Q2 2024 Sleep Number Corp Earnings Call

[music].

Operator: Welcome to Sleep Numbers' Q2 2024 earnings conference call. All lines have been placed in a listen-only mode until the question and answer session. Today's call is being recorded. If anyone has any objections, they may disconnect at this time. I would like to introduce Dave Schwantes, Vice President of Finance and Investor Relations. Thank you. Dave, you may begin.

Welcome to sleep Number's Q2, 'twenty 'twenty four earnings conference call all lines have been placed in a listen only mode until the question and answer session. Today's call is being recorded 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 you may begin.

Yeah.

David W. Schwantes: Good afternoon, and welcome to Sleep Number Corporation's second quarter 2024 earnings conference call. Thank you for joining us.

Speaker Change: Good afternoon, and welcome to Sleep number Corporation second quarter 2024 earnings Conference call. Thank you for joining us.

David W. Schwantes: I am Dave Schwantes, Vice President of Finance and Investor Relations. With me today are Shelly Ibach, 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.

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

Speaker Change: With me today are Shelly Ibach, our chair, President and CEO and Francis Lee, Our Chief Financial Officer.

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

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

David W. 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.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: The company's actual future results may vary materially.

David W. Schwantes: The company's actual future results may vary materially. We also want to refer you to the updated version of our investor presentation, which is available in the investor relations section of our website. I will now turn the call over to Shelly for her comment.

Speaker Change: We also want to refer you to the updated version of our Investor presentation, which is available on the Investor Relations section of our website.

Speaker Change: I'll now turn the call over to Shelly for her comments.

Shelly R. Ibach: Good afternoon, everyone, and thank you for joining us. My Sleep IQ score was 86 last night.

Shelly R. Ibach: Good afternoon, everyone and thank you for joining US My sleep IQ score was 86 last night.

Shelly R. Ibach: In October of last year, we communicated plans to transform our operating model to improve financial resilience and profitability in a range of economic environments. These transformative initiatives, coupled with the industry-leading innovation we continue to bring to market, position us to accelerate our performance and profitability as the industry recovers. Through the first half of 2024, we are slightly ahead of our expectations for both gross margin rate expansion and adjusted EBITDA, despite facing a tougher sales environment than we anticipated. My comments today will highlight the actions we are taking to improve our operating margins and generate cash to pay down debt.

Speaker Change: In October of last year, we communicated plans to transform our operating model to improve financial resilience and profitability in a range of economic environments.

Speaker Change: These transformative initiatives, coupled with the industry, leading innovation, we continue to bring to market.

Speaker Change: Additionally to accelerate our performance and profitability as the industry recovers.

Speaker Change: Through the first half of 2024, we are slightly ahead of our expectations for both gross margin rate expansion in adjusted EBITDA.

Speaker Change: Despite facing a tougher sales environment than we anticipated.

Speaker Change: My comments today will highlight the actions we are taking to improve our operating margin and generate cash to pay down debt.

Shelly R. Ibach: The financial results of our actions, including the favorable impact on both near-term performance and the long-term durability of our operating model and the ongoing intense focus we have on recalibrating our business for the difficult demand environment that the bedding industry continues to face. As a reminder, we previously communicated 2024 full-year financial targets related to restoring our margins, which included adjusted EBITDA of $125 to $145 million, additional operating cost reductions of 40 to 45 million dollars, which are on top of the 85 million dollars of reductions we delivered in 2023, and approximately 100 basis points of gross margin rate expansion. We are on track with each of these goals.

Speaker Change: The financial results of our actions, including the favorable impact on both near term performance and the long term durability of our operating model and the ongoing intense focus we have on recalibrating, our business for the difficult demand environment that the bedding industry continues to face.

Speaker Change: <unk>.

Speaker Change: As a reminder, we previously communicated 2020 for full year financial targets related to restoring our margins, which included adjusted EBITDA of $125 million to $145 million.

Speaker Change: Additional operating cost reductions of $40 million to $45 million, which are on top of the $85 million of reductions we delivered in 2023, and approximately 100 basis points of gross margin rate expansion.

Speaker Change: We are on track with each of these goals.

Shelly R. Ibach: Through the first six months of 2024, we reduced operating expenses by $44 million versus the prior year. We drove 60 basis points of gross margin rate expansion year over year, and we generated $9 million of free cash flow as planned, a $21 million improvement from last year. Our better-than-expected adjusted EBITDA for the first half of 2024 was driven by sustainable improvement in our cost base across our operations, including reductions in material costs, Efficiency Improvement in our Logistics and Fulfillment Network, and Reductions in Operating Expenses Supported by Lower Store Operating Costs and Ongoing Diligent G&A Expense Management.

Speaker Change: Through the first six months of 2024, we reduced operating expenses $44 million versus the prior year, we drove 60 basis points of gross margin rate expansion year over year.

Speaker Change: We generated $9 million of free cash flow as planned a $21 million improvement from last year.

Speaker Change: Our better than expected adjusted adjusted EBITDA for the first half of 2024 was driven by sustainable improvement in our cost base across our operations, including reductions in material cost efficiency improvements in <unk>.

Speaker Change: Our logistics and fulfillment networks and reductions in operating expenses supported by lower store operating costs and ongoing diligent G&A expense management.

Shelly R. Ibach: We are aggressively managing four principal areas that are within our control, including cost of acquisition, cost to serve, cost of goods sold, and G&A R&D leverage. The cost of acquisition is benefiting from greater precision in media and promotional investment, driven by expanding our AI-based models into our sales decision tools and further segmenting our media targeting to deliver more efficient demand generation, and Cost to Serve. We have outsourced select operational activities and further leveraged third-party expertise in information technology and services.

Speaker Change: We are aggressively managing four principal areas that are within our control, including cost of acquisition cost to serve.

Speaker Change: Cost of goods sold in G&A R&D leverage.

Speaker Change: Cost of acquisition is benefiting from greater precision in media and promotional investment driven by expanding our AI based models into our sales decision tools and further segmenting, our media targeting to deliver more efficient demand generation.

Speaker Change: And cost to serve we have outsourced.

Speaker Change: <unk> operational activities and further leverage third party expertise in information technology and services.

Shelly R. Ibach: These operating model changes give us additional flexibility in supporting peak volumes in our customer contact centers and in home delivery operations. In Cost of Goods, we have driven efficiency in our procurement process, manufacturing, and end-to-end fulfillment by introducing new best-in-class operating practices based on extensive assessments and cost controls. In G&A and R&D expense management, we have incorporated additional rigor to streamline our organizational design, remove inefficiencies, and increase productivity.

Speaker Change: These operating model changes give us additional flexibility in supporting peak volumes in our customer contact centers and home delivery operations.

Speaker Change: And cost of goods, we have driven efficiencies in our procurement process manufacturing and end to end fulfillment by introducing new best in class operating practices based on extensive assessment and cost controls.

Speaker Change: In G&A and R&D expense management, we have incorporated additional rigor to streamline our organizational design remove inefficiencies and increased productivity.

Shelly R. Ibach: All these initiatives are contributing to our ability to achieve our 2024 EBITDA and cash flow targets. When market growth inevitably returns to normal levels, the important business improvements we are now implementing will enable us to capitalize on our innovation leadership and accelerate our profitable growth, delivering increased value to shareholders. The mattress industry's demand environment remains challenging amid low consumer sentiment, a notable decline in home sales, and pressures on consumer purchasing power that include higher costs of living and interest rates that are reducing personal savings, types of consumer credit, and uncertainty related to geopolitical events and the upcoming U.S. election. With pinched wallets, consumers are spending more on essential items like food and clothing while reducing or delaying purchases of discretionary, durable items such as furniture and home furnishings.

Speaker Change: All of these initiatives are contributing to our ability to achieve our 2020 for EBITDA and cash flow targets.

Speaker Change: When market growth inevitably returns to normal levels. The important business improvements. We are now implementing will enable us to capitalize on our innovation leadership and accelerate our profitable growth delivering increased value to shareholders.

Speaker Change: The mattress industry demand environment remains challenging amid low consumer sentiment a notable decline in home sales.

Speaker Change: Pressures on consumer purchasing power that include higher cost of living and interest rates that are reducing personal savings type consumer credit and uncertainty related to GOP.

Speaker Change: Clinical events and the upcoming U S election.

Speaker Change: With pinched wallets consumers are spending more on essential items, like food and clothing, while reducing or delaying purchases of discretionary durable items, such as furniture and home furnishings.

Shelly R. Ibach: Mattress industry sales for 2024 are estimated around 25 million mattress units compared to a normalized level of about 32 million units based on long-term history and per capita spending trends. Our second quarter demand performance represents a slight sequential improvement from the first quarter. These results remained more pressured than we expected and were largely aligned with the reported industry trends. The scrutinizing consumer continues to concentrate his purchases during holiday promotional events like Memorial Day.

Speaker Change: Mattress industry sales for 2024, our estimated around 25 million mattress units compared to a normalized level of about 32 million units based on long term history and per capita spending trends.

Speaker Change: Our second quarter demand performance represents a slight sequential improvement from first quarter. These results remained more pressured than we expected and were largely aligned with the reported industry trends.

Speaker Change: This scrutinizing consumer continues to concentrate their purchases during holiday promotional events like Memorial day.

Shelly R. Ibach: As a result, we delivered both sales and unit growth in May, which was our strongest demand month since the start of the industry recession in February 2022. Based on our first half demand performance and current industry and economic forecast for the remainder of the year, we now expect our demand in the back half of the year to be flat to down low single digits versus our prior estimate of low single digit growth.

Speaker Change: As a result, we delivered both sales and unit growth in May which was our strongest demand months since the start of the industry recession in February 2022.

Speaker Change: Okay.

Speaker Change: Based on our first half demand performance and current industry and economic forecast for the remainder of the year. We now expect our demand in the back half of the year to be flat to down low single digits versus our prior estimate of low single digit growth.

Shelly R. Ibach: This outlook still represents a sequential improvement from our first half demand performance, which was down mid single digits. We expect this improvement to result from easier comparisons, especially in the third quarter, higher media investments than in the first half, and other demand-driving initiatives we've implemented and honed over the last three quarters.

Speaker Change: This outlook still represents a sequential improvement from our first half demand performance, which was down mid single digits.

Speaker Change: Expect this improvement to result from easier compares especially in the third quarter.

Speaker Change: Higher media investments than the first half and other demand driving initiatives, we've implemented and honed over the last three quarters.

Shelly R. Ibach: These media and selling strategies are focused on leading with differentiated benefits of our superior innovations, including adjustable firmness and temperature, starting at a value-oriented cost of $9.99 for our C1 SmartBed, amplifying our different differentiated smart bed message, applying our model's predictive capabilities to shift investment efficiently into higher traffic driving media, activating our loyal customer base for increased referral and repeat sales through social advocacy, and Driving Conversion through Improved Sales Training and Executi As we enter the fourth quarter, we also expect to benefit from the introduction of an exciting new smart bed called Climate Cool, which addresses a specific sleep need of customers.

Speaker Change: These media and selling strategies are focused on leading with differentiated benefits of our superior innovations, including adjustable firmness in temperature 30 net of value orientated cost of 999 with our C. One smart bed.

Speaker Change: Amplifying our different just to differentiate and smart bed message applying our models predictive capabilities to shift investment efficiently into higher traffic driving media.

Speaker Change: Activating our loyal customer base for increased referral and repeat sales through social advocacy.

Speaker Change: And driving conversion through improved sales training and execution excellence focused on our relationship based approach.

Speaker Change: As we enter the fourth quarter. We also expect to benefit from the introduction of an exciting new smart bed called climate cool.

Speaker Change: Which addresses a specific sleep need of customers.

Shelly R. Ibach: More than two-thirds of sleepers report sleeping too hot or experiencing temperature fluctuation during the night. The new Climate Cool smart bed, which builds on our successful Climate 360 smart bed technology, actively cools by drawing warm air away from your body. This is very different than competitor's products that push air through warm foam or use water to cool.

Speaker Change: More than two thirds of sleepers report sleeping too hot or experiencing temperature fluctuation during the night.

Speaker Change: The new climate cool smart bed to build on our successful climate 360, smart bed technology actively cool by dry.

Speaker Change: Warm air away from your body.

Speaker Change: This is very different than competitors products to push air through warm phone or use water to cool.

Shelly R. Ibach: In fact, the ClimateCool smart bed cools over 20 times faster than competing products. And like our Climate 360 Smart Bed, Climate Cool effortlessly adjusts and actively cools up to 15 degrees on each side of the bed for each sleeper's ideal firmness and sleep temperature. Additionally, the Climate Cool Smart Bed features scientifically proven cooling program routines, which are designed to provide deeper, more comfortable sleep. Sleepers can choose from these cooling programs, or they can personalize them for their needs. Sleepers will also be able to see the results in their Sleep Number app, along with other sleep health insights.

Speaker Change: In fact, the climate cool smart bed cools over 20 times faster than competitors products and.

Speaker Change: And like our climate 360, smart bed climate cool effortlessly adjust and actively cooled up to 15 degrees on each side of the bed for each sleepers ideal permanent and sleep temperature.

Speaker Change: Addition to leave the climate cool smart bed features scientifically proven cooling program routines, which are designed to provide deeper more comfortable asleep.

Speaker Change: Sleepers can choose from these cooling programs or they can personal life for their needs.

Speaker Change: Sleepers will also be able to see the results in their sleep number app along with other sleep health insights.

Shelly R. Ibach: Our teams accelerated the commercialization of this revolutionary innovation to the fourth quarter of this year as part of our margin improvement initiative. In the current pressure demand environment, we are forecasting sales of Climate Cool to come primarily from positive mix shifts, which we expect to contribute 20 to 30 basis points of accretion to our fourth quarter gross margin rate. The queen size Climate Cool smart bed with integrated base will be priced at $54.99.

Speaker Change: Our teams accelerated the commercialization of this revolutionary innovation to the fourth quarter of this year as part of our margin improvement initiatives.

Speaker Change: In the current pressured demand environment, we are forecasting sales of climate cool to come primarily from positive mix shifts, which we expect to contribute 20 to 30 basis points of accretion to our fourth quarter gross margin rate.

Speaker Change: The Queen size climate cool smart bed with integrated base will be priced at 50 499.

Shelly R. Ibach: Our extensive analytical rigor and deliberate business improvement actions are restoring margins and generating cash despite a persistently prolonged mattress industry recession. While 2024 demand remains pressured, our gross margin improvement supports our full year adjusted EBITDA guidance range of $125 million to $145 million. In our updated investor relations presentation, available on our website, we illustrate the significant upside we expect for Sleep Number's business as the mattress category recovers, industry units have contracted to 2016 levels, and are currently around six to seven million units below expected consumption levels.

Speaker Change: Our extensive analytical rigor and deliberate business improvement actions are restoring margins and generating cash despite a persistently prolonged mattress industry recession.

Speaker Change: While 2020 forward demand remains pressured our gross margin improvement supports our full year adjusted EBITDA guidance range of 125 million to $145 million.

Speaker Change: In our updated Investor relations presentation available on our website, we illustrate the significant upside we expect for sleep number's business as the mattress category recovers.

Speaker Change: Industry units have contracted to 2016 unit levels and are currently around six to 7 million units below expected consumption levels.

Shelly R. Ibach: With the actions we've taken assuming the industry returns to normalized demand levels of nearly 32 million units, we would expect to realize more than $500 million of incremental net sales and about $175 million of incremental adjusted EBITDA compared to current performance levels. In a more normalized mattress industry environment, the actions we have taken to transform our operating model position us to achieve adjusted EBITDA margins in the mid-teens and free cash flow of more than $200 million annually.

Speaker Change: With the actions we've taken in assuming the industry returns to normalized demand levels of nearly 32 million units.

Speaker Change: We'd expect to realize more than $500 million of incremental net sales and about a $175 million of incremental adjusted EBITDA compared to current performance levels.

Speaker Change: In a more normalized mattress industry environment. The actions, we have taken to transform our operating model position us to achieve adjusted EBITDA margin in the mid teens.

Speaker Change: And free cash flow of more than $200 million annually.

Shelly R. Ibach: I want to express my deepest appreciation to our Sleep Number team for your tenacity and ingenuity in navigating this challenging environment and for your shared belief in our purpose. Your commitment to strong execution of our operating model transformation has resulted in sustainable cost and gross margin improvement. Now Francis will provide additional details about our performance and outlook for the year.

Speaker Change: I want to express my deepest appreciation to our sleep number team for your tenacity and ingenuity in navigating this challenging environment and per year, a shared belief in our purpose.

Speaker Change: Your commitment and strong execution of our operating model transformation has resulted in sustainable cost and gross margin improvement.

Speaker Change: Now Francis who will provide additional details about our performance and outlook for the year.

Francis K. Lee: Thank you, Shelly, and good afternoon everyone. Our team continues to drive efficiencies throughout the business as we build greater durability and financial resilience into our operating model. These intensive efforts led to both operating expenses and gross margin rate performance coming in better than expected for the quarter. We also drove improved cash flow for the first half of the year with free cash flow of $9 million, $21 million higher than the prior year's first half, even with pressure from the year over year net sales decline.

Francis K. Lee: Thank you Shelly and good afternoon, everyone. Our team continues to drive efficiencies throughout the business as we build greater durability and financial resilience into our operating model.

Francis K. Lee: These intensive efforts have led to both operating expenses and gross margin rate performance coming in better than expected for the quarter.

Francis K. Lee: We also drove improved cash flow for the first half of the year with free cash flow of $9 million $21 million higher than prior year's first half even with pressure from the year over year net sales decline.

Francis K. Lee: Now let's turn to a review of our second quarter results. Second quarter net sales of $408 million were down 11% versus last year and were a couple of points below our expectations. Our net sales growth for the quarter included a mid-single-digit demand decline and six points of headwind from year-over-year backlog changes. Our delivered units decreased 8% for the quarter, with our ARU down 3% versus the prior year.

Francis K. Lee: Now, let's turn to a review of our second quarter results.

Francis K. Lee: Second quarter net sales of $408 million were down 11% versus last year, and we're a couple of points below our expectations. Our net sales growth for the quarter included a mid single digit demand decline and six points of headwind from year over year backlog changes.

Francis K. Lee: Our delivered units decreased 8% for the quarter with or are you down 3% versus the prior year.

Francis K. Lee: We remain intently focused on restoring our gross margin rate to higher levels, as evidenced by the 59.1% gross margin rate delivered in the second quarter. This was up 150 basis points versus the prior year's second quarter and ahead of our expectations. Some of the specific drivers of our year-over-year improvement for the second quarter included cost of goods sold reductions through product redesign, including reducing the number of parts for selected components. Ongoing supplier negotiations for all material components.

Speaker Change: We remain intently focused on restoring our gross margin rate to higher levels as evidenced by the 59, 1% gross margin rate delivered in the second quarter.

Speaker Change: This was up 150 basis points versus the prior year's second quarter and ahead of our expectations.

Speaker Change: Some of the specific drivers of our year over year improvement for the second quarter included.

Speaker Change: Cost of goods sold reductions through product redesign, including reducing the number of parts for selected components.

Speaker Change: Ongoing supplier negotiations for all material components for example, we redistributed our phone business across our partners, resulting in product cost reductions.

Francis K. Lee: For example, we redistributed our phone business across our partners, resulting in product cost reduction and year over year cost efficiencies in our home delivery and logistics operations, including implementing a flexible labor model in our home delivery operations with the use of more external delivery partners, providing cost savings and increased flexibility for peak volume periods. We have also leveraged fixed assets, such as our home delivery trucks, as freight shuttles during low-volume periods, yielding net lower logistics costs. In addition, we switched our primary parcel provider, resulting in significant cost savings.

Speaker Change: Year over year cost efficiencies in our home delivery and logistics operations, including <unk>.

Speaker Change: Implementing a flexible labor model in our home delivery operations with the use of more external delivery partners, providing cost savings and increased flexibility for peak volume periods.

Speaker Change: We have also leveraged fixed assets such as our home delivery trucks as freight shuttles during low volume periods, yielding net lower logistics costs.

Speaker Change: In addition, we switched our primary parcel provider, resulting in significant cost savings.

Francis K. Lee: The progress we have made in the first half of the year positions us well for a gross margin rate approaching 60% for the back half of this year. We have also made meaningful progress in reducing our operating costs, which were down $19 million versus the prior year's second quarter before restructuring costs and down $44 million year to date. Cost reductions have been broad-based, including a year-over-year reduction in media, lower selling expenses as we benefit from a net store count reduction, and reduced R&D spending.

Speaker Change: The progress we have made in the first half of the year positions us well for a gross margin rate approaching 60% for the back half of this year.

Speaker Change: We also made meaningful progress in reducing our operating costs, which were down $19 million versus the prior year's second quarter before restructuring costs and down $44 million year to date.

Speaker Change: Cost reductions have been broad based including a year over year reduction in media lower selling expenses as we benefit from our net store count reduction and reduced R&D spending.

Francis K. Lee: We have achieved these cost reductions through systematic scrutiny and reset of our cost base across our entire operations, with active cross-functional engagement throughout the company and external benchmarks. Here are some specific examples of the transformation initiatives we have taken.

Speaker Change: We have achieved these cost reductions through systematic scrutiny and reset of our cost base across our entire operations with active cross functional engagement throughout the company and external benchmarking.

Speaker Change: Here are some specific examples of the transformation initiatives we have taken.

Francis K. Lee: We expanded our self-service customer content, saving over $5 million annually. We also rationalized technology tools used across the business to reduce total vendors and deliver $1 million of annual savings. Our R&T teams have further streamlined their costs while also supporting gross margin rate improvement initiatives. We anticipate operating expenses for the back half of the year to be in line with the prior year's second half, as we achieved significant cost reductions in the back half of last year and increased our funding of media.

Speaker Change: We expanded our self service customer content saving over $5 million annually.

Speaker Change: We also rationalized technology tools used across the business to reduce total vendors and deliver $1 billion of annual savings.

Speaker Change: Our R&D teams have further streamline their costs, while also supporting gross margin rate improvement initiatives.

Speaker Change: We anticipate operating expenses for the back half of the year to be in line with the prior year's second half as we lap significant cost reductions in the back half of last year and increase our funding of media.

Francis K. Lee: We generated $28 million of adjusted EBITDA in the quarter, compared with $35 million last year, with a year-over-year decrease due to the decline in net sales, partially offset by a higher gross margin rate and $19 million of operating expense reduction. Our second quarter adjusted EBITDA was slightly ahead of our expectations, despite net sales being a couple of points below plan. We continue to focus on maximizing adjusted EBITDA and cash generation as demand for our category continues to bounce around bottoming levels.

Speaker Change: We generated $28 million of adjusted EBITDA in the quarter compared with $35 million last year with the year over year decrease due to the decline in net sales, partially offset by a higher gross margin rate and $19 million of operating expense reductions.

Speaker Change: Our second quarter adjusted EBITDA was slightly ahead of our expectations. Despite net sales being a couple of points below plan.

Speaker Change: We continue to focus on maximizing adjusted EBITDA and cash generation as demand for our category continues to bounce around bottoming levels.

Francis K. Lee: For the full year, we now expect free cash flow of $50 to $70 million, which we intend to use to pay down our credit line. This is a $10 million decrease from our prior expectations, primarily due to our reduced sales guidance, which negatively impacts our working capital expectations for the year. Our updated outlook implies $40 to $60 million of free cash flow for the second half, with an expectation of higher net income in the back half of the year, as well as expected benefit from working capital changes coming off of seasonally low levels at the end of Q2.

Speaker Change: For the full year, we now expect free cash flow of $50 million to $70 million, which we intend to use to pay down our credit line.

Speaker Change: This is a $10 million.

Speaker Change: Decrease than our prior expectations, primarily due to a reduced sales guidance, which negatively impacts our working capital expectations for the year.

Speaker Change: Our updated outlook implies $40 million to $60 million of free cash flow for the second half with an expectation of higher net income in the back half of the year as well as expected benefit from working capital changes coming off a seasonally low levels at the end of Q2.

Francis K. Lee: Turning to our 2024 outlook, we are reiterating our 2024 full-year adjusted EBITDA outlook range of $125 to $145 million. Here are a few items to highlight regarding our expectations for the remainder of the year, including some specific color about the third quarter. We expect net sales to be down mid-single digits for the year. For the back half of the year, we expect both demand and net sales to be flat to down low single digits versus the prior year as we face easier comparisons and benefit from demand driving initiatives.

Speaker Change: Turning to our 2024 outlook, we are reiterating our 2020 for full year, adjusted EBITDA outlook range of $125 million to $145 million pure or fewer.

Speaker Change: Items to highlight regarding our expectations for the remainder of the year, including some specific color about third quarter.

Speaker Change: We expect net sales to be down mid single digits for the year.

Speaker Change: For the back half of the year, we expect both demand and net sales to be flat to down low single digits versus the prior year as we lap easier comparisons and benefit from demand is driving initiatives.

Francis K. Lee: Our full-year net sales guidance continues to assume three percentage points of headwind from year-over-year backlog changes and one percentage point of headwind from lower average store counts. We expect at least 100 basis points of gross margin rate expansion in 2024, with the gross margin rate expected to approach 60% for the back half of the year. We expect $14 million in restructuring costs for the year, with less than $2 million expected for the balance of the year.

Speaker Change: Our full year net sales guidance continues to assume three percentage points of headwind from year over year backlog changes and one percentage point of headwind from lower average store count.

Speaker Change: We expect at least 100 basis points of gross margin rate expansion in 2024.

Speaker Change: With the gross margin rate is expected to approach, 60% for the back half of the year.

Speaker Change: We expect $14 million of restructuring costs for the year with less than $2 million expected for the balance of the year.

Francis K. Lee: We continue to expect capital expenditures of approximately $30 million for the year, down nearly 50% from the prior year. Turning to third quarter performance, we are expecting net sales to be down low to mid single digits versus the prior year's third quarter, with demand flat to down low single digits, and with three to four points of headwind from year over year backlog changes. We expect third-quarter adjusted EBITDA to be $25 to $30 million.

Speaker Change: We continue to expect capital expenditures of approximately $30 million for the year down nearly 50% from the prior year.

Speaker Change: Turning to third quarter performance, we are expecting net sales to be down low to mid single digits versus the prior year's third quarter with demand flat to down low single digits and with three to four points of headwind from year over year backlog changes.

Speaker Change: We expect third quarter, adjusted EBITDA to be $25 million to $30 million.

Operator: We also want to provide an update on how we are performing against our bank covenant. Our debt to EBITDA ratio was 4.4 times at the end of the second quarter compared to our covenant maximum of 5.5 times for the quarter. We continue to expect our debt to EBITDA leverage to improve during the balance of the year and end the year below $3.75. This includes a meaningful improvement in our trailing 12-month adjusted EBITDA as we benefit from year-over-year improvement in our gross margin rate.

Speaker Change: We also want to provide an update on how we are performing against our bank covenants.

Speaker Change: Our debt to EBITDA ratio was four four times at the end of the second quarter compared to our covenant maximum of five five times for the quarter. We continue to expect our debt to EBITDAR leverage to improve the balance of the year and ended the year below 375 times.

Speaker Change: This includes a meaningful improvement in our trailing 12 months adjusted EBITDA as we benefit from year over year improvement in our gross margin rate.

Operator: As we look forward, here's some context on how to think about our covenants in 2025. Starting in Q1 of next year, our covenant maximum will be 4.0 times, and we expect to be below 3.75 times by year end. For illustrative purposes, with the changes to our cost structure and gross margin rate advancements, we would expect to remain within our leverage covenants through 2025, even if there were no material improvement in the current recessionary demand environment for our category.

Speaker Change: As we look forward here are some context on how to think about our covenants in 2025.

Speaker Change: Starting in Q1 of next year, our covenant maximum will be 4.0 times and we expect to be below 375 times entering the year.

Speaker Change: For illustrative purposes, with the changes to our cost structure and gross margin rate advancements, we would expect to remain within our leverage covenants through 2025, even if there were no material improvement in the current recessionary demand environment for our category.

Operator: Based on our current cost structure, we would require a minimum net sales of approximately $1.8 billion to stay below our 4.0 times covenant maximum in 2025. While the demand environment has remained soft, we continue to drive operating efficiencies in both cost of goods sold and operating expenses to maintain our full year adjusted EBITDA guidance. We continue to maintain maximum flexibility and optionality to navigate alternative demand environments. I want to thank the entire Sleep Number team who are transforming the business and positioning us to achieve profitable growth when the demand environment improves. With that, Operator, please open the line for questions.

Speaker Change: Based on our current cost structure, we would require a minimum net sales of approximately $1 8 billion.

Speaker Change: To stay below our four <unk> times covenant maximum in 2025.

Speaker Change: While the demand environment has remained soft we continue to drive operating efficiencies in both cost of goods sold and operating expenses to maintain our full year adjusted EBITDA guidance, we continue to maintain maximum flexibility and optionality to navigate alternative demand environments.

Speaker Change: I want to thank the entire sleep number team, who are transforming the business and positioning us to achieve profitable growth when the demand environment improves.

Speaker Change: With that operator, please open the line for questions.

Operator: Now we begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your hands and ensure that your phone is not on mute when asking your question. Your first question comes from the line of Bobby Griffin with Raymond James. Bobby, your line is now open. ,,,,,,

Speaker Change: And that will begin the question and answer session. If you have that Ian would like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue.

Speaker Change: I would like to withdraw your question since your breasts are willing again, if you are called upon to pass your question and our listening via loud speaker in your device misspeak apprehension that insurer to triple and its not only with when asking your question.

Speaker Change: Your first question comes from the line of Bobby Griffin with Raymond James Bobby Your line is now open.

Robert Kenneth Griffin: Hey, good afternoon, everybody. Thanks for taking the question. Hi, Bobby. Hey, thanks.

Robert Kenneth Griffin: Hey, good afternoon, Brian Thanks for taking the questions.

Bobby: Hi, Bobby.

Robert Kenneth Griffin: I guess so, Shelly, first, I want to maybe talk about the higher media spending. Can you just talk a little bit more about how you guys are planning the spending in light of the election coming up? And, maybe if you have the data on you, kind of give us some context of how the category and kind of media trended four years ago. And just to help us kind of put all that together about the election cycle and what that could do for your media side.

Bobby: Hey.

Robert Kenneth Griffin: Thank you I guess, so first I want to maybe talk about the higher media spending can you just talk a little bit more about how you guys are planning to spending in light of the election coming up in and maybe if you have the data on you kind of give us some context of how the category and kind of media trend. It four years ago, and just to help us kind of.

Speaker Change: Put all that together about the election cycle and what that could do for your media side of things.

Shelly R. Ibach: Great. Well, you know, the election and the media remain a bit of a volatile process in themselves. But let me, you know, take a step back and talk about our media spending here in the first half and how we're approaching the second half and, you know, overall how we're approaching and running the business for demand in this environment. So, for the first half, our media spend was down 8%. And as we approach the second half, we intend to spend media levels that are flat to the prior year.

Speaker Change: Oh, great well, you know the election and the media remains.

Speaker Change: Paint a bit of a volatile process in itself, but let me take a step back and talk about.

Speaker Change: Our media spending here in the first half and how we're approaching the second half and overall, how we're approaching them.

Speaker Change: Running the business for demand in this environment. So for the first half hour media spend was down.

Shelly R. Ibach: So that's an increase for us from the first half of the year in how we're spending on media. Having said that, we are focused on prioritizing media that is most effective and most efficient using our tech-enabled tools that we've talked about.

Speaker Change: 8% and as we approach the second half we intend to spend media levels that are flat to prior year. So that's an increase for us.

Speaker Change: <unk>.

Speaker Change: <unk> first half of the year in how we're spending and media have having said that.

Speaker Change: We are focused on.

Speaker Change: Prioritizing media that is most effective and efficient using our tech enabled tools that we've talked about and we're also focused on when the consumers there and when she's not so.

Shelly R. Ibach: And we're also focused on when the consumer is there and when she's not. So we're prepared to deploy increased media if the consumer is there and she's responsive. And we will also pull back on the media if she's not. And that happened in June. I think the second quarter was a great example where we lean into media during the Memorial Day event when the scrutinizing consumer was there. She is highly responsive to discounts and value right now.

Speaker Change: So we're prepared to deploy increased media is if the consumer is there in cheese responsive and we will also pulled back on media if she's not that.

Speaker Change: That transpired in June I think June or the SEC.

Speaker Change: Second quarter was a great example, where we leaned into media during the Memorial day event when the scrutinizing consumer was there she is highly responsive to discounts and value right now and we leaned in and we drove growth in both sales and units.

Shelly R. Ibach: And we leaned in, and we drove growth in both sales and units, and as we moved into June, following the market share period, she disappeared. It was a very weak customer-consumer environment, and we pulled back on our media. And, you know, therefore, April and June were pretty similar at, you know, down mid single digits, and that's where we ended the quarter. As we move into the back half, we expect to be flat to down low single digits from a combination of initiatives. How we're applying media.

Speaker Change: And as we moved into June following the market share period she.

Speaker Change: Disappeared and it was a very weak customer consumer environment, and we pulled back on our media.

Speaker Change: And therefore April and June were were pretty similar at down mid single digits, and that's where we ended the quarter as we move into the back half, we expect to be flat to down low single mid single digits.

Speaker Change: From a combination of initiatives.

Speaker Change: We're applying media.

Shelly R. Ibach: The Easier Compares, especially in Q3, and Advancing the Demand Initiatives that we talked about. And, of course, we have our innovation leadership with Climate Cool in the fourth quarter, which is also the timing of the election. We recognize that. As I mentioned, we're really looking at Climate Cool as a mix shift, and that's how we've built it into our expectations for the back half, driving 20 to 30 basis points of gross margin improvement in the fourth quarter.

Speaker Change: The easier compares especially in Q3.

Speaker Change: And advancing the demanding initiatives that that we talked about and of course, we have our innovation leadership with climate cool in the fourth quarter, which is also the timing of the election, we recognize that as I mentioned, we're really looking at climate cool as our mix shifts.

Speaker Change: How we've built it into our expectations for the back half driving 20 to 30 basis points of gross margin improvement in the fourth quarter.

Shelly R. Ibach: Back to your media point around the overall election, we're going to be very agile. We have to be. And that's how we approached it four years ago with agility and plans and contingency plans and managing this very, very closely so that we could be effective and efficient with our spend.

Speaker Change: Back to your media a point around.

Speaker Change: The overall.

Speaker Change: Election.

Speaker Change: We're going to be very agile, we have to be and that's how we approached it four years ago with agility and plans and contingency plans and.

Speaker Change: Managing this very very closely so that we can be effective and efficient with our spend.

Speaker Change: Yeah.

Robert Kenneth Griffin: Thank you. I appreciate the extra details, too, about how the quarter played out.

Speaker Change: Thank you I appreciate the extra details to about kind of how the quarter played out that was actually one of my my questions. I guess, maybe next one for me then is.

Robert Kenneth Griffin: That was actually one of my questions. I guess maybe next up for me, then it's probably for Francis or Dave. Just kind of on the you know, I appreciate the details on 3Q, but the shape of the year is a little bit different than the kind of consensus was modeling for 3Q, let's say. So can you talk through kind of the big step up that you guys are implying for 4Q EBITDA and some of the drivers on that and just help us kind of unpack, you know, that kind of back end or kind of 4Q weighted side of getting into the guidance?

Speaker Change: Probably for Francis or Dave.

Speaker Change: Just kind of on the I appreciate the details on <unk>, but the shape of the year is a little bit different than kind of consensus was modeling <unk>. So can you talk through kind of the big step up that you guys are implying for <unk> EBITDA and some of the drivers on that and just help us kind of unpack.

Speaker Change: That kind of back in or kind of <unk> weighted side of getting into the guidance.

Speaker Change: Okay.

Francis K. Lee: Hey, Bobby. Yeah, we can get into that for sure. Our second half outlook for our adjusted EBITDA has us flat with our guidance for the full year that we've outlined before, and that's really driven by a couple of things. As we mentioned, we have gross margin rate improvement that we've seen in the first half and that we'll continue to see into the second half. And then we've got some increased media spending, as Shelly mentioned, which is driving the overall EBITDA story.

Speaker Change: Hey, Bobby Yes, we can get into that for sure our second half outlook for our adjusted EBITDA.

Speaker Change: Hum.

Speaker Change: Has this flat with our guidance for the for the full year that we've.

Speaker Change: We've outlined before.

Speaker Change: And that's.

Speaker Change: Really driven by.

Speaker Change: A couple of things as we mentioned we have gross margin rate improvement that we've seen in the first half and that will continue to see go.

Speaker Change: Go into the second half.

Speaker Change: And then we've got some increased media spending as Shelley mentioned.

Shelley: <unk> is driving the overall EBITDA story.

Francis K. Lee: When we look at Q3 and Q4, there's some timing of demand that, based on being closer to this, we've just reshaped some of the outlook. I'll turn to Dave and see if he has any additional commentary versus the guidance that you were asking about.

Shelley: When we look at Q3 and Q4.

Speaker Change: There is some timing of demand thats based on being closer to this.

Speaker Change: Based on being closer to the half that we've just reshape some of the outlook.

Speaker Change: I'll turn to Dave and see if he has any additional.

Speaker Change: Commentary versus the guidance that you were asking about.

David W. Schwantes: Yeah, so Bobby, I think one of the notable things is really around, I'll say marketing. So we are going to be spending our heaviest marketing is usually in Q3 to support the Labor Day event. And so you'll again, as Shelly said, we're looking at our media to be somewhat flat year-over-year for the back half of the year.

David W. Schwantes: Yeah, So Bob I think one of the notable things is really around.

Speaker Change: I'll say the marketing so we are going to be spending our heaviest marketing is usually in Q3 to support the labor day event and.

Shelly R. Ibach: So you'll again as Shelly said, we're looking at our media to be somewhat flat year over year for the back half of the year and I think Francis alluded to it but if you think about some of the demand that we're going to drive during the labor day event, which is which is our Super Bowl, it's going to be delivered in the fourth quarter. So youre going to see some movement there in terms of.

David W. Schwantes: And I think Francis alluded to it, but if you think about some of the demand that we're gonna drive during the Labor Day event, which is our Super Bowl, it's gonna be delivered in the fourth quarter. So you are gonna see some movement there in terms of ultimately where that demand goes. And you should see a pretty big difference, if you will, in terms of that total sales and marketing expense as you go from Q3 to Q4.

Francis K. Lee: Ultimately where that demand goes and you should see a pretty.

Speaker Change: A pretty big differential if you will in terms of that total sales and marketing expense I should go from Q3 to Q4.

David W. Schwantes: So based on our guide, the guide we provided of 25 to 30 million for Q3, it is specifically signaling that we do expect Q4's EBITDA to be a little stronger than Q3, and I would largely chalk that up to just some of that demand that's going to be fulfilled in Q4 that we generated in Q3. Thank you.

Speaker Change:

Speaker Change: Based on our guide the guide we provided of.

Speaker Change: $25 million to $30 million for Q3. It is specifically signaling that we do expect Q4's EBITDA to be a little stronger than Q3s, and I would largely chalk that up to just some of that demand that is going to be fulfilled in Q4 that we generate in Q3.

Robert Kenneth Griffin: Thank you. I appreciate the details there, and I'll turn it over to somebody else. Best of luck here for the rest of the year.

Speaker Change: Thank you I appreciate the details there and I'll turn it over to somebody else.

Speaker Change: Up here for the rest of the year.

Speaker Change: Thank you.

Operator: Your next question comes from the line of Peter Keith with Piper Sandler. Peter, your line is now open.

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

Alexia Morgan: Hi, this is Alexia Morgan on the line for Peter Keith. Thanks for taking our question. You said that consumer demand in the industry remains pressured, but we were curious about strength across your different pricing bands. Are you seeing any deviation in units or in demand between the higher priced items and the lower priced products?

Speaker Change: Hi, This is Alexia Morgan online for Peter Keith Thanks for taking my question.

Alexia Morgan: You just got that consumer demand in the industry remains pressured but we were curious on strength across your different pricing band are you seeing any deviation in units are in demand between higher priced items and a lower priced product.

Speaker Change: Okay.

Shelly R. Ibach: Thanks for the question, Alexia. Nice to meet you.

Speaker Change: Alright, Thanks for the question Alexia, a nice nice to meet you and we introduced the C. One.

Speaker Change: In June and that played certainly played a role in our mix we were happy with how it mix in how the C series mixed in.

Speaker Change: In the second quarter, but we were also up against the close out of the C series from prior year. So certainly a better margin profile. This year on our C series, but some unit pressure overall.

Shelly R. Ibach: We introduced the C-1 in June, and that certainly played a role in our mix. We were, you know, happy with how it mixed and how the C-series mixed in, you know, in the second quarter. But we were also up against the closeout of the C-series from prior years, so certainly a better margin profile this year on our C-series, but some unit pressure overall as we left the closeout.

Speaker Change: We as we lapped the close out so when we think about our different theory, we had positive margin from our mix.

Speaker Change: <unk> in the second quarter.

Speaker Change: Continued to see the initiatives that we've been driving in the last three quarters play out and helping us move the consumer when she's in the store up the line and.

Speaker Change: Two we're where we're benefiting from a margin perspective.

Speaker Change: Okay.

Shelly R. Ibach: Great, thank you. And then one more, how did demand trend throughout the quarter? And has there been any change? Or, well, I know you talked about your view on the state of the consumer, but how did Phil, kind of end, the quarter and then how is our field trending quarter to date?

Speaker Change: Great. Thank you.

Speaker Change: And then one more how did demand trends throughout the quarter and has there been any change.

Speaker Change: And while I know you talked about your view on the state of the consumer but.

Speaker Change: How did it.

Speaker Change: Sales.

Speaker Change: And in the quarter, and then tolerance sales trending quarter to date.

Speaker Change: Okay.

Shelly R. Ibach: Yeah, the shape of Q2 was very similar to the shape of Q1. In the first half, the two strong months were the market share months, the months where we had the big holidays. And that was February and May, and the other months, the shoulders of the market share events remained weak. The scrutinizing consumers certainly focus when we have the best offers.

Speaker Change: Yes, the shape of Q2 was very similar to the shape of Q1 and in the first half the two strong months, where the market share amongst the months, where we had the big holiday and that was February and May.

Speaker Change: And the other months the shoulders of the market share events remain weak they're scrutinizing consumers certainly focused win when we have the best offers we're seeing that in our business and from everything I've read on the industry reports, that's what the industry is.

Shelly R. Ibach: You know, we're seeing that in our business, and from everything I've read in the industry reports, that's what the industry is experiencing as well. So we, as I mentioned before, April and June were very similar down mid-single digits, and that's, you know, where we were for the quarter on demand. And, you know, we did have a couple of points of sequential improvement from Q1, but, you know, obviously, you know, still, you know, pressured overall.

Speaker Change: Experiencing as well.

Speaker Change: So we as I mentioned before April and June were very similar down mid single digits, and that's where we were for the quarter on demand.

Speaker Change: We did have a couple of points of sequential improvement from Q1, but obviously still pressured overall.

Speaker Change: And we saw similar consumer behavior in the month of July where July 4th was in early on in the month into smaller holidays small part of of Q3, but positive July 4th week.

Shelly R. Ibach: And we saw similar consumer behavior in the month of July, where July 4th was, you know, early on in the month, a smaller holiday, a small part of Q3, but a positive July 4th, you know, weak. And then the consumer was very weak in her activity following that event and period. And we're looking forward to our big market share here in the third quarter, which, you know, is a large part of August and September.

Speaker Change: And then the consumer.

Speaker Change: <unk> is very weak.

Speaker Change: In her in her activity following that event and period.

Speaker Change: And we're looking forward to our big market share here in in the third quarter, which is a large part of August and September.

Alexia Morgan: Great, thank you. That's it for me.

Speaker Change: Great. Thank you that's it for me.

Speaker Change: Yeah.

Speaker Change: Thank you.

Operator: Your next question comes from the line of Brad Thomas with KeyBank Capital Markets. Brad, your line is now open.

Speaker Change: Your next question comes from the line of Brad Thomas with Keybanc Capital markets. Brad. Your line is now open.

Bradley Bingham Thomas: Hi, thanks so much for taking the questions. Just a few housekeeping items, maybe more for me, if I could squeeze in a few here. The first, Shelly, I was wondering if you talked a little bit about, you know, the current outlook for stores and how you're thinking about potentially, you know, some incremental closures and what, if anything, you're seeing in terms of benefit to profitability, if you're seeing a favorable transfer rate to other stores in the market, you know, just just an update on how you're how you're seeing the benefit from those closures playing out. Hey, Brad.

Bradley Bingham Thomas: Hi, Thanks, so much for taking the questions.

Bradley Bingham Thomas: Just a few housekeeping items, maybe more for me if I could squeeze in a few here.

Bradley Bingham Thomas: The first Shelley I was wondering if you can talk a little bit about.

Speaker Change: The current outlook for stores, and how youre thinking about potentially some incremental closures and what if anything youre seeing in terms of benefit to profitability, if youre seeing a favorable.

Speaker Change: For rate to other stores in the market just an update on how you're how you're seeing the benefit from those closures playing out.

Francis K. Lee: Hey Brad, this is Francis. I'll answer your store question. We entered Q2 with 646 stores, and we ended last year at 672, so we're progressing with our store closures. We don't have a lot more to be at the targeted store zone where we said we would be. In terms of our performance overall, we've seen net transfer sales rates that were in excess of our plans. And so that certainly is a positive both for our total sales as well as our profitability because we're getting more comp store sales profitability out of that.

Bradley Bingham Thomas: Hey, Brad this is Frances.

Speaker Change: I will answer your stores question, we entered Q2 with 646 stores and we ended last year at.

Speaker Change: 672, so we're progressing on our store closures.

Speaker Change: We don't have a lot more to be at the targeted stores on where we said we would be.

Speaker Change: In terms of our performance overall.

Speaker Change: We've seen.

Speaker Change: Net transfer sales rates that were.

Speaker Change: In excess of our plans and so that certainly is.

Speaker Change: As a positive both for our total sales as well as our profitability because we're getting more comp store sales profitability out of that type of performance.

Bradley Bingham Thomas: That's helpful, Francis. And just as a follow-up on that, you know, has the company undergone a more rigorous, rigorous, you know, real estate review at this time when perhaps, you know, maybe pushing towards profitability that might be obtainable here with incremental closures, you know, perhaps an analysis that hadn't been done in some time? From having covered the company for a number of years, my recollection was there were some pretty positive benefits from sort of You know, about 15 years ago.

Francis K. Lee: That's helpful Francis and just as a follow up on that.

Speaker Change: Yeah.

Francis K. Lee: Has the company undergone a more rigorous rigorous real estate review at this time when perhaps.

Francis K. Lee: Maybe pushing towards profitability that might be obtainable here with incremental closures.

Francis K. Lee: Perhaps an analysis that hadn't been done in some time.

Speaker Change: Having covered the company from a number of years. My recollection was there were some pretty positive benefits from sort of a similar undertaking about 15 years ago.

Shelly R. Ibach: Yeah, Brad, I'll start and let Francis add on here. Just going back in time, this is a very different situation than when we rationalized our portfolio back in 2008 to 2010. At that time, we were 98% mall and average revenue was under $1 million, whereas right now, our retail portfolio, in total, is very profitable. And our stores average, I think our trail in 12 months is $2.7 million. In the second half of last year, we scrutinized the portfolio, you know, with the lens of, you know, thinking about our cost structure and taking advantage of timing to be able to rationalize the portfolio of any closures that we intended to have in the coming 12 to 24 months.

Francis K. Lee: Yeah, Brad I'll start and let Francis.

Francis K. Lee: Add on here and just going back in time. This is a very different situation than when we.

Speaker Change: <unk> rationalized our portfolio back in.

Speaker Change: 008 percent.

Speaker Change: Two 2010.

Speaker Change: At that time, we were 98% mall and.

Speaker Change: Average revenue was was.

Speaker Change: Under a $1 million were.

Speaker Change: Right now our retail portfolio in total.

Speaker Change: Is very profitable and.

Speaker Change: Our stores average I think our trailing 12 months is $2 7 million and so when we embarked on this endeavor.

Speaker Change: In.

Speaker Change: In the second half of last year, we scrutinized the portfolio with the lens of thinking about our cost structure and and taking advantage of timing to be able to rationalize the portfolio any closures that we intended to have.

Speaker Change: In the coming 12 to 24 months.

Speaker Change: But overall, we were faced with a very healthy portfolio. This is an ongoing process of rigor that we have built into to our regular management of our retail portfolio Thats why we have such a healthy London.

Speaker Change: We do a lot of repositions ever.

Speaker Change: Every single year.

Speaker Change: The consumer in the marketplace moves in each DMA and we want to be where the consumer is and where the shopping is and so we keep our our real estate portfolio very healthy as a result of that and when we do repositions, we get a nice lift with that.

Shelly R. Ibach: And we want to be, you know, where the consumer is and where the shopping is. And so we keep our real estate portfolio, you know, very healthy as a result of that. And when we do repositioning, we get a nice lift from that. And that kind of movement has continued, you know, this year. So this is a very different situation than we were in before.

Speaker Change: And that kind of movement has continued.

Speaker Change: This year, so just a very different situation than we.

Speaker Change: We were in before.

Bradley Bingham Thomas: That all makes sense, Shelly. That's helpful to hear.

Speaker Change: That all makes sense that's helpful to hear.

Speaker Change: I think I was just trying to extrapolate on your comment that the transfer rates and ended up being favorable with perhaps there might be.

Speaker Change: Greater opportunity ahead here is yes.

Speaker Change: With us.

Bradley Bingham Thomas: I think I was just trying to extrapolate from the comment that the transfer rates had ended up being favorable, that perhaps there might be a greater opportunity ahead here as you look closely at this. In any case, moving on to my next question about your partner Synchrony, there have been many in the financial sector that have kind of talked about some incremental tightening. I was wondering if you could just comment a little bit about what you're seeing out of Synchrony, if that's something that's a headwind for your business that's different than maybe the way you would have thought about it three or six months ago, and just what you're seeing as you rely on them as a key partner.

Speaker Change: In any case moving onto my next question around.

Speaker Change: Your partner Synchrony there've been.

Speaker Change: Many in the financial sector that have kind of talked about some incremental tightening I was wondering if you could just comment a little bit about what youre seeing out of synchrony.

Speaker Change: If that's something that's a headwind for your business, it's different than maybe the way you would've thought about it for six months ago, and just what Youre seeing.

Speaker Change: As you rely on them as a key partner.

Francis K. Lee: Hi Brad. Synchrony is a great partner of ours, and we certainly appreciate working with them. Overall, there's no material impact to financing overall with Synchrony or in the current environment. So, there are no substantive changes to report there.

Speaker Change: Hi, Brad Synchrony is a great partner of ours, and we certainly appreciate working with them.

Speaker Change: Overall, there is no material impact to financing overall.

Speaker Change: With.

Speaker Change: With synchrony or with the current environment.

Speaker Change: So there is.

Speaker Change: There is no substantive changes to report there.

Shelly R. Ibach: Brad, we also have, you know, as you know, a very high-quality customer base with Synchron-E, so we over index in their portfolio in a very, you know, favorable perspective from that aspect.

Speaker Change: Brad We also have as you know a very high quality customer base with synchrony. So we over index in their portfolio in.

Speaker Change: A very favorable.

Bradley Bingham Thomas: From from that aspect.

Bradley Bingham Thomas: Gotcha. That makes sense.

Bradley Bingham Thomas: Got you that makes sense. Okay. Thank you so much I appreciate it yeah, Brad I wanted to comment on you. When you gave a little more color about your store question.

Shelly R. Ibach: Yeah, Brad, you know, I wanted to comment on your store question when you gave a little more color about your store question. You know, some of the closures that we took action on were some of the tests that we had been driving on density. So, with our real estate portfolio, we're, you know, always pushing against our assumptions and testing different aspects, and that certainly probably contributes to positive transfer rates as we carry out numerous tests where we were pressing on density.

Bradley Bingham Thomas: Okay. Thank you so much. I appreciate it. Yeah. Brad, you know, I wanted to comment on you when you gave a little more.

Speaker Change: Some of the closures that we took action on where some of the tests that we had been driving on density.

Speaker Change: So with our real estate portfolio, where we're always pushing against our assumptions in testing different aspects and.

Speaker Change: That certainly probably contribute to positive transfer rates as we took out numerous test where we were pressing on density.

Speaker Change: Got you. Thank you Shelly.

Speaker Change: Yes. Thank you.

Operator: Your next question comes from the line of Michael Lasser with UBS. Michael, your line is now open.

Speaker Change: Your next question comes from the line of Michael Lasser with UBS, Michael Your line is now open.

Dan Silverstein: Good afternoon, this is Dan Silverstein on for Michael. Thank you so much for taking our question. We just had two questions on kind of how to think about how a recovery plays out for both the industry and Sleep Number. So how do you view the return to that long-term unit growth rate of 1% in the investor deck playing out now that we're close to four years of consecutive unit declines? And then, just related to that, how much of the operating expense savings that Sleep Number has driven recently do you view as structural versus there are some areas you would need to reinvest in as the category backdrop? Thank you.

Speaker Change: Hey, Good afternoon. This is Dan Silverstein on for Michael. Thank you so much for taking our questions.

Shelly R. Ibach: Yeah, great, great questions. You're asking about, you know, fixed and variable costs as we begin to recover, and Francis will cover that. You also asked about how we see the recovery as we approach, you know, the fourth year, next year. Yes, you know, we are anxious, and it's certainly inevitable that we will return to growth in this industry. And, you know, taking a pretty conservative view on page 29 of our IR deck, showing that, you know, from 05 to 19, the industry grew about 1% in units.

Dan Silverstein: Oh, Hi, I just had two questions.

Speaker Change: Kind of how to think about our recovery plays out for both the industry and sleep number.

Speaker Change: So how do you view the return to that long term unit growth rate of 1% in the investor deck, playing out now that we're close to four years of consecutive unit declines.

Speaker Change: And then just related to that how much of the operating expense savings that sleep number has driven recently do you view as structural versus there are some areas you would need to reinvest in the category backdrop improves. Thank you.

Speaker Change: Yes, great great questions Youre, asking about fixed and variable as we begin to recover and as Francis will will cover that and you also asked about how we see that recovery as we approach the.

Speaker Change: Fourth year next year, yes on.

Speaker Change: We are anxious to it certainly inevitable that we will return to growth in this industry and taking a pretty.

Speaker Change: Conservative view on page 29 of our IR deck.

Francis K. Lee: Showing that from five to 19, the industry grew about 1% in units and so if we simply hold our share.

Shelly R. Ibach: And so if we simply hold our share, it assumes $500 million in sales and $175 million in EBITDA, and we give an illustration there. With our transformation, we expect to be able to have increasing profitability with mid-teen EBITDA. And I mentioned the free cash flow of, you know, over $200 million annually along with that.

Speaker Change: It assumes 500 million in sales and $175 million in EBITDA.

Speaker Change: And we give an illustration there with our transformation, we expect to be able to have increasing profitability with mid teen EBITDA.

Speaker Change: And I.

Speaker Change: I mentioned the free cash flow.

Speaker Change: Of over over 200 million annually, along with that so certainly puts us in a much more favorable position with our our transformation our transformation to actions. We're taking we're focused on transforming our operating.

Shelly R. Ibach: So it certainly puts us in a much more favorable position with our transformation. The actions we're taking, we're focused on transforming our operating model, meaning finding durable ways to improve our financial resilience in a range of economic environments and also in a sustainable manner. So we've talked specifically in our prepared remarks about some examples of what that looks like. For example, when we move 50% of some of our services to outsourcing so that we have greater flexibility, et cetera.

Speaker Change: Model, meaning finding durable ways to improve our financial resilience.

Speaker Change: A range of economic environment and also in a sustainable manner.

Speaker Change: So we've talked specifically in our prepared remarks about some examples of what that looks like.

Speaker Change: For example, when we move 50% to some of our services to outsourcing so that we have greater flexibility.

Shelly R. Ibach: So we see these as sustainable actions. And you're also right that we need to invest in variable as the industry turns and we start to, you know, spend media, et cetera. And Francis can give you a little color on the fixed and variable. Yeah. Hi Donna.

Speaker Change: Et cetera, So we see these as sustainable.

Speaker Change: The actions and Youre also right that we need to invest variable is as the interest returns and we start to.

Speaker Change: You can spend media et cetera, and Francis can give you a little color on the fixed and variable.

Francis K. Lee: Yeah. Hi Don. Nice to meet you.

Don: Hi, Don.

Don: Nice to meet you.

Dan Silverstein: The, you know, operating transformation that we are undertaking is more than simply addressing costs. It's about systematically examining how we do business. The result is that we're getting costs out, but we're also constantly looking for new ways to do things. And we gave some examples of those, you know, to put some dimension around this year's cost, cost savings, about 80% of that was fixed. 20% of that is variable. But as you think about some of the savings, for example, that I shared with you on just the technology tools, it delivers a million dollars.

Francis: The operating transformation that we are undertaking is more than simply addressing costs, it's about <unk>.

Speaker Change: Systematically.

Speaker Change: <unk>, how we do business. The result is that we're getting cost out, but we're also constantly.

Speaker Change: Constantly looking for new ways to do things and we gave some examples of those.

Speaker Change: To put some dimension around this year's costs cost savings about 80% of that was fixed 20% of that is variable.

Speaker Change: <unk>.

Speaker Change: But as you think about.

Speaker Change: Some of the savings for example that I shared with you just even the technology tools, we've delivered a $1 million.

Dan Silverstein: Now, that's a million dollars of savings that we would anticipate won't come back in the future. And it's a mindset and a way of inspection of our business that we will continue to operate with that level of scrutiny. Other examples, like changing our parcel providers, give us a partial cost benefit this year because it was implemented partway through the year. We're going to get even more savings next year as we put more volume through that, and it covers the full year period. So, you know, these savings have fixed elements, but even within the variable elements, there's a part of greater efficiency that we're achieving through our variable costs, even though they are variable.

Speaker Change: That's a $1 million of savings that we would anticipate.

Speaker Change: It doesn't come back in the future.

Speaker Change: It's a mindset and a way of inspection of our business that we will continue to operate with that level of scrutiny.

Speaker Change: Other examples like changing our parcel providers they gave us a partial cost benefit this year.

Speaker Change: Because it was implemented partway through the year, we're going to get even more savings next year.

Speaker Change: As we put more volume through that and it covers.

Speaker Change: Full year period so.

Speaker Change: These these savings have fixed elements, but even within the variable elements there is a.

Speaker Change: Part of greater efficiency that we are achieving through our variable cost even though they are variable.

Francis K. Lee: Thank you so much and good luck!

Speaker Change: Thank you so much and good luck.

Speaker Change: Thank you.

Operator: Your next question comes from the line of Peter Keith with Piper Sandler. Peter, your line is now open.

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

Peter Jacob Keith: Hi, thanks. I got two questions from Piper Sandler this evening on media spend. It seems to be kind of a popular topic amongst the community about how much media spend for the mattress industry is down. I know you guys look at this data pretty closely. Do you have an opinion industry-wide on how much media spend is down versus, say, the pre-pandemic level in 2019?

Peter Jacob Keith: Hi, Thanks, when you get to quest.

Speaker Change: Questions from Piper Sandler Keybanc.

Speaker Change: Maybe on the media spend seems to be.

Speaker Change: Kind of a popular topic amongst the community how much media spend it for the mattress industry is down.

Speaker Change: I know you guys look at this data pretty closely as you do you have an industry wide how much media spend is down versus say <unk>.

Speaker Change: Pandemic level of 2019.

Shelly R. Ibach: I do not have a data point.

Speaker Change: I do not have a data point on that specifically.

Speaker Change: Okay.

Shelly R. Ibach: My sentence is down quite a bit, but that's just a sentence. Maybe you could also just talk to... Well, there are, you know, far fewer companies spending dollars on media in the industry at this time as well.

Speaker Change: My sense is down quite a bit but that's just me.

Speaker Change: Yeah.

Speaker Change: <unk> go ahead.

Speaker Change: Well there are.

Speaker Change: As far fewer company.

Speaker Change: Spending dollars on media in the industry at this time as well.

Peter Jacob Keith: And then there's also, there's also pressure, you know, Peter of, you know, just a normal consumer sentiment environment where the sentiment is healthy. There are about 12 points of pressure with the lower consumer sentiment we're operating in. So there's just a 12, just as your starting point, there's 12 points of pressure. And then later on, the overall category is spent as well. Yeah, okay. And any color on some of the newer products that are less than 12 months old? I know you talked about C1 earlier, but about like Climate 360, any of those, how are those responding with consumers today?

Speaker Change: And then there is also there is also a pressure.

Peter Jacob Keith: Peter is just.

Speaker Change: Yes.

Peter Jacob Keith: Normal consumer sentiment environment.

Peter Jacob Keith: The sentiment is healthy.

Speaker Change: There is theres about 12 points of pressure.

Speaker Change: With the lower consumer sentiment, we're operating in and so there is just a 12 just as your starting point there is 12 points of pressure.

Speaker Change: And then layer on the overall category of spend as well.

Speaker Change: Yes, okay.

Speaker Change: And.

Speaker Change: Any color on some of the newer products that are less than 12 months old on this I know you talked about Q1 earlier.

Speaker Change: What about like climate through 60.

Speaker Change: Those are all of those are resonating with consumers today.

Shelly R. Ibach: Yeah, really well. Both the C1 is extremely early, but it seems to be, you know, playing its role that we expected, where customers are coming in, realizing that, you know, we do, Sleep Number does offer a smart bed that is affordable for them. You know, we have our dual-temp layer at $9.99, which is available for any mattress, and you can offer customers heating and cooling with the dual-temp layer.

Speaker Change: Yeah really well both.

Speaker Change: D. C. One is extremely early but it seems to be playing its role that we expected where customers.

Speaker Change: Customers are coming in realizing that we do sleep number does offer.

Speaker Change: Smart bed that is affordable for them and even though we would often promote to see too in the past at 999 or $10 99.

Speaker Change: This is resonating in a different way and Thats part of the role that we wanted to see one to play so more to come and then climbing 360, we just continue to be very pleased with the performance.

Speaker Change: It is.

Speaker Change: Exceeding continues to exceed our expectations, we're super excited about.

Speaker Change: <unk> leadership in temperature.

Speaker Change: All we have our dual temp layer at at $9 99, which is available for any mattress and you can offer.

Speaker Change: Offer customers heating and cooling with the dual temp layer you can purchase it for just one side of the bed. So it has a lot of flexibility and then of course all of our smart beds now have temperature balancing features and benefits and then the introduction of climate cool in the fourth quarter at 50.

Speaker Change: <unk> 99 in this this bad actively cooled and of course adjust on on each side in fleets up to 15 degrees cooler and its integrated the cooling is integrated into the smart bed pulse the heat away from the customer.

Shelly R. Ibach: You can purchase it for just one side of the bed, so it has a lot of flexibility. And it's integrated, the cooling is integrated into the smart bed, pulls the heat away from the customer. Our front lines are, you know, so excited about this new innovation, and we think it will really resonate with consumers. All right.

Speaker Change: Our our front lines are so.

Speaker Change: So excited about this.

Speaker Change: This new innovation, and we think it will really resonate with consumers.

Peter Jacob Keith: All right, thank you very much. Good luck.

Speaker Change: Alright, Thank you very much good luck.

Speaker Change: Thank you.

Speaker Change: Yeah.

Speaker Change: Okay.

Shelly R. Ibach: This concludes our question and answer session. I will now turn the conference back over to the company for closing comments.

Speaker Change: This concludes our question and answer session I will now turn the conference back over to the company for closing comments.

Operator: Thank you for joining us today. We look forward to discussing our third quarter 2024 performance with you in October. Sleep well, and dream big.

Speaker Change: Thank you for joining us today, we look forward to discussing our third quarter 2020 for performance with you in October sleep.

Speaker Change: Sleep, well and dream Big.

Speaker Change: Okay.

Operator: This concludes today's conference call. You may now disconnect.

Speaker Change: This concludes today's conference call you may now disconnect.

Speaker Change: Okay.

Speaker Change:

Speaker Change: Yeah.

Speaker Change: Yes.

Speaker Change: Yeah.

Speaker Change: Yeah.