing the 530 basis point decline versus the prior year included the absorption of $140 million of annualized cost increases.

Lower overhead absorption on 5% fewer smart beds delivered and 25% fewer adjustable basis delivered in the quarter than the prior year due to current year chip supply constraints.

Q1, operating expenses increased nearly 7%, reflecting the challenges of operating a business in this fast changing environment.

In the face of worsening macro challenges in March we curtailed Q1 spend planned spend by about $10 million, while prioritizing near and long term growth drivers.

Despite these cost cutting actions the efficiency of our Q1 demand driving spend was negatively impacted by Amazon in January and by geopolitical events and low consumer confidence in March.

Still demand in the quarter exceeded deliveries due to constrained chip supply.

Leading to a 20% increase in backlog since December .

Constrained deliveries of our most profitable sales resulted in EPS of <unk> <unk>.

For the quarter compared with expectations for 30 to 40.

We have responded to the changed macro environment by trimming, our spending plans and being conservative with capital deployment as we continue to support our innovations brand support and market expansion initiatives.

Our commitment to drive long term performance is evident in the 23% increase in R&D as our teams create game changing innovations to be launched later this year and next.

We expect these new sleep solutions to fuel future demand and improved future supply by using newer chip technology and fewer components.

Our differentiators plus efficiency driving digitization and an evolved logistic network laid the foundation for superior shareholder value creation in the years ahead.

However, the current operating environment is dynamic and challenging.

Our updated guidance reflects lower demand additional cost pressures and.

In service of our backlog as we continue to chase electronics supply.

Let's review key assumptions supporting our updated 2022 EPS guidance.

Five to $6 range is based on flat to low single digit demand growth the balance of the year.

Sufficient chip supply to service a portion of our excess backlog within the year, resulting in low double digit net sales growth.

And commodity and inefficient operating cost pressures arising from the uneven flow of chips that prevent us from level loading deliveries.

This will be particularly challenging in Q2, when the delayed supply of chips due to the Shanghai Lockdown will constrict weekly deliveries. The first seven to eight weeks to about half the volume expected the final weeks of the quarter.

In total we expect to deliver fewer smart beds in Q2 than Q1, but with a much stronger profit profile, which will be partly offset by the inefficient flow of deliveries.

As a result, we now expect Q2 gross margin of 57% to 58% with improvements in the back half to 58% to 60%.

We also expect to generate approximately $200 million of cash from operations in 2022 as changes in demand backlog and working capital are less favorable than the prior year.

Year end debt leverage is expected to be approximately three times EBITDAR.

We are actively managing all the levers in our control to balance near term financial risks with our opportunities to create superior value long term.

Our approach is to preserve maximum flexibility to move quickly as business conditions change.

The fundamentals of our strategy and our balance sheet are strong.

We continue to drive to improve lives through proven quality sleep as the means to create superior shareholder value.

Operator, please open the lines for questions.

At this time, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.

First question comes from the line of Peter Keith with Piper Sandler Your line is open.

Hi, Thank you good afternoon.

To start off I guess I had a fairly simplistic question just on the Q1 results did missed the EPS guidance by a fair amount, but it sounded like the supply chain.

Laid out as you expected.

<unk> got worse in March, but I would have figured you'd been servicing the supply chain is sort of an offset so what was the I guess the reason for the.

The EPS Miss relative to.

Mid February when it was provided.

Yes.

Thanks, Peter a couple of things one the demand in March was less than we expected that was.

That change really starting February 24th.

Associated with the beginning of the war in Ukraine.

We.

The other factor was the demand that we did generate.

Skewed very high end and that ended up in the backlog and contributed to.

What I highlighted the 20% increase in our backlog since December and the addition of $50 million net sales equivalent.

Our excess backlog at the end of the quarter.

Okay. So.

So.

Maybe next just on the guidance.

You're calling for demand growth of flat to low single digit for the remainder of the year.

But you were negative three for Q1.

With a pretty good February sort of implied March was worse than the negative three.

Why would why would you be expecting demand to be getting better for the balance of the year versus where you landed the last month or two.

Yes, Peter Thank you for the clarifying questions around demand.

We've made good progress in a rapidly evolving marketplace.

Since the onset of the war immediately following the start of the war we were experiencing.

Sales that included down double digits versus prior year, and we took actions in response to the changed consumer marketplace and with the last couple of weeks of March we had move that trend to down 3% to prior year and kantar.

To make advancements and improvements as a result of the adjustments to support this particular consumer environment, where the consumer is still challenged with inflation and so April .

<unk> sample size, but we feel our guidance of flat to low single digit growth for the balance of the year is appropriate based on what we've seen and the actions we've taken and the response from the consumer to the action.

Kelly as a follow up to that could you provide maybe an explicit example.

Amount of testing.

And Iterating and adjusted.

Throughout the month of March and one thing that we clearly see is.

Strength from our insiders as well as.

Are the premium consumer being less affected.

Yet wanting an extraordinary value so the activation is there.

With a strong value to the premium consumer and of course, we play broadly in the good better best.

I want to share exactly the specific tactics, obviously for competitive reasons, but yet.

I've given you some good color there in the adjustments and then I would also say the media adjustments that we've been making moving to more productive media in this marketplace and we're seeing strong conversion.

Higher conversion than prior year on some of the tactics that we've been advancing and then of course the improvement in our demand.

Okay.

Good thanks, so much.

You bet.

Yes.

Your next question comes from the line of Bobby Griffin with Raymond James Your line is open.

Good afternoon, everybody. Thanks for taking my questions.

Hey, Bob I just wanted to quick.

Quickly maybe understand a little bit more of the earnings guide for the year better.

The topline stayed unchanged yet, but obviously, we're going to service more of the backlog with the change in demand, but even excluding the first quarter. Miss there is still a pretty big cut of over $1 plus to the earnings number for the year and I know you called out 20, 20 million excuse me of incremental commodity, but just any other big buckets that you can help size for us.

Or what's driving that change in profitability.

For sure Bobby glad to do it.

Q1.

It was softer than we expected both from a net sales perspective in and lower EPS as you saw so that's contributing partly to the change in the full year.

Also.

We do expect.

Lower net sales for the year.

The benefit of backlog will help support that.

To be low double digit growth over the prior year.

Whereas in our previous guidance.

Hughes the backlog too.

Benefit.

The current P&L.

You've highlighted.

Again the <unk>.

$20 million of cost pressures that we.

We talked about.

There are some.

A bunch of inefficiencies that are new.

In terms of the timing of when ships.

Arrive and are able to support deliveries.

<unk> that in the weekly delivery schedule that we expect here in the in the second quarter, that's an expensive way to run the business, but it's necessary and as appropriate to prioritize serving the customers.

And the kind of market that we're in.

Are those all in.

Impacted our thinking for the balance of the year.

Okay, and then David maybe just help us understand how servicing the backlog.

The difference in profitability.

Looking back into the net sales guidance is still up double digits from the prior report versus now youre getting more from our backlog versus demand, but how does the letting the backlog flow and ended up impacting profitability more than just having organic demand.

Well, it's a couple of points lower few points lower.

Double digit growth first of all but also the actual numbers come down.

Okay growth rate is lower than what we were talking about previously Bobby or.

This double digit but I understand those.

Two different things.

Yes, yes, yes, okay that all makes sense I get yourself, sorry about that I guess two other follow ups then.

One.

Shelly or David or.

This is supply chain challenges potentially delay the launch of climate 316 kind of the big launch that we are talking about in 2023.

And then my second question on the spread announcing now and I can jump back off but this is David I mean, we're looking at gross margins in the 57 ish range versus the old range of 61% to 62, clearly a lot going on in the numbers, but can you maybe size in a few buckets.

What's what in your view as temporary pressure and then what should we consider it more long term pressure that will take time to gain back.

Very good Ravi I'll start with the response on climate 360, and then the subsequent new 360 line. We remain on track targeting late this year for climate 360, <unk>. This is an important move both.

Strategically.

In all aspects strategically for us in getting to this new expanded platform with a really game changing innovation for the consumer.

It also enables as we fully move to the new platform a reduction of the number of components and moving to more advanced semiconductor chips.

There is a lot of.

The benefit to moving to our new innovations and we're working very hard to stay on on track with those innovations and and we are at this point.

And Bob.

Yes, great and then on the gross margin question.

This is fundamental to where we're headed longer term.

And fundamental to how we thought about the pricing adjustments that we've taken to date.

We identified last year.

$140 million of annualized cost pressures and took about $140 million of pricing that alone just the math that pressures gross margin rate by about 400 basis points, but.

The.

The components of that of those cost pressures and then we added an incremental.

$20 million ish.

We're seeing about this year, so about 30%.

And of that 160, we think of as temporary and within that bucket you would be things like.

Using <unk>.

Brokerage.

Services to find components, that's a very expensive way to buy components and thats not something thats, a permanent part of our cost structure.

There is expediting costs.

Across both getting it into the country and then to get it around the country to get it to the customer's.

Timely.

<unk> been very inefficient.

The operations from our manufacturing operations logistics operations, and our home delivery operations are highly inefficient and in a market where you can where the flow of chips is uneven can you can't level load your business and so those are also contributing to.

To the temporary elements things like labor are going to take us longer to quasi call them quasi permanent.

Over time, we will gain efficiencies through our major strategic initiatives and find ways to offset those as well we believe that.

Getting back into the <unk> is.

Definitely a priority and will happen I think as an exit rate even this year.

Thank you Dave I appreciate the detail best of luck.

Hey, Thanks, a lot Bob.

Your next question comes from the line of Seth Basham with Wedbush Securities. Your line is open.

Hi, This is Matt Mccartney offers.

I was just wondering a couple of quick questions. Here I was wondering how you plan on managing advertising expense and personnel costs and a slower demand environment.

And then.

Also wondering with leverage at 334 times and worsening from the end of last year. This seems to suggest you don't have as much room to buy back stock at this point.

With that in mind should we expect muted repurchases here in the near to medium term.

Sally do you want to handle the advertising.

We've taken actions here in the first quarter.

Rapidly pretty decisively around aligning our media dollars to the demand environment that we're in and then of course testing.

In different ways, how do you utilize the media differently for higher productivity and have found some good solutions to be able to move to more productive actions in this environment. So it's a combination of cutting back but also.

Changing and reallocating, what we're doing to the more productive ways and then.

<unk>.

Also as a result of where the demand wise as we made adjustments to our staffing overall.

Working to continue to optimize.

Sure.

Our team members as well as our shareholders.

Very good and this Matt I'll add on.

I just wanted to remind you to go back in time and look at how we acted.

At the onset of the pandemic back in March of 2020.

Was to take actions to protect our business and also.

Have a bias toward being able to rebound with pace.

And had we not done that we would not have been able to accelerate growth and profitability. The subsequent six quarters. The way we did.

We are approaching the current situation.

Similar kind of way in the sense that.

We know that our innovations are game changing and that consumers really are drawn to sleep number 360, smart beds and so we want them to have improved quality sleep and our mission is to improve lives. So our bias is to protect the future and to invest in our <unk>.

Long term and near term growth drivers that go there. So at the same time. We also have layers of contingency actions that we will activate as needed as we go as we progress through the year as it is this is all part of that whole leverage conversation as well because.

It all starts with demand creation for this business model.

Cash comes from cash as an outcome of that as well and we suspended share repurchases when we saw.

Tougher demand environment in March in fact March early on in March It was down double digits and so that was a appropriate response response to the metrics that we're seeing at the time.

We as we said we have we're expecting to end the year with three times EBITDAR leverage and generate about $200 million in cash from operations, we have us substantial amount of liquidity available.

On the revolver and so there is room within that guidance for share repurchases and we will keep you updated as we progress through the year.

Thanks, that's very helpful.

You bet.

Your line is open.

Good evening. Thanks, a lot for taking my question make single digit quarter to date. When you guys reported the first quarter. So really for you to end the quarter.

Down treat or implied March.

It was down low double digit or even worse.

Is that alright estimate of where.

Both digit declines.

Pretty much immediately following the.

The invasion of the Ukraine and the pressure on.

On consumers we finished.

March with an exit rate of minus.

Three for the last couple of weeks.

And that's in line with where we ended the quarter.

Got it.

And are you able to share how you're tracking in April thus far on a demand basis.

Yes sure April .

Really small sample period with inclusive of an Easter shift as well, but we feel our guidance of flat to low single digit growth for the balance of the year is appropriate.

Okay.

So then my follow up question.

It is really.

One of the key questions that folks in the investment community have when trying to figure out.

<unk> number or some of your peers is what's really a reasonable floor for earnings.

Basically the question is.

With the new guidance.

And Scott in the lower end of dollar five how do we get confidence that this does not get revised further in the next few quarters.

Have you assumed in your expectation of demand.

Slightly up going forward have you assumed in.

An improvement in the macro or do you expect to get there even if the macro stays where it is and then b.

What have you assumed for the supply chain backdrop in this guidance.

Yes, well.

Certainly this is a challenging environment to operate in and we.

<unk> recognized that and have been working on finding ways to overcome all the external challenges.

We've made good progress in a rapidly evolving marketplace.

We've made the progress necessary in our demand that gives us.

The confidence in flat to low single digit growth for the balance of the year.

So much of this is how to make the adjustments to be able to reach and activate the premium.

Sumer in this new have view that and we continue to test and learn and we're.

A few weeks.

Less than two months into this new environment and we've.

We're looking forward to applying our tactics in a bigger demand period like the memorial day period as as we move forward.

The Q1 had really two.

External events and had the omicron variant in January and then of course it had the onset of the war late in February .

And we delivered ahead of demand.

Down 3% in the first quarter, so thinking about the remainder of the quarters, we don't expect to.

External events too.

To start with in another quarter.

And the balance of the year, but we do consider the current environment as prolonged the second part of your question was how we're thinking about supply.

Clearly, we have been dealing with different delays in supply, but thus far for the year, we have been steady on the allocation although.

The challenges have been timing has been different which of course drives some inefficiency in the business.

We're still.

Staying staying closed with our customers who are.

Lyle and steady in our cancels and returns remained steady.

Overall brand sentiment and brand leadership is strong and we continue to navigate those delays.

With pretty pretty strong outcome, we're very strong outcomes.

Based on the advantages of this vertical model.

No.

What we contemplate in the guidance is the allocation that we were given for this year not we're not baking in more than than that.

But we also recognize that there are delays and thus a fairly wide range in our guidance.

Until I will add on a little bit.

There is another way to think about our growth expectations as well and that is price.

Pricing.

And new distribution new stores combined.

Would add normally mid single digits.

Type of growth. So we're actually thinking about this in terms of having.

Negative.

Units lower unit volumes this year than last and so that's something that you should.

Be aware of.

<unk>.

And then the benefit of coming into the year with a significant backlog.

Helps us.

<unk> steady and in fact helps us with our.

<unk> financial results for the year.

We we've mentioned in the past that we have the equivalent of about we came into the year with the equivalent of about $150 million worth of net sales in our excess backlog as we get through the year as long as we are able to get the supplies, we need that would we.

Have that as a as a.

Backstop against our performance for the year as well.

Got it.

Any helpful. Just one quick question on <unk>.

On the pricing with the latest round of price increases.

And then what was the amount of the increase if you can share. Please yes.

So we've taken last year.

About call it $140 million worth of annualized price increases the last one was based in October , but we took a smaller one at the beginning sometime in the middle of Q1.

As well very focused ones. So in total it's about 150 call it $1 million worth of annualized.

Price increases and.

Those will those are being actualized now as as we create new demand those are all at the new pricing of course.

Got it. Thank you very much and good luck with the rest of the year.

Thank you.

Your next question comes from the line of Brad Thomas with Keybanc. Your line is open.

Hi, good afternoon, Shelly good afternoon, Dave.

Just to follow up on some of the recent demand trends.

The timing, where you've had some weakness does seem to also coincide with.

The big months last year for stimulus payments have you all had a chance to look at that more closely and how much do you think that's been an issue for you.

Excuse me.

Well, we certainly looked at it Brad.

With our.

Demographic of our customer.

We didn't really.

A big benefit it's hard to discern frankly, when somebody comes in and they are buying.

So the number of smart bed theyre not necessarily telling you that they are doing it because they got a stimulus check, but we don't we don't typically see.

Activity surrounding when those checks got issued.

Just like when.

Around.

April timeframe when people start getting there.

Refunds from the IRS, we don't we don't tend to see a lot of spike in our in our performance.

Brad what we did see was a very.

Acute.

Acute change in consumer behavior.

That time perfectly with the start of the war.

And.

That have progressed and then.

It also showed up in the consumer sentiment and the inflation numbers in March and that did improve slightly at the start of April .

In the overall consumer sentiment that that correlation with the strongest we could see.

That's helpful.

Just along a similar vein are you seeing anything different of late in terms of the.

The interest in or the uptick of your financing options with synchrony and.

Can you talk a little bit about if theres been any change in approval rates and how perhaps the cost of that financing may change fee with interest rates being higher.

Well, Brad it's certainly on our mind has.

As LIBOR goes up for deferred financing costs go up obviously that will affect our the discount rate that would be.

We share that share with synchrony.

Wherever we have a wide range of offerings in terms of the tenure tenor excuse me of the timing of our financing offers and we generally look at financing and promotions as a collective bud bucket and manage them. Accordingly, we also have a great relationship with synchrony.

And.

Are coming up with creative ways to offset some of those pressures in terms of changes too.

Approval either dollars or rate.

Have not yet seen any impact on either.

Brad I'll add one more thing just some color as to the specific color on March four our total Buckeye to promotion dollars and financing dollars was a very similar year over year in total we utilized this bucket as a conversion tool versus and.

The track in our business, which is different than most of our competitors.

So keep that in mind Ed.

If you look at our year over year specific promotions or financing offers.

They actually look pretty different than prior year, but yet the total is the same and thats one of the advantages of our business model and the.

Rapid testing and learning and adjusting that we make that we referenced so often and so just a little additional color there.

That's very helpful. Shelly, maybe just one last one for me.

With the delays that we're seeing I mean, we're really still at some pretty long levels while.

Much of the industry that doesn't have the complexity that you or your products have.

It's pretty widely available today.

When you talk to your customers and store personnel do you get the sense that you were seeing any demand destruction of sales loss, just because the customer doesn't want to wait right now.

Okay.

Well. This is such an important question, Brad and obviously with our model in and direct relationship with the consumer we stay very close to two deaths and.

If you ask a few weeks ago, we were.

One to two weeks and then with the signal.

The delay with with Shanghai being shutdown, we did extend that in our current delivery window is five two to eight weeks and yet.

A couple of weeks when.

Well right.

Closer to three weeks or four weeks.

When when we have when we know and see the day these chips.

Our our airplanes.

Okay.

Come to us through.

Airfreight.

The moment they leave China, we will make the adjustment back to one to two weeks. So it does fluctuate quite a bit.

For the most part we can service a customer who has an immediate need.

With the solution that is closer in so I'm talking the majority of our smart beds are right now 5% to eight weeks, but there still are some.

Shorter closer in delivery dates to service customers. Our team members is such a great job of developing that relationship understanding our customers' needs and servicing them.

We have a lot of confidence that we're continuing to to service the customers in the way they need to.

That's very helpful. Thank you Shelly.

Your next question comes from the line of Curtis Nagle with Bank of America. Your line is open.

Good afternoon. Thanks.

Just wanted to dig in again.

Question on I think a 12 point delta in pricing to trend.

The delivered in the order.

<unk> Q.

I guess, just a little surprising given an environment, where demand was lower people are worried about the economy.

Alright, what drove.

That delta from our desktop new shelf tactics or promotions or whatever it might be.

That led to higher unit conversion or higher price conversion could you talk about.

For sure Curtis and Youre talking about the 12 point swing in our <unk> metrics.

The metrics that I highlighted was.

The two point decline in delivered a R U.

Versus the nearly 10% increase in the demand <unk>.

And so what youre seeing is folks wanting.

The full gamut of our features and benefits that come with the higher end of the lines and.

As a result.

They are willing to wait.

A longer period of time to get that delivered because they we knew coming into this quarter into Q1 excuse me that we had some constraints on.

Chips that were needed for our.

Flex that adjustable base flex that number three.

Which comes with foot warming and other benefits that consumers really embrace and so that was that was that.

What's happening consumers.

That are out shopping want value and they're shopping at the higher end of the line.

Okay, and then in terms of the negative.

To ticket.

Couldnt deliver the beds.

Not to belabor the point here just want to make sure I understand it.

Couldnt deliver there is very high and Thats good.

<unk> or.

Im just trying to figure out why there is there going to be material. Okay alright.

That's exactly right I mean, our.

Our units were down 5% on our ARU is down 2% on the delivered side at the same time, we added $50 million worth of net sales.

Benefit into our <unk>.

<unk> delivered backlog.

Okay, Okay understood.

And.

Okay.

Focusing on some of your other commentary.

Yes.

No no I was little surprised to hear higher gas price was called out as a potential headwind or a headwind in the quarter.

So about that retails for many thousands of dollars I think more premier consumer so why would that be a headwind for.

Okay, so more premium consumer.

Sure Howard square that.

There are a couple of <unk>.

Elements, where I highlighted that in my remarks, one was the impact on consumers and.

In terms of what they are seeing at the pump and the inflation impact.

That theyre seeing in food prices and so I called that out as those were triggers that were highlighted in the consumer sentiment survey that inflation was causing them to be more cautious in and so we saw that for sure in March and the consumer sentiment side.

Our cost structure side.

We absolutely have gasoline prices as input cost for our business we have one.

1000 home delivery technicians around the country that are using vehicles to deliver our smart beds to customers' homes and of course fuel is a component that is part of that process.

Okay, maybe I'll follow up offline.

Okay, maybe I misunderstood so happy to talk about in Africa.

Okay, Josh any other questions.

Later are you there.

So I guess, we do have another question we have a question from Bobby Griffin with Raymond James Your line is open.

Let me sneak in one more.

Just one quick follow up Dave understanding and show that the predicting demand right now it's pretty tough.

When you think about you guys are assuming flat to slightly up demand. We ended the quarter a little bit lower is the EPS guide more dependent on demand snapping back to where you wanted to go or is it more dependent on just the cost side of things that are also hard to predict I guess said another way.

We get to the end of the year and demand down, 3% or 5% kind of in line with <unk> trends.

We can we still hit the guide of $5 to $6 or would that be enough to drive below the guidance.

Bobby.

There are a lot of levers to drive performance and we're going to use them all.

So if demand is lower than what we expect obviously we have.

Backlog to cushion some of that we also have the opportunity within the business to control our spending differently and.

All of those levers are.

And then the gamut of what we will do.

So yes, even if.

Demand is down.

You said low single digits.

We believe we can still get to the low end of the guidance range.

Thank you that's very helpful exactly what I was asking and best of luck here in a tough environment.

Thanks, a lot Ravi.

Okay.

Your next question comes from the line of Peter Keith with Piper Sandler Your line is open.

Thanks, Dave if I could follow up on that.

The guidance does include servicing significant excess backlog.

You are running.

I think it's around $200 million right now where would the midpoint of guidance land do you for servicing excess backlog does that mean about half of it.

Okay.

It depends on.

At defense.

It defends sorry, I'm not being trying to be elusive, Peter but like I, just said to Bobby.

A lot of different things can go different ways, meaning demand could ebb and flow.

Our cost structure, we will certainly ebb and flow supply has certainly shown that it can be.

Positive and challenging sometimes so.

The midpoint of the guidance I would say is the is the midpoint of our that demand is in that positive territory for the year and that would include less use of the backlog to get to the total.

Which we are seeing low double digit net sales growth for the year.

I can help that I can help you with modeling in the in the after call. If that's helpful.

Yeah, maybe just one last one for us well, we're in a public forum.

Yes.

The sales are difficult to model for US right now how should we think about Q2.

We are we had negative or positive I have no idea.

Yes, very good.

Yes, I agree is hard and you probably.

<unk>.

Look I expect our units to be less than they were in Q1 by call. It.

No.

Up to.

We did 108000 units in Q1, we will do.

Call. It I don't know 90 to 101 hundred call. It 90 to 100000 units in Q2, but our ARU will be significantly higher based on the comments that we said earlier, so our sales and our profitability is going to be much bigger than what we've had in.

In a normal Q2.

When we get to 2023 modeling you'll have to remind you of that so that you do.

We baked that into your thinking since then as well but.

Because of backlog service this year.

Flip of having now the chips that we needed for our flex the three adjustable basis.

That will benefit us in Q2 deliveries. So you should model Q2 sales higher than you would have otherwise thought.

For net for net sales.

Very good very helpful. Thanks, so much.

You bet. Thank you.

Alright, Josh I think that takes us to the end.

Yes, there are no further questions I will turn the call back to you for closing remarks.

Thank you for joining us today, we look forward to discussing our second quarter 2022 performance with you in July .

<unk>, well and dream Big.

This concludes today's conference call. Thank you for joining you may now disconnect.

Okay.

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