Q4 2022 Sleep Number Corp Earnings Call
non-GAAP financial measures and supplemental financial information included in the news release or that May be discussed on this call.
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 thank you for joining our 2022 year end earnings call. My sleep IQ score was 83 last night.
Before providing details about our 2022 results I'd like to express my appreciation to David <unk> for his many contributions to sleep number and wish him well in his future endeavors.
Chris could mark.
Remember executive Vice President and Chief Human Resource Officer has assumed the role of interim Chief Financial Officer, as we conduct a search for a permanent replacement.
Chris has been a sleep number team members since.
2005, and has held a variety of financial and operational leadership roles. During the past 18 years prior.
Prior to joining sleep number Chris served as a CPA NDA assurance and advisory practices of E Y and Arthur Andersen.
During today's call, we'll review our 2022 financial performance share early observations about the 2023 business climate and our outlook for the year and highlight 2022 strategic milestones that underscore our long term orientation and.
<unk> fleet number to capitalize on profitable growth opportunities when the economic environment improves.
Fourth quarter net sales increased 1% to $498 million with an 18% decline in demand for the quarter, which was offset by the servicing of our excess backlog.
Our Q4 loss per share was 24.
For the full year results included net sales of $2 1 billion down 3% year over year and earnings per share of $1 60.
Our 2022 performance reflects the sustained impact of external business and economic disruptions that began early in the year.
Constrained micro chip supply to spread up only cloud.
The war in Ukraine, and skyrocketing costs drove record low consumer sentiment, which significantly reduced demand and pressured profits.
Yet as we navigated a steady stream of macro challenges commitment to our purpose galvanized our passionate team to find creative solutions to enhance our customers' experience.
We completed two important milestones that strengthen our sleep health and wellness technology leadership for the future. We introduced the climate 360, smart beds with our new technology platform. The greatest innovation in our company history, and we completed our five year transition to us.
Single Assembly and fulfillment network.
With the start of 2023, we are experiencing early signs of improvement in our business associated with the following advancements.
For the first time in 18 months, we have adequate chip inventory to support our full line of smart adjustable basis, including flex, one and flex fit too which have been unavailable.
September 2021.
This enables us to offer our entire range of good better best to customers in an environment, where price sensitivity remains high.
And we are operating with normal delivery times, thanks to improvements in our micro chip inventory.
In addition, we are seeing somewhat more favorable economic indicators, including improving consumer sentiment.
Although still near historic lows consumer sentiment rose to nearly 65% in January a five point sequential improvement versus December .
With these improvements we cautiously increase our planned media spend to capture near term market opportunity.
We are encouraged by the related improvements in demand traffic trends in media efficiency since taking this action.
Our quarter to date demand is down high single digits against our toughest 22, 2022 comparison period and represents a notable sequential improvement from the fourth quarter.
While these early 2023 trends are encouraging we remain prudent in our planning with assumptions for 2023, reflecting continued uncertainty in the environment. We are prioritizing demand and margin improvement initiatives that support both the shore.
And long term, while also controlling expenses this.
This combination positions us for a strong rebound when consumer sentiment improves. Although we are also prepared to execute additional contingency actions should conditions warrant.
For the full year, we expect EPS in the range of $1 25 to $2 and yet the midpoint of our range net operating profit growth of at least 20%.
We expect to generate more than $100 million of cash from operations in 2023, including positive free cash flow.
Our recent strategic accomplishments directly contribute to our 2023 performance and benefit our business long term further strengthening our leadership in consumer innovation and wellness technology.
For example, since its introduction last October our climate 360, smart bed has outperformed our sales expectations and customers are raving about how the smart bed temperature benefits comfort and design are improving their sleep quality.
Here are a few customer comments, one customer said, great first night perfect Bedford couple with different sleep settings at temperatures. Another stated climate 360 has greatly improved my ability to fall asleep and stay asleep throughout the night and a third noted I bought this.
A month ago, and it's so worth it.
While the climate 360, smart bed is still a small percentage of our total sales mix better than expected demand is resulting in current deliveries being scheduled into late March our suppliers have increased component output to consistently support the higher climate 360 sales.
<unk> and we expect to be on normal delivery times for this fabulous smart beds by the end of next quarter.
Consumer response to the climate 360, smart bed is encouraging ahead of our planned introduction of our Nexgen spark deadline.
<unk> is on track for the beginning of the second quarter.
Nextgen smart beds incorporate the new technology platform, which not only supports our customers adapted sleep experience and related health and wellness benefits, but it also reduces supply chain complexity due to utilization of more readily available components.
In addition to our next Gen Smart deadline, we plan to introduce our new lifestyle furniture collection in April which extends our customers' sleep benefits this furniture.
Optimizes sleep and wake routines through ambient lighting designed to complement your circadian rhythm and embedded speakers that created some blanket to minimize noise disruptions.
The collection also includes optional accessories that support changes in life stages and health conditions.
In home testing is showing very high satisfaction.
And later this year, we will transition to our new sleep number App. This next evolution of our current sleep IQ App will integrate all sleep number digital touch points for a simpler experience for our millions of smart sleepers and further advance our connected health strategy.
We are supporting demand initiatives with strategic partnerships, new brand marketing and media.
Since restoring our full portfolio, we've seen sequential demand immediate efficiency improvement.
We also plan to introduce the next generation of smart beds with a new marketing campaign.
World Class partnerships amplify the performance and recovery benefits of sleep number smart beds with impact and scale.
At Super Bowl 57, we announced a five year renewal of our partnership with the National Football League as their official sleep and wellness partner.
The NFL is one of the worlds largest audience engagement platforms.
Our brand health and digital engagement metrics from the past five years underscore.
The benefits of this partnership which include broadening our brand reach and deepening our brand relevance.
Our partnership has built.
Unparalleled product adoption with 80% of NFL players owning fleet numbers smart beds.
In addition to demand driving initiatives improving gross profit is a top priority. We expect to begin realizing meaningful gross margin improvement in 2023 due to some easing in commodity cost reduce cost premiums using from using broker.
<unk> parts and fewer expedited deliveries.
And operating efficiencies from a more even flow of microchips.
We will also begin to benefit from operating with a single more flexible and scalable assembly and fulfillment model, our integrated network enables greater visibility and control of product quality that will contribute to improved service and gross margin through increasing delivery.
Reliability and expanding opportunities for new <unk>.
In home services, providing greater supply chain flexibility and disruption optionality and more balance in our manufacturing and distribution process, which reduces waste and drives cost savings.
Each of these strategic advancement strengthens our competitive advantages supports profit margin improvement and enables.
Long term value creation for all our stakeholders.
Now Chris will provide additional detail on fourth quarter and full year 2022 performance and our outlook for 2023.
Thank you Sally.
And good afternoon everybody.
I am pleased to join you today as interim CFO of sleep number.
As we lead through this transition we are fortunate to have an incredibly talented finance team, including Dave Schwantes, Vice President of Investor Relations and <unk>, who will join Shelly and me for Q&A.
It is a privilege to lead this experienced team during the active search for our next Chief Financial Officer.
In 2022 external factors had a significant impact on both our fourth quarter and full year results.
We reported net sales for the fourth quarter were $498 million.
Of 1% versus the prior year.
Our Q4 loss per diluted share of 24 was at the lower end of our guidance range.
We delivered 93000 smartphone units in the fourth quarter consistent with expectations shared in our third quarter earnings call.
Our delivered <unk> increased 1%, primarily due to net pricing actions.
Gross margin rate for the quarter was 54, 7% down 220 basis points from the prior year.
We came in short of our gross margin rate expectations for the quarter as we faced modest downward pressure on delivered product mix and inefficiencies due to the uneven supply of chips.
We offset most of this gross margin gross profit pressure was spending controls.
Our 2022 full year results included net sales of $2 1 billion full.
Full year EPS of $1 60.
<unk> reflects a 3% net sales decline of 350 basis point reduction in our gross profit rate.
And operating expense deleverage from the sales decline.
We reduced planned operating expenses more than $150 million during the year and ended the year with operating expenses up 1% year over year.
In 2022, we prioritized investments in long term initiatives, including our product innovation pipeline, while reducing spending across the organization.
Interest expense impacted 2022.
<unk> by more than 40 versus the prior year, primarily due to the average interest rate on our revolver, increasing by over 200 basis points year over year.
Despite the challenging environment, we generated $36 million of cash from operations and EBITDA of $148 million.
We ended 2022 with $359 million of liquidity under our revolving credit facility and a leverage ratio of four four times EBITDAR below our amended five times covenant.
Now, let's turn to our outlook for 2023, we are excited to have had our full smart bed and base assortment in place since the end of December benefiting from an improved flow of semiconductors. The.
The improved chip supply has allowed us to normalize delivery times for our customers and will provide greater predictability for our manufacturing and fulfillment teams.
We will also benefit from a full year of climate 360, smart bed sales introduced in October 2022, and our Nextgen smart beds and lifestyle furniture, which we will begin introducing in the second quarter.
For 2023, we expect full year diluted EPS of between $1 25 and $2.
To your specific assumptions included in our 2023 outlook.
We assume consumer intent consumer sentiment will remain at or near current levels at least through the first half of 2023.
The outlook assumes net sales are flat to down mid single digits versus the prior year.
This includes the expectations of a low to high single digit net sales decline in the front half of the year as we face tougher compares.
We expect improvement in the back half of the year with net sales down low single digits to up mid single digits, when we face easier comparisons and benefit from Nextgen smart beds introductions.
Our net sales guidance assumes two to three percentage points of headwind from year over year backlog changes.
We expect our gross margin rate to improve by over 150 basis points in 2023, driven by modest improvements in commodity costs and avoidance of brokerage part premiums and expedited delivery costs, which impacted us in 2020 to the.
The improved supply of semiconductors entering the year is also expected to significantly improve our labor utilization and enable production and delivery efficiencies across our manufacturing and fulfillment operations.
Pricing actions taken in 2022, including $30 million of annualized actions taken in December of 2022 will provide ARU and gross margin rate benefit in 2023.
We are carefully prioritizing our spending in the current environment, which is reflected in our guidance for the year.
At the low end of our outlook, we expect operating expenses to be down more than $30 million versus 2022.
At the high end of our guidance operating expenses are expected to be up less than 2% year over year.
Our guidance also includes approximately 80, a pressure to fund broad based participation incentive compensation programs. We expect next gen smart bed launch costs of approximately $6 million to $7 million in 2023.
At the midpoint of our guidance range, we expect to grow our operating profit by at least 20% in 2023, and our operating profit rate by approximately 100 basis points, most notably from the expected improvement in our gross profit rate.
We expect 2023 EBITDA to grow more than 20% versus 2022 at the midpoint of our range with at least 150 basis point improvement in our EBITDA margin.
Our outlook assumes interest expense of approximately $35 million for 2023 with an expected borrowing rate on our credit facility of 7% compared to an average rate of under 4% in 2022.
We are planning for an effective tax rate of 27% for the year, including discrete tax expense in the first quarter, primarily due to stock compensation accounting.
We intend to generate more than $100 million in cash from operations in 2023 and positive free cash flows.
And plan no share repurchases for the year.
We expect to end 2023, with a debt leverage below four times EBITDAR.
For the first quarter of 2023, we expect net sales to be flat to up low single digits versus the same quarter last year and expect to deliver approximately 90000 smart bed units I will now turn the call back to Shelly for a few closing thoughts before turning to Q&A.
Sure.
Sure.
Prioritizing innovation leadership, and maintaining a thoughtful strategic progress while prudently managing costs positioned fleet number to capitalize more quickly unprofitable growth opportunities in the future.
Is inspiring to engage with sleep number team members.
Throughout our company I have been touched by their self with courage and commitment and so truly grateful for their hard work and their passion for our life changing sleep innovations, which are creating a more sustainable future for all of us.
Now, Chris Dave and I will be happy to take your question Kelly. Please open the line for questions.
Thank you at this time, if you do have a question that will be star one on your telephone again star one for questions. At this time, we'll hear first today from Bobby Griffin with Raymond James.
Good afternoon, everybody. Thank you for taking my questions.
Hey, Bobby.
I guess first I wanted to touch it seems like a good bit of the outlook here to get a little bit better in profitability does center around the recovery in gross margin and with this business. It really does take around having gross margins as close to above 60% as you can get so can we just unpack a little further for everybody here the visibility into the 150 base.
With <unk> plus.
I understand there's been a lot going on in the supply chain, but is it more on thing now that you actually have visibility into you have you had the chance you have the cost under control you kind of add the delivery aspect or is there still some variability in there for us to keep in mind.
Hey, Bobby this is Dave Thanks for the question.
Certainly improving our gross margin rate, it's a big priority for us for 2023, and as Shelley mentioned, we're looking to improve that by over 150 basis points during the year.
As we've talked about over the last couple of years, we've absorbed significant commodity pressures.
In our cost of goods sold along with really inefficiencies that we've also taken on because of the uneven flow of chips.
So the good news is as we enter 2003 is the first time since really September of last year that we've had the full product assortment in place.
And the even fluid shifts that we really need to get efficiencies. So maybe turning to some of the specific drivers that we look forward for 'twenty three.
Starting with we expect about $15 million to $20 million of benefit from the easing of commodities. So we've seen some modest easing of commodities here late in the year specifically in foam and we also are excited to no longer be procuring parts and the broker markets, which we paid premiums in those markets during <unk>.
Last year to procure some of our components and also we retain expedited delivery costs. So if you combine the commodity easing with some of the avoidance of some of those costs, we see that worth about $15 million to $20 million of year over year benefit, which is about 80 basis points.
Second area that we look forward is really pricing. So we did take pricing in August of 'twenty. Two we also took about $30 million worth in December of 'twenty, two and as you look at those pricing actions benefiting our 'twenty three results, we expect that to be worth about 80 basis points of benefit as well.
The third area would really be around mix. So.
We're excited to have our climate 360 now in our lineup with it was introduced in October had really strong demand for it during the fourth quarter and several of those units are sitting in our backlog as we enter 'twenty three and we look for those units along with a full year climate 360 sales.
Benefiting our gross margin rate for the year.
And we do expect named it throw one item going the other direction some modest deleverage from.
Expected lower unit volume for the year, so that's going to create some fixed cost deleverage across our business. So really kind of three main buckets with with really one headwind being deleverage from unit unit volumes.
Thank you Dave.
That was very clear I appreciate all the details.
I guess secondly for me you guys talked a little bit about the shape of the year with back half revenue a little stronger than the front half revenue given the comparison is there any issues on the shape of profitability as it relates to the covenants.
You guys did some work to I think take it up to five times.
As the ceiling for the covenant.
Anything we have to think about for the first or second quarter covenant related.
Yeah, So Bob as we look at the shape of the year, we certainly expect the net sales performance to be.
A little bit stronger than the first half of the year part of that is just the compares we have are going to be much tougher, particularly in Q1. So we do see if you think about the proportionality of sales a little more sales falling in the first half of the year and a little less little less in the first half a little more in the back half sorry, and if you look at the EPS splits I'll say at the midpoint of the <unk>.
<unk>.
Do we think about our EPS kind of being 40% to 45% in the first half of the year and the rest of it being in the back half of the year.
Relative to the to the covenants, we did have a amendment that we did back in October that did.
Amend our covenants to be up to five times leverage through the second quarter, and our forecasts have as well within those leverage covenants.
Through the second quarter and through the balance of the year.
Thank you that's exactly right before I appreciate all the details and best of luck you're navigating this.
We'll hear next today from Peter Keith with Piper Sandler.
Hey, Thanks, and good afternoon, everyone.
Looking at the sales Guy there's a lot of puts and takes and I was hoping you could kind of break it down for US just in terms of how youre thinking about demand versus pricing versus backlog recognition and any other factors that may not be thinking of.
Okay.
Great. Thanks for the question Peter asked.
Start and Dave can provide some additional color here.
First of all just start with we're really pleased with the sequential demand improvement that we've experienced.
Since restarting our full line of smart adjustable basis with normal delivery timelines as a result of having the semiconductor chip inventory that we're well positioned.
With our chip inventory.
For the balance of the year and.
February .
Represented another step up from January so we're.
Happy to see that against our most difficult comparison.
And at the same time.
We know that as we progressed through the year that compares get get easier.
So thats a little bit on the shape.
Yes, I think Peter maybe to add a little bit of color on both ARU and units, which I think is embedded in your question. So.
We are looking at ARU being of at least mid single digits for the year. There's a few areas that we think are going to be benefiting us in the year number one pricing. So the pricing I mentioned in the gross profit question thats going to be a plus up as well as.
Really the benefit of mix. So the climate 360, smart beta it starts at about $10000 for that product and as that gets in our mix. It really helps with area as well. So that's how we see the ARU side of the business.
Implied in our guidance of being being flat to down mid single digits for net sales would imply we expect units to be down year over year I think.
As we progressed through the year, we do expect the greatest challenges in the first quarter and then expect those to moderate, particularly as we're up against the easier compares the balance of the year. So.
Maybe just to touch on quickly on the industry the industry data isn't out yet for the year, but we actually believe that like others that I think the bottom the bottom has probably been reached on units in 'twenty two but we're just not frankly expecting any significant improvement in units in 'twenty, three and we really think it's <unk>.
<unk> just based on how we how we see the metrics in our business to be cautious about the top line and.
Not get ahead of ourselves in terms of unit expectations for the year.
Okay.
And within that.
Maybe Chris setup.
I didn't get it down, but how much backlog revenue would be recognized in 2023.
Yes, so Peter we ended the year with about $40 million of excess backlog and largely we expect that to benefit the first half of the year.
So we talked about year over year, we still expect a drag because of year over year backlog changes. So we did get more benefit from backlog in 'twenty, two 'twenty three but specifically that backlog that we have at the end of the year, we do expect it to largely benefit the first half of the year.
Okay great.
Another topic Thats.
Getting more attention is just financing costs with the rise in interest rates. So we know you guys.
Through a third party finance about 50% of your beds.
What are you guys seeing with financing costs and maybe are you or is that going to show up in the P&L at all or do you have to cut back on the.
The months of interest refinancing provided.
Yes, Peter that's a great question.
Utilized both discounts and finance team as conversion tools in our business and Lee we think about them as a total bucket and you now have.
Pretty creative approaches depending on the current environment.
To be able to execute in different ways financing is definitely more costly in fact added about 100 basis points of pressure in 2022. So as we are here in 2023, where we're actively managing the.
<unk> cost.
Along with our discount bucket so we're.
Thinking about it in totality I think a good example would be during the President's event, we had 24 month financing on the low end of our line.
That carries a lower gross margin.
And then 36 months on the balance of our line. So just being creative in our approach to be able to mitigate that that core.
Cost.
I'll still driving the performance.
Okay. Thank you very much that's helpful.
We'll hear now from Brad Thomas with Keybanc capital markets.
Hi, Thanks for taking our question.
The first just around the assortment and I knew that.
You had limited or no availability of our future.
Popular selling adjustable bases.
I was wondering if it's possible just to frame up for us and I know you have.
The main markets.
Thanks.
But how you may be.
What kind of headwind you had from an assortment standpoint from not having products available.
And when we think we can get to the point, where theyre all available with the assortment that you want to have here for this year.
Great. Thank you for the question Brad.
We had the constrained micro chip challenge for the past 18 months and that resulted in us.
Not having the flex that run in the flex fit to adjustable base in our assortment.
Until December 26, 2022 so.
At first it didn't appear to be hurting our demand.
Once the consumer sentiment fell last may it really had an impact on our performance.
We could see and we could see that on the digital behavior.
From customers and so we.
So excited to be in this position of having the microchip inventory not only for our fall assortment, which means we have good better and best smart adjustable basis.
To support our full line.
But also having that normal delivery time periods I guess, the best way I can describe how big of an impact it had would be.
Sequential improvement that we've had from December .
In the fourth quarter, having demand down 18% and then right.
Right now quarter to date down.
Hi.
Single digits.
That's a pretty pretty significant improvement.
That we saw.
Right away with that change and then the media effectiveness has been real strong as well and then here in February .
Another step up in performance during our most difficult compare so where we are.
We're super excited to be operating on all cylinders again, and having the effectiveness of our selling process with good better best in.
And then the climate 360 on top of that and then heading into the balance of the year with introducing our next generation of smart beds with new creative thin and.
Lots of initiatives to be able to drive performance, especially as that consumer environment or when the consumer environment improves.
That's helpful Shelly.
<unk> got a tail off of that can you talk a little bit about the approach will be taken with advertising and and.
With with <unk>.
Operations kind of tightening up here.
Given that the world is hopefully getting better than it was during the height of the pandemic.
How are you feeling about.
Perhaps putting more into advertising there to see if you can drive some greater traffic.
Well, we started doing that when we return to our our full assortment.
And normalized delivery time periods at least against our plans and immediate but we are at the same time, we're driving media effectiveness and I think that's important to highlight that we're we're going to be prudent.
In our approach.
And continue to.
Drive performance and.
And.
Cautiously take steps forward that way.
Sure.
We're definitely making making some good.
Progress and we have new creative to support our next gen.
Smart beds.
I appreciate it thank you Sean.
Well hear now from Seth Basham with Wedbush Securities.
Thanks, a lot and good afternoon. My first question, if you could add some more color on the improving demand trends quarter to date.
Was the decline in demand in each of January and February and if you look at on a two year stack basis was there much improvement from January to February .
Okay.
Hey, Seth.
Yes.
As I highlighted we're down high single digits quarter to date with the step up in February if you look at last February for the presidency band we were.
We were up high single digits against a record year.
The year before.
And.
So definitely.
Definitely a step up in our performance here this year and against tougher compares.
That's good to hear that Youre still anticipating no material improvement for the remainder of the quarter.
Despite the fact that compares ease.
Emil.
As we look at it.
Backdrop is still a very cautious consumer.
With inflation and drawn down savings and higher interest rate variability. So we're.
We're just entering that very in a very prudent manner and consumer sentiment is has the highest correlation has the highest correlation to our trends overall.
So while we'll see we're going to continue to.
Two.
Take steps forward in and at the same time.
To be very prudent.
Got it. Thank you and then my second question is on SG&A, just thinking about some of the moving pieces in 2023.
Talk about advertising before should we be thinking that advertising being a point of deleverage.
And then on incentive compensation that seems like a pretty big deleverage point are there any other big moving pieces to think about thank you.
Yes, Hi, Seth this is Dave. Thanks for the question I think if you look at SG&A kind of broadly.
We would expect modest deleverage from SG&A in total and really Thats, primarily due to the fact that we are guiding to sales being flat to down mid single digits. So.
At the midpoint of our guidance I think in total you're looking at total operating expenses pretty pretty flat year over year, but with some modest deleverage because of where we have the sales pegged.
As you kind of move through the through the different elements of SG&A and you look at sales and marketing.
We would expect some leverage in marketing overall and some deleverage in selling again, we have more fixed cost and the selling side. So they do tend to de lever a little bit more and we do expect to see improved marketing efficiency as we benefit from having our full product assortment normalized delivery times and then we're excited.
About the nexgen products that were introducing here in the second quarter. So we think that all is going to lead to some improved marketing efficiency year over year, we are expecting some modest deleverage and if you think about G&A and R&D combined.
I think if you look at base spending base spending would actually be down slightly but then when you do bring in funding a very important variable comp programs for the.
Broad based employee set that does bring in some pressure relative to just the overall leverage in G&A and R&D.
Got it that's helpful and the pressure from higher financing interest.
That flows through the selling component of SG&A.
Yes, so the financing expense itself that we utilize at the time of purchase that runs through our sales and marketing line.
The interest cost obviously related to a revolver runs through the interest expense line, which is below NLP.
Got it alright, and you expect that line to deleverage in 2020 through the financing costs associated with promotional financing programs.
We expect financing to be relatively flat I think Shelly mentioned that we had about 100 basis points of deleverage in 'twenty, two but we arent expecting that to be a big source of deleverage in 'twenty three in part because of how we're going to manage the programs.
Understood. Thank you very much.
And as a reminder, that is star one to ask a question, we'll hear next from Atul Maheshwari with UBS.
Thank you and good evening.
It's a lot for taking my question Shelly you mentioned a couple of times about.
Normalized <unk> times, even supply of chips.
And some of the excess cost of incurred last year that should potentially not recurred. This year. So would it be fair to say that keep numbers supply chain has largely of life at this point.
Has largely I'm, sorry, you cut out.
Yes, it is the supply chain largely volume, but yes.
Yes that is absolutely fair to us thank you.
Okay great.
In that backdrop chassis.
You're still guiding to gross.
March and which is.
Oh yeah.
200 basis points.
Below more than 200 basis points below.
Peak level.
I guess, what is holding back the gross margin even with normal supply chain.
What are some of the.
Some of the drags on that gross margin question, because today that you should be able to put interest recovery later.
Yeah, I'll I'll start and Dave can add some additional detail.
The first of all let me just start with Hey, we expect improvement this year.
At least 150 basis point Tim.
Both the easing of.
Commodity costs as well as.
Having the even flow of.
Chip inventory, so that we don't have that.
The stops and starts in our delivery timeframe and also not using.
The airfreight and expensive broker markets that we've had to these past couple of years.
And then.
We still have significant inflation cost.
Onboard debt that.
We took on this last year and pricing has offset some of that.
And and we are seeing some easing in the commodity costs.
But we have more more work to do to get that.
Get back to the rates that we were at before and that will take us.
This year end.
And into next year.
Yes, I would just add.
Go ahead until I would just add to that this is Dave sorry that if you think about our business I mean, we certainly have been investing and developing the business to support our long term trajectory. So we just completed at the end of last year.
A whole new delivery network, which is supporting a much improved customer experience.
And we're excited to as we as we rebuild our unit volumes to really leverage that new network that we've established and so.
As I mentioned earlier, we think we're probably at somewhat trough ish levels for units for the industry and probably for ourselves and as we rebuild our units over time that presents huge efficiency and leverage opportunities that we can scale across the business.
Got it.
It has to fall a couple of follow ups here.
Our.
Costs that are part of your Cogs. Currently that you believe are structurally higher than where they were pre COVID-19 could you share. Some examples if you if you have.
And is it realistic.
Do you expect again I'm not asking for a timeline, but is it realistic that September can get back 2000.
2019 gross margin level of around 60%.
Yes.
It's definitely realistic for us too.
Get back to our prior margin levels.
<unk>.
As Dave mentioned the unit.
The unit leverage is an important aspect of that as well as the.
The commodity costs and labor costs are elevated.
And those are pressures right now so we have we have headwinds that we're managing we have.
Key initiatives to drive our margin over the next couple of years and we have a lot of confidence in our ability to do so.
Yes keep in mind.
As we think about the gross margin improvement for the year of over 150, we're doing that against the backdrop of <unk>.
Sales expectations that are kind of flat to slightly down so I think.
We are going to be working have some unit deleverage working against us, but we do expect to continue to get leverage over time and also really claw back some of the commodity pressures that we've been facing.
Okay awesome.
That's super helpful. Thank you for that and good luck with the rest of the year.
Thank you.
And with no other questions at this time I would like to turn things back to the company for closing remarks.
Yeah.
Thank you for joining us today, we look forward to discussing our first quarter 2023 performance with you in April .
Sleep, well and dream Big.
And that does conclude today's conference. Thank you all for joining us and you may now disconnect.
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