Q4 2023 Sleep Number Corp Earnings Call

Operator: Music This video was the final draft of the piece. Babies are the cornerstone of sex. I hope you liked this bit. Now, allow me to go through some of the rules of sex and sexual intercourse with babies.

Mmm.

[music].

Operator: Now, just to let you know, you can really collect all these dates, wait time, and age parameters for those regardless of whether the baby has stayed away from sex. Okay. So the date of the birth date that you really considered killing a baby is next from January 30, 2010 to 2023. In reality, since if the mom and dad treated you to aged sex, you can actually go back and look at the forensic report that says you are anti-child and child-tolerated by explosives.

Operator: In reality, you might not want to consider it as a matter of culture to wait for them. This is a test. Ladies and gentlemen, you're currently on hold for the Sleep Number Corporation call. We are admitting additional participants and will be starting shortly. Thank you for your patience, and and and and and and and and and and, and welcome everyone to Sleep Numbers' Q4 and 4 Year 2023 Earnings Conference Call. All lines have been placed in a listen-only mode until the question and answer session.

Operator: Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I would like to introduce Dave Schwantes, Vice President of Finance and Investor Relations. Thank you.

Dave Schwantes: You may begin. Good afternoon, and welcome to the Sleep Number Corporation fourth quarter 2023 earnings conference call. Thank you for joining us. I am Dave Schwanes, Vice President of Finance and Investor Relations. With me today are Shelly Eibach, our chair, president, and CEO, and Francis Lee, our chief financial officer. This telephone conference is being recorded and will be available on our website at sleepnumber.com. Please refer to the details in our news release to access the replay.

Dave Schwantes: 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 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, everyone, and thank you for joining our 2023 year-end earnings call. My Sleep IQ score was 84 last night.

Ladies and gentlemen, you're currently on.

Great number corporation to call.

Additional participants and will be starting shortly thank you for your patience.

[music].

Shelly Eibach: While the consumer demand environment remains challenging for our industry, the swift actions we took to improve demand and reduce costs allowed us to make important progress in the fourth quarter. We are continuing to transform our operating model to improve our financial resilience through the broad-based restructuring actions we discussed with you last quarter. As we streamline our cost structure and strengthen our balance sheet, we are poised for accelerating growth as the mattress industry's demand environment improves. Importantly, our long-term opportunity remains intact as we lead through this transformation.

Speaker Change: Welcome everyone to sleep numbers.

2023 earnings conference call.

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

Speaker Change: Call is being recorded if anyone has any objections you may disconnect. At this time I would like to introduce Dave <unk>, Vice President of Finance and Investor Relations. Thank you you may begin [laughter].

Dave: Good afternoon, and welcome to the Sleep number Corporation fourth quarter 2000 twenty-three earnings conference call. Thank you for joining us.

Dave: Hi, I'm, Dave Schwandt Us Vice President of Finance and industrial relations.

Shelly Ibach: With me today are surely Ibox chair, President and C E O.

Shelly Eibach: During today's call, I'll start with some observations on the industry and macroeconomic environment, then focus my comments on our performance in the three strategic imperatives for repositioning our business, which are competing effectively, restoring profit margins, and paying down debt. Following my remarks, Francis will provide further details on our 2023 financial results and 2024 outlook. Many of the macroeconomic challenges we discussed during our last call persisted in the fourth quarter. Low consumer sentiment, slower new home purchases, and elevated interest rates continued to pressure demand for our category. Additionally, consumer purchasing power continued its steady downward trend. We estimate that mattress units in 2023 will be below 2015 levels and down more than 25% from their 2020 peak. Per capita spending on mattresses is also nearing historic lows, approaching levels not experienced since the 2008-2009 Great Recession.

Shelly Ibach: And Francis Lee, our Chief Financial Officer.

Shelly Ibach: This telephone conference is being recorded and will be available on our website at sleep number dotcom.

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

Shelly Ibach: 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.

Shelly Ibach: Primary purpose of this call is to discuss the results of the physical period. Just ended however, our commentary and responses to your questions may include certain forward looking statements.

Shelly Ibach: 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.

Shelly Ibach: Companies actual future results may vary materially.

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

Shelly Ibach: Good afternoon, everyone and thank you for joining our 2023 year and earnings call. My sleep I Q score was 84 last night.

Shelly Eibach: And although we are seeing some indications that the consumer environment may stabilize in the coming year, the mattress industry remains in a historic recession. Considerations like price and perceived value continue to drive consumer purchasing decisions, which remain highly responsive to external factors and events that are disruptive to the mattress industry. This challenging demand environment continued to weigh on our financial results in the fourth quarter, though we slightly outperformed our demand and cost reduction expectations. For the fourth quarter, net sales of $430 million were down 14% from the prior year, with demand down low single digits for the full year.

Shelly Ibach: Well the consumer demand environment remains challenging for our industry. The Swift actions, we took to improve demand and reduce costs allowed us to make important progress in the fourth quarter.

Shelly Ibach: We are continuing to transform our operating model to improve our financial resilience through the broad based restructuring actions, we discuss with you last quarter.

Shelly Ibach: As we streamline our cost structure and strengthen our balance sheet, we are poised for accelerating growth at the mattress as the mattress industry demand environment improves.

Shelly Ibach: Importantly, our longterm opportunity remains intact as we lead through this transformation.

Shelly Eibach: Our net sales were $1.89 billion, a year-over-year decline of 11% with demand down in the high single digits. Against this backdrop, we executed several actions to strengthen our competitive positioning, which is our first strategic imperative. With consumers' heightened focus on price and value and scrutiny of every purchase, we prioritize actions to increase her consideration and conversion. We sharpened our marketing messages to emphasize our differentiated benefits of adjustable firmness and temperature, promoting the value of your best sleep every night and for every budget.

Shelly Ibach: During today's call I'll start with some observations on the industry and macroeconomic environment, then focus my comments on our performance and the three strategic imperatives for repositioning our business, which are competing effectively restoring profit margins.

Shelly Ibach: And paying down debt.

Shelly Ibach: Following my remarks branches will provide further details on our 2023 financial results in 2024 outlook.

Shelly Ibach: Many of the macroeconomic challenges we discussed during our last call persisted in the fourth quarter.

Shelly Ibach: Low consumer sentiment slower new home purchases and elevated interest rates continued to pressure demand for our category.

Shelly Eibach: We renegotiated with our media partners to improve impressions per dollar spent, optimized the media mix, and reflighted media in Q4, resulting in improved traffic and media ROI. We refined our promotional strategy and selling process to focus on SmartBeds first before communicating the additional benefits of our Smart Adjustable Bases. This approach is resonating with today's consumer, who is acutely focused on value. Our vertical integrated model allows us to stay close to the customer and adjust our marketing strategy and coordinate our in-store and online experience in real time. We also drive greater brand awareness through our partnership with the NFL. Our Why Choose a Sleep Number Smart Bed campaign featuring Justin Jefferson and Jamar Chase increased purchase consideration with NFL fans, who represent approximately half of the US population.

Shelly Ibach: Additionally, consumer purchasing power continues its steady downward trend.

Branches: Estimate that mattress units in 2023 were below 2015 levels and down more than 25% from their 2020 peak.

Branches: Capital spending on mattresses is also nearing historic lows approaching levels not experience.

Branches: The 2008 2009, great recession.

Branches: And although we are seeing some indications that the consumer environment may stabilize in the coming year. The mattress industry remains in a historic recession.

Branches: Considerations like price and perceived value continued to drive consumer purchasing decisions, which remain highly responsive to external factors and events that are disruptive for the mattress industry.

Shelly Eibach: Since implementing these actions, our demand trajectory improved significantly to a low single-digit year-over-year decline in the fourth quarter, compared with a double-digit decline in Q3. We also drove positive unit growth on a demand basis in the fourth quarter for the first time since the third quarter of 2021. With this demand performance, we expect that we will outperform the industry in the fourth quarter. As part of our second strategic imperative, we are taking steps to reduce costs across our business and restore margins. During the third quarter, we began aggressively executing our contingency plans to align our discretionary costs with the softer demand environment. In the fourth quarter, we established operating mechanisms and tools to accelerate our restructuring efforts and drive sustainable change across the organization. We have initiated dozens of workstreams with program charters, timelines, and weekly reporting to promote accountability, continuous progress, and recognition as benefits are realized.

Branches: This challenging demand environment continued to weigh on our financial results in the fourth quarter. So we slightly outperformed our demand and cost reduction expectations.

Branches: For the fourth quarter net sales at $430 million were down 14% from the prior year with demand down low single digits.

Branches: For the full year net sales were.

Branches: $1.89 billion, a year over year decline at 11% with demand down high single digits.

Branches: Against this backdrop, we executed several actions to strengthen our competitive positioning which is our strategic imperative.

Branches: With consumers heightened focus on price and value and scrutiny of every purchase we prioritize action to increase her consideration and conversion wished.

Branches: We sharpened our marketing messages to emphasize are differentiated benefits of adjustable firmness in temperature promoting the value of your best sleep every night and for every budget.

Shelly Eibach: I'm proud of our team's energy and efforts in executing this cost reduction roadmap and identifying and validating new opportunities. Broadly, our cost reduction initiatives fell into four categories: cost of customer acquisition, including streamlining vendors and indirect spend based on capability and cost; costs to serve our customers, such as condensing services, outsourcing functions, and increasing digital support assets for greater efficiency.

Branches: We renegotiated with our media partners to improve impressions per dollar spent.

Branches: Optimize the media mix and Reflated media in queue for resulting in improved traffic and media R O y.

Branches: We refined our promotional strategy and selling process to focus on smart beds first before communicating the additional benefits of our smart adjustable basis.

Shelly Eibach: Cogs leverage through value engineering, including an exhaustive material cost reduction program, and R&D leverage as we reprioritize R&D spend to accelerate near-term innovation while driving greater efficiency. We are also realizing the benefits of the workforce restructuring actions taken in the fourth quarter, which reduced the number of team members to approximately 4100 at the end of 2023, 7% lower than in 2019. Together, these efforts enabled us to reduce our operating expenses in the fourth quarter before restructuring costs by $24 million, $5 million more than we had planned. For the full year, we reduced operating expenses by $85 million.

Branches: This approach is resonating with today's consumer who is acutely focussed on value.

Branches: Our vertical integrated model allows us to stay close to the customer and adjust our marketing strategy and coordinate our in store and online experience in real time.

Branches: We also drove greater brand awareness through our partnership with the N F. L O R.

Branches: Why choose asleep number smart bad campaign, featuring Justin Jefferson and Jabar Chase increased purchase consideration with the N F. L fans, who represent approximately half of the U S population.

Branches: Since implementing these actions argent demand trajectory improved significantly to a low single digit year over year decline in the fourth quarter compared with the double digit decline in Q3. We also drove positive unit growth on a demand basis in the fourth quarter for the first.

Shelly Eibach: With our team's commitment to the execution of our cost improvement roadmap, we expect $40 to $45 million of in-year cost reductions in 2024 and expect full-year operating expenses to be $125 to $130 million below 2022 levels. As a result of this restructuring, we will have a leaner, more efficient business model with higher margins and stronger cash flow as industry trends improve. We also remain intently focused on restoring our gross margin rate to our historical average in the low 60s in a normalized demand environment.

Branches: Time since the third quarter of 2021.

Branches: With this demand performance, we expect that we outperformed the industry in the fourth quarter.

Branches: With our second strategic imperative, we are taking steps to reduce costs across our business and restore margins.

Branches: During the third quarter, we begin aggressively executing our contingency plans to align our discretionary costs with the softer demand environment and.

Branches: In the fourth quarter, we established operating mechanisms and tools to accelerate our restructuring efforts and drive sustainable change across the organization.

Branches: We have initiated dozens of work streams with program charters timelines and weekly reporting to promote accountability continuous progress and recognition as benefits are realized I'm proud of our teams energy and efforts and executing this cost reduction roadmap and identify.

Shelly Eibach: In 2023, we grew our gross margin rate by 80 basis points while navigating a double-digit decline in our net sales as the mattress industry experienced its second consecutive year of recession. In 2024, we are targeting approximately 100 basis points of gross margin rate expansion from the cost improvement initiatives I highlighted earlier. We expect the mattress industry to remain under pressure in 2024, and our outlook for the year reflects that assumption. Thus, we continue to prioritize liquidity and paying down debt, our third strategic imperative.

Branches: <unk> invalidating new opportunities.

Branches: Broadly are cost reduction initiatives fell into four categories cost of customer acquisition, including streamline named vendors and indirect spend based on capability in cost.

Branches: Cost to serve our customers such as condensing service outsourcing functions and increasing digital support assets for greater efficiency.

Branches: <unk> leverage through value engineering, including an exhaustive material cost reduction program.

Branches: And R&D leverage as we re prioritize R&D spend two accelerates near term innovation, while driving greater efficiency.

Shelly Eibach: In the third quarter of 2023, we took steps aimed at enhancing our financial flexibility, including working with our bank group to amend our financial covenant. Reducing our outstanding credit line balance and related financial leverage remain key priorities for us in 2024 and beyond. The actions we have taken to date and have underway are making Sleep Number a stronger, more durable business. As we realize additional benefits of our cost management strategy in 2024, we expect to generate 60 to 80 million dollars in positive free cash flow and intend to use this cash to pay down debt. We also expect depreciation to be significantly greater than CAPEX. With our focus on cash flow generation and paying down debt, we plan to reduce capital expenditures in 2024 by roughly half to approximately $30 million. 2023 was a challenging year.

Branches: We are also realizing the benefits of the workforce restructuring actions taken in the fourth quarter, which reduce the number of team members to approximately 4100 at the end of 2023.

Branches: 7% lower than in 2019.

Branches: Together these efforts enabled us to reduce our operating expenses in the fourth quarter before restructuring costs by $24 million 5 million more than we had planned.

Branches: For the full year, we reduce the operating expenses by $85 million.

Branches: With our teams commitment to the execution of our cost improvement roadmap, we expect $40 million to $45 million of in your cost reductions in 2024, and expect full year operating expenses to be $125 million to $130 million below two.

Branches: <unk> 22 levels.

Branches: As a result of this restructuring we will have a leaner more efficient business model with higher margins and stronger cash flow is industry trends improve.

Shelly Eibach: We have initiated fundamental changes to transform our business, and we have more work to do. That said, our long-term opportunity, supported by our consumer innovation strategy, remains strong. Sleep remains one of the areas in which consumers have the most unmet needs. According to the CDC, one-third of U.S. adults report they usually get less than the recommended amount of sleep.

Branches: We also remain intently focused on restoring our gross margin right.

Branches: To our historical average and the low sixties in a normalized demand environment and.

Branches: In 2023, we grew gross margin rate by 80 basis points, well navigating a double digit decline in our net sales as the mattress industry experienced its second consecutive year of recession.

Shelly Eibach: Not getting enough sleep is linked to many chronic diseases and conditions that threaten our nation's health. And in a recent McKinsey Future of Wellness survey, sleep ranked as one of the highest wellness priorities among consumers, who indicated they're looking for data-driven, science-backed solutions that empower them to take more control over their health outcomes. Our competitive advantages, including our connected physical and digital sleep wellness platform. The network of millions of smart sleepers, vertically integrated operating model, and purpose-driven team member culture uniquely position Sleep Number to solve the many untapped opportunities related to sleep across the continuum of care. The foundation of our differentiated long-term value proposition in our smart bed wellness platform is our smart bed wellness platform, which provides an individually customized, adjustable, and responsive sleep experience. By effortless adjusting to sleepers' unique needs, our smart beds help millions of people achieve more restful sleep every night.

Branches: In 2024, we are targeting approximately 100 basis points of gross margin right expansion from the cost improvement initiatives I highlighted earlier.

Branches: We expect the mattress industry to remain under pressure in 2024, and our outlook for the year reflects that assumption. Thus, we continue to prioritise liquidity and paying down debt our third strategic imperative.

Branches: In the third quarter of 2023, we took steps aimed at enhancing our financial flexibility, including working with our bank group to amend our financial covenants.

Branches: Reducing our outstanding credit line balance and related financial leverage remain key priorities for us in 2024 and beyond.

Branches: The actions, we have taken to date and have underway are making sleep number a stronger more durable business as we realize additional benefits of our cost management strategy. In 2024, we expect to generate $60 million to $80 million in positive free cash flow and intend to.

Branches: Who uses cash to pay down debt.

Branches: We also expect depreciation to be significantly greater than capex with our focus on cash flow generation and paying down debt, we plan to reduce capital expenditures in 2024 by roughly half to approximately $30 million.

Shelly Eibach: In fact, 94% of smart bed sleepers report benefiting from better quality sleep compared with sleeping on a non-smart bed. Our innovative technology, supported by a robust portfolio of over 800 patents and patents pending worldwide, is a key differentiator in a consolidating and commoditizing market. These unique assets empower us to protect and take market share even in a difficult environment. Additionally, our proprietary ecosystem of loyal smart sleepers continues to grow, reaching nearly 3 million at the end of 2023.

Branches: 2023, with a challenging year, we have initiated fundamental changes to transform our business and we have more work to do.

Branches: That said, our longterm opportunity supported by our consumer innovation strategy remains strong.

Branches: Sleep remains one of the areas in which consumers have the most unmet needs.

Branches: According to the C. D C. One third of U S. Adults report, they usually get less than the recommended amount of sleep.

Branches: Not getting enough sleep is linked with many chronic diseases and conditions, which threaten our nation's health.

Shelly Eibach: And their advocacy of our brand is an important element of our future growth. Our Innovation Roadmap supports ongoing engagement initiatives within this ecosystem. For example, in the fourth quarter, we integrated our Loyalty Rewards Program and customer support into the Sleep Number app. And in 2024, smart sleepers will also be able to shop within the app.

Branches: And then a recent mckinsey future of Wellness survey sleep ranked as one of the highest wellness priorities among consumers who indicated they are looking for data driven science back solutions that empower them to take more control over their health outcomes.

Branches: Our competitive advantages, including are connected physical and digital sleep wellness platform.

Shelly Eibach: Our average monthly engagement rate of 80% is best in class for digital products. This high engagement with our sleep wellness platform increases customer lifetime value and drives lower cost customer acquisition through referrals. Our vertically integrated operating model enables margin efficiency opportunities, which are amplified with scale through our SmartBed ecosystem and optimized fulfillment network. And our culture of individuality and well-being reinforced by our team members' dedication to our mission is a vital factor in our successful business model transformation, continued innovation, and profitable growth. We are prepared for accelerating growth as the mattress industry environment improves. I am grateful for our team's resilience and strong execution as we work together to build a more sustainable business and capitalize on opportunities to deliver meaningful value for our shareholders. With that, I'll turn the call over to Frances, who will provide more details on our 2023 financial results and 2024 guidance. Thank you, Shelley, and good afternoon.

Branches: Network of millions of smart sleepers vertically.

Branches: Critically integrated.

Branches: Operating model and purpose driven team member culture uniquely positioned sleep number to salt the meat.

Branches: Many untapped opportunities related to sleep across the continuum of care.

Branches: The foundation of our differentiated longterm value proposition and are smart bad wellness.

Branches: Is are smart bad wellness platform, which provides an individually customised adjustable and responsive sleep experience.

Branches: By effortlessly adjusting to sleepers unique needs are smart beds help millions of people achieve more restful sleep every night.

Branches: In fact, 94% of smart bed sleepers report benefiting from better quality sleep compared with sleeping on a non smart bed.

Branches: Our innovative technology supported by a robust portfolio of over 800 patents and patent pending worldwide is a key differentiator in a consolidating and commoditizing market.

Branches: These unique assets empower us to protect and take market share even in a difficult environment.

Branches: Additionally, our proprietary ecosystem of loyal Smart sleepers continues to grow.

Branches: <unk> nearly 3 million at the end of 2023 and their advocacy of our brand is an important element of our future growth.

Francis Lee: As we close fiscal year 2023 and have started the new year, our teams have shown agility and diligence as we work to build a more durable operating model and greater financial resilience. As we have navigated a pullback in demand for the industry over the last couple of years, the important actions we are taking will lead to a stronger foundation for our business, which will enable accelerating profitability as the industry backdrop improves. In my comments today, I will focus my remarks on three primary areas.

Branches: Our innovation roadmap supports ongoing engagement initiatives within this ecosystem.

Branches: Example, in the fourth quarter, we integrated our loyalty rewards program and customers support into the sleep number app and.

Branches: And in 2024 March sleepers will also be able to shop within the App.

Branches: Average monthly engagement rate of 80% as best in class for digital products. This high engagement with our sleep wellness platform increases customer lifetime value and drives lower cost customer acquisition through referrals.

Francis Lee: One, a review of our fourth quarter and full year results. Two, the progress we have made in our cost restructuring and impacts on our 2024 financial outlook. And three key assumptions underlying our 2024 guidance. Now, let's move on to a review of our fourth quarter and full year results. Fourth quarter net sales of $430 million were down 14% versus last year. Demand for the quarter was down low single digits and slightly better than our expectations of a mid-single-digit demand decline. Year-over-year changes in backlog drove a majority of the net sales decline.

Branches: Or vertically integrated operating model enables margin efficiency opportunities, which are amplified with scale through our smart bad ecosystem and optimize fulfillment network and.

Branches: In our culture of individuality and wellbeing reinforced by our team members dedication to our mission is a vital factor in our successful business model transformation continued innovation and profitable growth.

Branches: We are prepared for accelerating growth as the mattress industry environment improves.

Branches: Grateful for our teams resilience and strong execution as we work together to build a more sustainable business and capitalize on opportunities to deliver meaningful value for our shareholders.

Francis Lee: Our fourth quarter gross margin of 56.6% was up 190 basis points year over year and included the benefit from pricing actions taken over the past 12 months and improvement in commodity prices. These benefits are partially offset by increased promotional offers aimed at budget and value-conscious consumers and fixed-cost de-leverage from a year-over-year decline in delivered units. We also faced year-over-year gross margin rate pressure related to the mix of FlexFit Smart Adjustable Bases as we had the full Good, Better, Best assortment of FlexFit Smart Bases in 2023. However, in 2022, the SmartBase portfolio was limited to higher margin products due to semiconductor chip constraints.

Branches: With that I'll turn the call over to France's who will provide.

France: More details on our 2023 financial results in 2024 guidance.

France: Thank you Shirley and good afternoon.

France: And we close fiscal year 2023, and have started the new year. Our teams have shown agility and diligence as we work to build a more durable operating model and greater financial resilience.

France: As we navigated a pullback in demand for the industry over the last couple of years. The important actions. We are taking will lead to a stronger foundation for business, which will enable accelerating profitability as he industry backdrop improves.

France: And my comments today, I will focus my remarks, and three primary areas.

France: One review of our fourth quarter and full year results.

Francis Lee: We were ahead of plan with cost reduction actions in the fourth quarter, with operating expenses and pre-restructuring costs down $24 million year over year. We are making broad-based cost cuts across the entire business, impacting all areas of our operating cost structure. We recorded $16 million of restructuring costs in the quarter versus our original 2023 estimate of $10 million.

France: <unk> progress we've made in our cost restructuring and impacts tour of 2024 financial outlook and.

France: And three key assumptions underlying R 2024 guidance.

France: Let's move on to a review of our fourth quarter and full year results.

France: Fourth quarter net sales of $430 million were down 14% versus last year.

France: Demand for the quarter was down low single digits and slightly better than our expectations of a mid single digits demand declined.

Francis Lee: This included the acceleration of a few store closures late in the quarter. With the advancement of our cost initiatives, we estimate our 2024 restructuring costs will be approximately $12 million. As a reminder, restructuring costs are reported as a separate line item in our financial statements, and we will continue to provide an as-suggested EPS figure for comparative purposes.

France: Year over year changes in backlog drove a majority of the net sales decline.

France: Our fourth quarter gross margin of 56.6% was up 190 basis points year over year and included the benefit from pricing actions taken over the past 12 months and improvement in commodity prices. These.

France: These benefits are partially offset by increased promotional offers aimed at budget value conscious consumers and fixed costs deleverage from a year over year decline and delivered units we.

Francis Lee: We generated $18 million of EBITDA in the quarter versus $23 million last year, primarily due to the year over year net sales decline, partially offset by a higher gross margin rate and year over year operating expense reduction. Our 2023 full year results included net sales of $1.89 billion, down 11% versus the prior year, with demand down high single digits for the year. Our gross margin rate increased 80 basis points for the year. We reduced operating expenses by $85 million, or 7% year over year, prior to the $16 million of restructuring costs. We reported a full-year diluted loss per share of $0.68 and a full-year as-adjusted loss per share of $0.14, excluding $16 million of restructuring costs recorded in the fourth quarter.

France: We also faced your over your gross margin rate pressure related to.

France: To the mix of flex fit smart adjustable basis, as we had the full good better best assortment of flex fit smart basis in 2023.

France: 2022, the smart based portfolio was limited to higher margin products due to semiconductors Dr. <unk>.

France: Constraints.

France: We were ahead of plan with cost reduction actions in the fourth quarter with operating expenses pre restructuring costs down $24 million year over year.

France: We are making broad base cost cuts across the entire business impacting all areas of our operating cost structure.

France: We recorded $16 million of restructuring costs in the quarter versus our original 2023 estimate of $10 million.

France: This included the acceleration of a few store closures late in the quarter.

France: With the advancement of our cost initiatives, we estimate of 2024 restructuring costs will be approximately $12 million.

France: As a reminder, restructuring costs are reported as a separate line item in our financial statements and we will continue to provide an <expletive> adjusted EPS figure for comparative purposes.

Francis Lee: Adjusted EBITDA declined 14% to $127 million compared to $148 million last year, driven by the net sales decline partially offset by a higher gross margin rate and ongoing operating expense reduction. Now, let me discuss in a little more detail the important work we are doing to adjust our cost structure in support of a more durable business model and financial resilience. With the change in demand trends in the third quarter, we have been executing accelerated cost reduction actions across the business to strengthen our financial position as we continue to navigate the ongoing challenging demand environment for the mattress industry. These efforts contributed to the $85 million year-over-year reduction in operating expenses in 2023 and our plans for an additional $40 to $45 million operating expense reduction for 2024. This will result in a two-year cost reduction total of $125 to $130 million. Our operational transformation work is progressing with velocity, and we have established operating mechanisms to promote and build sustainable change across the organization. Each initiative we are implementing has been developed with a project projected range of cost improvement and relative risk assessment.

France: Regenerated $18 billion of EBITDA in the quarter versus $23 million last year, primarily due to the year over year net sales decline, partially offset by a higher gross margin rate and year over year operating expense reductions.

France: R 2023 full year results included net sales of $1.89 billion down 11% versus prior year with demand down high single digits for the year.

France: Gross margin increased 80 basis points for the year.

France: We reduced operating expenses by $85 million or 7% year over year prior.

France: Prior to the $16 million of restructuring costs.

France: We reported a full year diluted loss per share of 68 cents and a full year as adjusted loss per share 14 cents, excluding $16 million of restructuring costs recorded in the fourth quarter.

France: Adjusted EBITDA declined 14% to $127 million compared to $148 million last year <unk>.

France: Driven by the net sales decline, partially offset by a higher gross margin rate and ongoing operating expense reductions.

France: No let me discuss in a little more detail. The important work, we are doing to adjust our cost structure and support of a more durable business model and financial resilience.

France: With the change in demand trends in the third quarter, we have been executing accelerated cost reduction actions across the business to strengthen our financial position as we continued to navigate the ongoing challenging demand environment for the mattress industry.

France: These efforts contributed to the 85 million dollar year over year reduction in operating expenses in 2023.

France: And our plans for an additional 40 to 45 million dollar operating expense reduction for 2024.

France: This will result in a two year cost reduction total of $125 million to $130 million.

France: Our operational transformation work is progressing with velocity and we have established operating mechanisms to promote and build sustainable change across the organization.

Francis Lee: Some of the specific cost actions we have taken include workforce reductions across the organization as we enter 2024 with 25% fewer team members than in 2021; reducing our cost to serve customers through service simplification programs, adjusting hours, outsourcing, and increasing digital customer support assets. Given the downmarket environment, we also seized the opportunity to reduce our store density in selected markets and accelerate the closing of lower performing stores with natural lease expirations. This included closing stores where we had been testing store proximity in selected markets. In each case, we carefully considered the opportunity to transfer sales to other stores in the same DMA or online to minimize lost sales while reducing overall fixed store costs and increasing total DMA profit.

France: Each initiative, we are implementing has been developed with a project projected range of cost improvement in relative risk assessment.

France: Some of the specific cost actions we have taken include.

France: Workforce reductions across the organization as we enter 2024 with 25% less team members than in 2021.

France: Reducing our cost to serve customers through service simplification programs adjusting hours outsourcing and increasing digital customer support assets.

France: Given the down market environment. We also sees the opportunity to reduce our store density in selected markets and accelerate the closing of lower performing stores with natural release esque explorations.

France: This includes closing stores, where we had been testing store proximity in selected markets.

France: In each case, we carefully considered the opportunity to transfer sales to other stores in the same DMA or online to minimize loss sales, while reducing overall fixed store costs and increasing total.

France: Total DMA profit.

Francis Lee: We expect the net impact of store closures to be about a one point drag on 2024 net sales growth, and we expect to end 2024 with 25 to 30 fewer stores compared to 2023. We also continue to drive gross margin improvement actions across the business. These actions include value engineering, material cost reductions, and driving additional efficiencies through our manufacturing and home delivery network.

France: We expect the net impact of store closures to be about a one point drag to the 2024 net sales growth and we expect to end of 2024 with 25 to 30 fewer stores compared to 2023.

France: We also continued to drive gross margin improvement actions across the business.

France: These actions include value engineering material cost reductions and driving additional efficiencies through our manufacturing and home delivery network.

Francis Lee: We expect to grow our gross margin by approximately 100 basis points in 2024. As we move into 2025, we expect to realize additional cost savings as we annualize the 2024 cost action. Now, let me turn to 2024.

France: We expect to grow our gross margin right by approximately 100 basis points in 2024.

France: As we move into 2025, we expect to realize additional cost savings as we annualize the 2024 cost actions.

France: Okay.

Speaker Change: Now, let me turn to 2024.

Francis Lee: As Shelly mentioned, we built our 2024 plans on the assumption that the industry does not experience any material recovery in 2024, despite having experienced two years of recessionary demand levels. While the mattress industry is likely at bottoming levels, we feel it is prudent to plan our cost structure on the basis of no improvement in demand levels this year. For our 2024 Outlook, we are providing Adjusted EBITDA as a primary guidance metric. As we transform our business to a more durable business operating model, we see Adjusted EBITDA as the best way to communicate our performance and the earnings power of our business. Adjusted EBITDA is a key metric we are using to track our transformation progress and, in particular, cash generation to pay down debt.

France: Shall we mentioned we built our 2024 plans on the assumption that the industry does not experienced any material recovery from 2024, despite having experienced two years of recessionary demand levels.

France: While the mattress industry is likely a bottoming levels, we feel it is prudent to plan our cost structure on the basis of no improvement in demand levels. This year.

France: Four 2024 outlook, we are providing adjusted EBITDA as a primary guidance metric is.

France: We transform our business to a more durable business operating model, we see adjusted EBITDA is the best way to communicate our performance and the earnings power of our business.

France: Adjusted EBITDA as a key metric we are using to track our transformation progress and in particular cash generation to pay down debt.

Francis Lee: Let me unpack some of the specific assumptions included in our 2024 outlook. The outlook assumes net sales are down mid-single digits for the year with a low single-digit demand decline. Our Net Sales Guidance assumes three percentage points of headwind from year-over-year backlog changes and one percentage point from net store closures. We expect net sales to be down high single digits in the first half of the year based on tougher comparisons followed by low single-digit growth for the back half of the year. We expect the majority of approximately 100 basis points of gross margin rate expansion in 2024 to be in the back half of the year. Key drivers include further reductions in our material costs through product value engineering and ongoing supplier negotiations.

France: Let me unpack some of the specific assumptions included in our 2024 outlook.

France: The outlook assumes net sales are down mid single digits for the year with a low single digit demand decline.

France: Net sales guidance assumes three percentage points of headwind from year over year backlog changes and one percentage point from that store closures.

France: We expect that sales to be down high single digits in the first half of the year based on tougher comparisons followed by low single digit growth for the back half of the year.

France: We expect a majority of approximately 100 basis point of gross margin right expansion in 2024 to be in the back half of the year.

France: Key drivers include further reductions in our material costs through product value engineering and ongoing supplier negotiations.

Francis Lee: We are also expecting benefit from further optimization of our fulfillment network, including facility closures and using temporary labor where it makes sense. Headwinds for the year include the fixed cost of leverage from slightly declining delivered units for the year. We expect operating expenses to be down $40 to $45 million versus last year, with the cost savings spread across the P&L. We are estimating restructuring costs of approximately $12 million to be incurred in 2024, with approximately $10 million of the costs falling in Q1. We expect interest rates of approximately $45 million for the year.

France: We're also expecting benefit from further optimization of our fulfillment network, including facility closures and using temporary labor where it makes sense.

France: Headwinds for the year include fixed costs deleverage from slightly declining delivered units for the year.

France: We expect operating expenses to be down $40 million to $45 million versus last year with the cost savings spread across the piano.

France: We are estimating restructuring costs of approximately $12 million to be incurred in 2024 with approximately $10 million of the costs falling in Q1.

France: We expect an interest rates of approximately $45 million for the year.

Francis Lee: The above assumptions support our adjusted EBITDA outlook range for the year of $125 to $145 million. We remain intently focused on liquidity and balance sheet strength and expect to meet our liquidity needs for 2024 from operating cash flow in our existing credit facility. We expect to generate $90 to $110 million of operating cash flow with $30 million of planned capital expenditures. This results in $60 to $80 million of free cash flow for the year, which we intend to use to pay down our credit line.

France: The above assumptions support our adjusted EBITDA outlook range for the year of $125 million to $145 million.

France: We remain intently focused on liquidity and balance sheet strength and expect to meet our liquidity needs for 2024 from operating cash flow and our existing credit facility.

France: We expect to generate $90 million to $110 million of operating cash flow with $30 million a planned capital expenditures. This results in $60 million to $80 million of free cash flow for the year, which we intend to use to pay down our credit line.

Francis Lee: Working capital changes are expected to be a source of cash in 2024 versus a significant use of cash in the last two years. We expect non-cash charges to be a combined $90 million or similar to 2023 levels. We also want to provide some clarity regarding our first quarter 2024 performance expectations. We are expecting net sales to be down approximately 10% versus the prior year's quarter, including three to four points of headwind from year-over-year backlog. We expect first quarter adjusted EBITDA to be just over $30 million.

France: Working capital changes are expected to be a source of cash in 2024 versus a significant use of cash the last two years we.

France: We expect non-cash charges to be a combined $90 million or similar to 2023 levels.

France: We also want to provide some clarity regarding our first quarter of 2024 performance expectations.

France: We are expecting net sales to be down approximately 10% versus the prior year quarter, including three to four points of headwind from year over year backlog changes.

France: We expect first quarter adjusted EBITDA to be just over $30 million.

Francis Lee: Our outlook for 2024 provides appropriate clearance against the revised bank covenants put in place last quarter. The new bank agreement and related covenants have provided increased flexibility to enable us to restructure the business and navigate the demand environment in 2024. We expect our debt to EBITDA leverage to peak in Q2 of this year and end the year below 3.75x under our covenant level. As the industry recovers, we see a significant opportunity for our business to accelerate. By building a more durable operating model with greater financial resilience, we are transforming our business to deliver profitability and free cash flows across the highs and lows of the mattress industry cycle. We are at a cycle low right now and expect to generate $60 to $80 million of free cash flow this year.

France: Our outlook for 2024 provides appropriate clearance against the revised bank covenants put in place last quarter.

France: The new bank agreement and related covenants have provided increased flexibility to enable us to restructure the business and navigate the demand environment in 2024.

France: We expect our.

France: Two EBITDAR leverage to peek in Q2 of this year and end of the year below 3.75 X under our covenant levels.

France: As the industry recovers, we see a significant opportunity for our business to accelerate.

France: But building a more durable operating model with greater financial resilience, we're transforming our business to deliver profitability in free cash flows across the highs and lows of the mattress industry cycle.

France: We are at a cycle low right now and expect to generate $60 million to $80 million or free cash flow this year as.

Operator: As we continue to benefit from the cost optimization initiatives underway, we expect our gross margin rate to return to 60% plus and low double-digit EBITDA margins as industry unit trends return to more normalized levels. With that, Lisa, please open the line for questions. Thank you, sir. And everyone, if you would like to ask a question today, please press star one on your telephone keypad. Once again, that is star one.

France: As we continue to benefit from the cost Optimisation initiatives underway, we expect our gross margin right to return to 60% plus and low double digit EBITDA margins as industry unit trends return to more normalised levels.

France: With that Lisa Please open the line for questions.

Lisa: Thank you, Sir and everyone. If you would like to ask a question today. Please press star one on your telephone keypad. Once again that is star one if you have a question.

Operator: If you have a question. We'll take the first question from Bobby Griffin, Raymond James. Good afternoon, everybody.

Lisa: We'll take the first question from Bobby Griffin Raymond James.

Bobby Griffin: Good afternoon. Thanks.

Bobby Griffin: Thanks for taking my questions. And I appreciate all the detail, all the details given around the moving parts for 2024. So, I guess first, when we spoke last, we were talking about some of the store closures to strengthen the store portfolio. And maybe you've done a few so far, so can you give us a little detail on what you're seeing on recapture rates as you're closing some of these stores? Yeah, Bobby, thanks for the question. First, it's early on that.

Bobby Griffin: Thanks for taking my questions.

Speaker Change: With all the details of the details given around the moving parts for 2024, So I'll get first when we spoke last we were talking about some of the store closures to strengthen the store portfolio.

Speaker Change: And maybe you've done a few so far so can you can you give us a little detail what you've seen on recapture rates.

Speaker Change: As your closing some of these stores.

Speaker Change: Yeah, Bobby Thanks for the question you have first it it's it's early on that but what we have is a a very detailed store transfer strategy uhm to be able to capture those sales and expect you know approximately 45 to.

Shelly Eibach: But what we have is a very detailed store transfer strategy to be able to capture those sales and expect, you know, approximately 45 to 50% of the sales to transfer. We focus on the total DMA and positive profitability for the DMA. And we have a lot of historical experience with store transfer.

Bobby Griffin: 50% of the sales too to transfer we focus on the total DMA and positive profitability for the DMA and we you know we have a lot of historical experience on star transfer and then you know over the years as we've been executing our portfolio.

Shelly Eibach: And then, you know, over the years, as we've been executing our portfolio, you know, to keep a very current retail strategy of stores and online, you know, we look at the DMAs, we relocate stores. You know, we understand how to, you know, capture the consumer digitally and pull her through and develop relationships. And so, you know, we're, you know, we're bullish on what we can do here and therefore expect, you know, only one point of pressure due to due to our net stores this year. Okay, that's helpful.

Bobby Griffin: To you know to keep a very current retail strategy.

Bobby Griffin: Of stores and online.

Bobby Griffin: We look at the Dma's, we relocate stores, we understand how to capture that consumer digitally and pull her through and develop relationships and so we're we're bullish on on what we can do here and therefore expect.

Bobby Griffin: Only one point of pressure due to do two R. R. Net stores this year.

Speaker Change: Okay. That's helpful and I guess, maybe the kind of step back and talk a little bit on four Q and some of the changes you've got to put into place.

Shelly Eibach: And I guess, Kelly, maybe you could kind of step back and talk a little bit about 4Q and some of the changes you've got put into place. I mean, pretty notable change in where the demand was. I think we ended 3Q running down low double digits and then ended 4Q running down low single digits. So can we talk about the progression and what you saw as you kind of moved some of the advertising or different initiatives? Because that is a pretty sizable change against comparisons that were roughly about the same last year. Yeah, thanks. Thanks, Bobby.

Speaker Change: Pretty notable change in where the demand was I think we ended three Q running down.

Speaker Change: Low double digits <unk> running down low single digits. So can we talk about the progression and and what you saw as you kind of move some of the advertising or different initiatives because that is a pretty sizable change against comparisons that are roughly about the same last year.

Speaker Change: Yeah. Thanks, Thanks, Bobby we we did make better progress in both generating demand and reducing costs than we had expected in the fourth quarter you know.

Shelly Eibach: You know, we did make better progress in both generating demand and reducing costs than we had expected in the fourth quarter. Regarding demand, you know, it was about strengthening our competitive positioning. You know, we had a low single-digit decline for the quarter. Pretty consistent performance across.

Speaker Change: Ah regarding demand you know it was about strengthening our competitive positioning we had a low single digit decline for the quarter pretty consistent performance across the the three months and we.

Shelly Eibach: 3 months, and we took many actions, integrated actions, in the back half, at the end of September and heading into October, which focused on messages, Media, Selling Process, and Promotion. And the integrated work led to improved brand metrics and also traffic. Media ROI, and therefore, our demand. 4.

Shelly Eibach: We took many actions integrated action in the back half of them at the end of September and heading into October, which focused on messaging media selling process and promotions and.

Speaker Change: The integrated work led to improved brand metrics and also traffic and media R O Y and and therefore, our demand performance.

Speaker Change: How is I mean, how is the demand for any so far in 2024, you know there's been a lot of comments out there. The the industry. Unfortunately took a step back in January with some winter weather as well as February. So just curious if you can kind of tell us how things are trending year to date for you.

Shelly Eibach: How is, I mean, how has demand trended so far in 2024? You know, there's been a lot of comments out there that the industry unfortunately took a step back in January with some winter weather, as well as February. So just curious if you can kind of tell us how things are trending year to date for you. Sure, this speaks to the highly reactive approach that I spoke about in my prepared remarks.

Speaker Change: Sure you know this this speaks to the highly reactive consumer that that I spoke about in my prepared remarks, you're you're right you know it's been widely.

Shelly Eibach: You're right; it's been widely reported that January demand trends for the mattress industry were very challenging, including the weather impact. But there was also a pullback in spending across the category, and we saw that from the consumer, probably tied to purchasing power. We were also impacted by these same factors in January and had a double-digit decline in January. February has returned to a low single-digit decline for us, including a low single-digit growth over the President's weekend, which I think is probably a little better than what I'm hearing for the end of the year.

Shelly Eibach: Reported that January demand trends for the mattress into three were very challenging including the weather impact, but it was also a pullback in spending across the category and we saw that from the consumer and you know probably tied to purchasing power purchasing power.

Shelly Eibach: We were also impacted by these same factors in January and had a double digit decline in January February has returned to a low single digit decline for us, including a low single digit growth over the President's weekend, which you know I think is.

Shelly Eibach: A little better than what I'm hearing before the industry. We're forecasting Q1 demand to be down mid single digits with two N net sales down 10% year over year and then in the back half of the year, we expect a low single digit.

Shelly Eibach: We're forecasting Q1 demand to be down mid-single digits, with Q1 net sales down 10% year over year. Then in the back half of the year, we expect low single-digit growth as we lap easier comparisons, particularly against Q3. Okay, I appreciate that detail. I'll jump back in the queue and turn to the others, but thank you and best of luck here.

Speaker Change: Growth as we lap easier compares particularly against Q3.

Speaker Change: Okay, I appreciate that detail I'll <unk> I'll jump back in queue and turn the others, but thank you and best of luck to you.

Bobby Griffin: Thank you, Bob. And a reminder, it is star number one. If you would like to ask a question, we'll go to Brad Thomas, KeyBank Capital Markets. Hi, good afternoon.

Speaker Change: Thank you Bobby.

Shelly Eibach: And a reminder, at a star one if you would like to ask a question will go to Brian Thomas Keybanc capital market.

Brad Thomas: Hi, good afternoon. Thanks for taking my question Shelly I was wondering if you could just talk a little bit about some of the product and promotional strategies, you think might be most effective for you own in this current backdrop.

Brad Thomas: Thanks for taking my question. Shelly, I was wondering if you could just talk a little bit about some of the product and promotional strategies you think might be most effective for you all in this current backdrop. What, if anything, are you planning to do from a product standpoint, and how much of the line might be changing out there this year? Hi Brad.

Brad Thomas: What if anything do you plan to do from a product standpoint, and how much of the line might be changing after this year.

Shelly Eibach: Hi, Brad tanks, you know I'll I'll start with our 10 consumer nation strategy, which reshaped really what consumers should be expecting out of their bed.

Shelly Eibach: Thanks. You know, I'll start with our consumer innovation strategy, which, you know, reshapes really what the SmartBed platform is continuing to set for this category and certainly for the concern. We continue to have value-added solutions that not only deliver the highest quality sleep, but our platform also has the opportunity with digital innovation to solve many untapped opportunities in the future around sleep and the continuum of care.

Shelly Eibach: We you know we see are smart bed are smart bed platform continuing to set pace for this this category and certainly for the consumer we continue to have value added solutions that.

Shelly Eibach: Not only delivered the highest quality sleep in our platform also has the opportunity with digital innovation to solve many untapped opportunities in the future around and you're asleep and the continuum of care. So we continue.

Shelly Eibach: So we continue to focus on setting pace there, and we'll compete aggressively in this marketplace to win the consumer with delivering the highest quality. You asked specifically about some of the messaging and promotion strategy that's resonating. You know, we still are operating with a scrutinizing consumer in the marketplace. And we worked on, you know, a lot of, took a lot of actions in the third and fourth quarter to be able to refine our messaging, to be able to reach this consumer. Breakthrough with a Strong Value Equation.

Shelly Eibach: To focus on on setting pace, there and we'll compete aggressively.

Shelly Eibach: In this marketplace to to win the consumer with delivering the highest quality sleep.

Shelly Eibach: You asked specifically about some of the messaging and promotion strategy. That's resonating and you know we still are operating with Ah scrutinizing consumer in the marketplace and we worked on you know a lot of took a lot of actions in the third and fourth quarter too.

Shelly Eibach: Able to refine our message and to be able to reach this consumer Bree.

Shelly Eibach: Breakthrough with a strong value equation and you know, we're we're liking what we're seeing and I think you know as we.

Shelly Eibach: And we're liking what we're doing, And I think, you know, as we competed here in the month of February and over the President's weekend, we're seeing the advancement of our work from Q4, you know, to effectively reach the consumer. And specifically, you know, this is one of the advantages around our vertical model where we're able to integrate our plans and look at total variable margin inclusive of promotional dollars, finance, and media investment, being able to, you know, manage discounts in a way that drives higher as well as ATT&CK, and overall focused on optimizing our variable margin and still delivering media efficiency in a challenged environment. That's helpful, Shelly, and just to follow up on that, I don't know that we can totally tell as we look through some of the items you disclosed because there are some issues with comparability and everything, but, but, you know, ARU ticked down a little bit from where it's been the last several quarters, gross margins up, but the comparisons, you know, play into it, and then you mentioned the units, Is that accurate? Did you get more promotional?

Shelly Eibach: As we competed here.

Shelly Eibach: In the month of February and over the President's weekend, we're seeing the advancement of our work from Q for you to effectively reach the consumer and specifically you know this is one of the advantages around our vertical model where.

Speaker Change: We're able to integrate our plans and look at total variable margin inclusive of promotional dollars financing and media investments in and structure or promotion promote promotional plan accordingly, being able to manage discounts in a way that.

Shelly Eibach: <unk> higher myths, which were seeing as well as attach an an overall you know focused on optimizing our variable margin and still delivering media efficiency in a challenged environment.

Speaker Change: Okay. That's helpful Shelley and just to follow up on that.

Speaker Change: That we can totally tells we look through some of the items you you disclose cause there's.

Speaker Change: Some issues with compatibility and everything but.

Speaker Change: <unk> are you took down a little bit from where it's been the last several quarters.

Shelly Eibach: Gross margins up with the comparisons plan to it and then you you mentioned the Unix going positive.

Speaker Change: All of this may be implies that you've got a bit more promotional here is that accurate did you get more promotional and is that going to be a strategy that you're pushing on more than 2024 to drive the business.

Brad Thomas: And is that going to be a strategy that you push on more in 2024 to drive the business? Yeah, thanks for asking the additional specific question. Did in Q4, you can see that in our ARU. And then, as you noted, units were positive and offset that. But for us, even though ARU was positive.

Speaker Change: Yeah. Thanks for asking you know additional specific questions you.

Brad Thomas: We did in queue for you you can see that in R. R. A R. U and then as you noted units were were positive and and set that you know, but for us even though a R. U was up we were a few hundred below what where we were.

Shelly Eibach: We were a few hundred below where we were forecasted, and we've continued to iterate and are really happy with the progression. Since that time, and you know right on what we would expect right now in February and for the President's Week, where you know we're seeing some, some good movement in ARU and, at the same time, you know, having units fairly flattish. So, you know, it's advancing, and, you know, if you look at, I think specifically for President's Week. If you look at our... You may look at it by model and say, oh, the discounts are higher, but that was designed to drive mix. So, again, you know, fully loaded variable margin. Using Discounts to Drive Mix. We look at discounts and financing differently.

Shelly Eibach: Forecasting and we've continued to iterate and you know really happy with the progression since that time and you know right on you know what we would expect right now in February and and for the President's weekend, where you know we're seeing some you know some good movement in.

Shelly Eibach: Are you and at the same time, you know, having having units fairly flattish. So you know it's a.

Shelly Eibach: Dancing and and you know if you look at I think specifically for the President's weekend. If you look at our discounts you may look at it by model and say Oh, the discounts are higher but that was designed to drive mix up. So again, you know fully loaded variable margin.

Shelly Eibach: Using discounts to drive mix using financing differently. We look at discounted financing is a total bucket. We you know we actually have year over year reduction in dollars and in some you know favorability in in the variable margin.

Shelly Eibach: We look at discounts and financing as a total bucket. We, you know, actually have year-over-year reductions in dollars and some, you know, favorability in the variable. That's very helpful, Shelly. Thank you so much.

Speaker Change: That's very helpful. Thank.

Shelly Eibach: Thank you so much I'll turn it over others and good luck.

Brad Thomas: I'll turn it over to others. Great. And we'll go back to Bobby Griffin and Raymond James.

Brad Thomas: Thanks.

Brad Thomas: And we'll go back to Bobby Griffin Raymond James.

Bobby Griffin: Hey guys, thanks for letting me back in here. Shelley, just to clarify, the positive unit comment in 4Q, is that on a demand basis? So excluding the moving parts with the backlog year over year? Yes, the man.

Bobby Griffin: Hey, guys. Thanks for coming back in here. So just to clarify the positive unit comment and four Q. He's got on a demand basis. So excluding the moving parts with the backlog year over year.

Speaker Change: Yes demand basis. Thank you okay. Thank you for clarifying that.

Shelly Eibach: Thank you. Okay. Thank you for clarifying, and my comments here about, you know, ARU and in command and our current performance here in the quarter are all. Okay, that's helpful. In Francis or David, is the backlog comparison largely just a 1Q issue, or is it going to impact all the quarters in 2024? Hey, Bobby.

Speaker Change: Okay comment here about.

Speaker Change: You in and demand and and our.

Speaker Change: Current performance here in the quarters all demand related.

Speaker Change: Okay. That's helpful in granting the data is the backlog comparison.

Speaker Change: Largely just a <unk> or once you issue or does it.

Speaker Change: All the quarters in 2024.

Speaker Change: Hey, Bobby Thanks for asking we have the.

Francis Lee: Thanks for asking. We have, The backlog comparison will largely impact the front half of the year and be weighted toward Q1, for 2012. And then I want to circle back, I think Bobby, Bobby. I'll just do that. So if you think the first half of the year, probably looking at about a, as Shelley said, a three to four point drag on net sales growth year-over-year with the backlog. The back half of the ear; it's probably less than a point, by the way...

Francis Lee: The backlog comparison will largely impact the front half of the year.

Francis Lee: Be weighted towards Q Q1.

Speaker Change: Okay I'm 24.

Francis Lee: And then I want to so bad I think Bobby.

Speaker Change: Well just the first half of the year.

Francis Lee: We're probably looking at about Shelley said, a three to four point drag on net sales growth year over year with the backlog changes.

Francis Lee: The back half of the year, it's probably less than a point the way we see it now.

Francis Lee: Okay, just pure backlog headlines. Okay, yeah, pure backlog headlines. Okay. And then the second part is, is that part of the reason the gross margin progression is kind of different than maybe we would have expected with all the expansion in 2H? Or is there some other thing going on inside gross margins that are impacting the timing throughout the year? I think the underlying...

Speaker Change: Okay, I've, just pure backlog headphones, okay, yes, your backlog headwinds, it's exclusively really focused on the first half of the year.

Francis Lee: And then the second part is is that part of the reason the gross margin progression is kind of different than maybe would I expect it with all the expansion in two eight or is there. Some other things going on inside gross margins that are impacting the timing throughout the year.

Francis Lee: Yeah, I think the underlying.

Francis Lee: Gross Margin Shifts will be largely due to the timing of some of these cost initiatives that we're putting in place through the work and the programs that we've been putting in for our cost, overall. I'll say that. Thank you. You know, I've been here for several months now.

Francis Lee: Gross margin shifts will be largely to the timing of some of these cost initiatives that we're putting in place through the work.

Francis Lee: Work in the program. So we put them putting in for a cost improvement profitability improvement overall I'd say.

Francis Lee:

Francis Lee: Been here for several months now and it is a new CFO one of my top priorities is to build a more durable operating model and we've left no stone unturned as we look across all elements of our cost structure with gross margin.

Francis Lee: And as a new CFO, one of my top priorities is to build a more durable operating model, and we've left no stone unturned as we look across all elements of our cost. Gross Margin, and the initiatives we're putting in place. Some of those will take hold in the second half of the year and be annualized, giving you even more. Okay, and then I guess, lastly, for me, it's just, you guys are tightened up on CapEx to drive cash flow and play down debt. And that, you know, obviously, is the right strategy.

Francis Lee: The initiatives, we're putting in place some of those will take hold in the second half of the year and maybe annualized again gives us even more benefit of 2025.

Francis Lee: Okay, and then I guess Laffey for me. It's just you know you guys are are tightening up on on Capex to drive castle and play down that in that you know obviously is the right strategy. Just curious what what is getting pulled outta capex to see you go down to $30 million for some of the historical rates what are we deferring and and you know things like that.

Bobby Griffin: Just curious, what is getting pulled out of CapEx to see it go down to $30 million or some historical rates? What are we deferring and, and, you know, things like that? Yeah, our capex is around $30 million this year. It's about half of what it's been in the last couple of years. In addition to store closures, we're also being more thoughtful about store openings. And we're focusing the rest of the CapEx on some critical tech spend for our, I would add, so it's really a slowdown, a slowdown of store expansion and a slowdown of, you know, some of our infrastructure. Okay, that's helpful. That's what I was looking for.

Bobby Griffin: Yeah, our capex is around.

Bobby Griffin: Around $30 million this year, it's about half of what it's been in the last couple of years. In addition to store closures were also being more thoughtful about store openings.

Bobby Griffin: And we're focusing the rest of the Capex on some critical tech spend for our key systems.

Bobby Griffin: Okay add no. So it's really a slow down slow down of of newer expansion and a slow down of some of our.

Bobby Griffin: Infrastructure.

Speaker Change: Okay. That's helpful. That's what I was looking for I. Appreciate you guys. Let me ask some additional questions best of luck in the first quarter.

Francis Lee: I appreciate you guys letting me ask some additional questions. Best of luck here in the first quarter. At this time, there are no further questions. I'll hand the call back to the management team for any additional or closing remarks. Thank you for joining us today. We look forward to discussing our first quarter 2024 performance.

Speaker Change: Thank you.

Francis Lee: At this time there are no further questions I'll hand, the call back to the management team for any additional are closing remarks.

Speaker Change: Thank you for joining us today, we look forward to discussing our first quarter of 2024 performance with you in April.

Francis Lee: Sleep, well and dream Big.

Operator: And again, everyone, that does conclude this conference. Thank you for your participation, and many more. Thank you for watching. We'll see you next time.

Speaker Change: And again, everyone that does conclude this complaint. Thank you for your participation.

Operator: Mmm.

Operator: Mmm.

Operator: [music] [music].