Sleep Number Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2024

There are 6 speakers on the call.

Operator

Welcome everyone to Sleep Number's Q4 and Full 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. You may begin.

Speaker 1

Good afternoon, and welcome to the Sleep Number Corp. Q4 2023 earnings conference call. Thank you for joining us. I am Dave Schwantes, Vice President of Finance and Investor Relations. With me today are Shelly Eibach, our Chair, President and CEO and Francis Li, our Chief Financial Officer.

Speaker 1

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. 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.

Speaker 1

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 ks 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.

Speaker 2

Good afternoon, everyone, and thank you for joining our 2023 year end earnings call. My SleepIQ score was 84 last night. 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 4th 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 at the mattress as the mattress industry demand environment improves.

Speaker 2

Importantly, our long term opportunity remains intact as we lead through this transformation. 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 3 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 4th quarter. Low consumer sentiment, slower new home purchases and elevated interest rates continued to pressure demand for our category.

Speaker 2

Additionally, consumer purchasing power continues its steady downward trend. We estimate that mattress units in 2023 were 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 2,008, 2009 Great Recession. 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 for the mattress industry.

Speaker 2

This challenging demand environment continued to weigh on our financial results in the Q4, though we slightly outperformed our demand and cost reduction expectations. For the Q4, net sales of $430,000,000 were down 14% from the prior year with demand down low single digits. For the full year, our net sales were $1,890,000,000 a year over year decline of 11% with demand down 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.

Speaker 2

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. We renegotiated with our media partners to improve impressions per dollar spent, optimize the media mix and re flighted media in Q4, resulting in improved traffic and media ROI. We refined our promotional strategy and selling process to focus on smart beds 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.

Speaker 2

We also drove greater brand awareness through our partnership with the NFL. Our Why Choose a Sleep Number Smart Bed campaign featuring Justin Jefferson and Ja'Marr Chase increased purchase consideration with NFL fans who represent approximately half of the U. S. Population. Since implementing these actions, our demand trajectory improved significantly to a low single digit year over year decline in the 4th quarter compared with a double digit decline in Q3.

Speaker 2

We also drove positive unit growth on a demand basis in the 4th quarter for the first time since the Q3 of 2021. With this demand performance, we expect that we outperformed the industry in the Q4. With our second strategic imperative, we are taking steps to reduce costs across our business to restore margins. During the Q3, we began aggressively executing our contingency plans to align our discretionary costs with the softer demand environment. In the Q4, we established operating mechanisms and tools to accelerate our restructuring efforts and drive sustainable change across the organization.

Speaker 2

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 team's energy and efforts in executing this cost reduction roadmap and identifying and validating new opportunities. Broadly, our cost reduction initiatives fell into 4 categories: cost of customer acquisition, including streamlining vendors and indirect spend based on capability and cost cost to serve our customers, such as condensing service, outsourcing functions and increasing digital support assets for greater efficiency. COGS leverage through value engineering, including an exhaustive material cost reduction program. And R and D leverage as we reprioritize R and D spend to accelerate near term innovation while driving greater efficiency.

Speaker 2

We are also realizing the benefits of the workforce restructuring actions taken in the Q4, which reduced the number of team members to approximately 4,100 at the end of 2023, 7% lower than in 2019. Together, these efforts enabled us to reduce our operating expenses in the 4th quarter before restructuring costs by $24,000,000 $5,000,000 more than we had planned. For the full year, we reduced operating expenses by $85,000,000 With our team's commitment to the execution of our cost improvement roadmap, we expect $40,000,000 to $45,000,000 of in year cost reductions in 2024 and expect full year operating expenses to be $125,000,000 to $130,000,000 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.

Speaker 2

In 2023, we grew gross margin rate by 80 basis points, while navigating a double digit decline in our net sales as the mattress industry experienced its 2nd 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 3rd strategic imperative. In the Q3 of 2023, we took steps aimed at enhancing our financial flexibility, including working with our bank group to amend our financial covenants, reducing our outstanding credit line balance and related financial leverage remain key priorities for us in 2024 and beyond.

Speaker 2

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 $60,000,000 to $80,000,000 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 $30,000,000 2023 was a challenging year. We have initiated fundamental changes to transform our business and we have more work to do.

Speaker 2

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, 1 third of U. S. Adults report they usually get less than the recommended amount of sleep.

Speaker 2

Not getting enough sleep is linked with many chronic diseases and conditions which 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 are 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, network of millions of smart sleepers, vertically integrated operating model and purpose driven team member culture uniquely positions 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 is our Smart Bed Wellness platform, which provides an individually customized adjustable and responsive sleep experience. By effortlessly adjusting to sleepers' unique needs, our smart beds help millions of people achieve more restful sleep every night.

Speaker 2

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 our 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 3,000,000 at the end of 2023 and their advocacy of our brand is an important element of our future growth. Our innovation roadmap supports ongoing engagement initiatives within this ecosystem.

Speaker 2

Example, in the 4th 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. 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 smart bed ecosystem and optimized fulfillment network.

Speaker 2

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 Francis, who will provide more details on our 2023 financial results and 2024 guidance.

Speaker 3

Thank you, Shelly, and good afternoon. 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 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 in 3 primary areas. 1, review of our Q4 and full year results 2, progress we have made in our cost restructuring and impacts to our 2024 financial outlook and 3, key assumptions underlying our 2024 guidance.

Speaker 3

Let's move on to a review of our 4th quarter and full year results. 4th quarter net sales of $430,000,000 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. Our 4th quarter gross margin of 56.6 percent 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.

Speaker 3

These benefits are partially offset by increased promotional offers aimed at budget and value conscious consumers and fixed cost deleverage 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 basis as we had the full good, better, best assortment of FlexFit smart bases in 2023. In 2022, the smart base portfolio was limited to higher margin product due to semiconductor chip constraints. We were ahead of plan with cost reduction actions in the Q4 with operating expenses, pre restructuring costs down $24,000,000 year over year. We are making broad based cost cuts across the entire business impacting all areas of our operating cost structure.

Speaker 3

We recorded $16,000,000 of restructuring costs in the quarter versus our original 2023 estimate of $10,000,000 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 $12,000,000 As a reminder, restructuring costs are reported as a separate line item in our financial statements, and we will continue to provide an as adjusted EPS figure for comparative purposes. We generated $18,000,000 of EBITDA in the quarter versus $23,000,000 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. Our 2023 full year results included net sales of $1,89,000,000 down 11% versus prior year, with demand down high single digits for the year. Our gross margin rate increased 80 basis points for the year.

Speaker 3

We reduced operating expenses by $85,000,000 or 7% year over year prior to the $16,000,000 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 $16,000,000 of restructuring costs recorded in the 4th quarter. Adjusted EBITDA declined 14% to $127,000,000 compared to $148,000,000 last year, driven by the net sales decline, partially offset by a higher gross margin rate and ongoing operating expense reductions. 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 Q3, 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.

Speaker 3

These efforts contributed to the $85,000,000 year over year reduction in operating expenses in 2023 and our plans for an additional $40,000,000 to $45,000,000 operating expense reduction for 2024. This will result in a 2 year cost reduction total of $125,000,000 to $130,000,000 Our operational transformation work is progressing with velocity we have established operating mechanisms to promote and build sustainable change across the organization. Each initiative we are implementing has been developed with a projected range of cost improvement and relative risk assessment. Some of the specific cost actions we have taken include workforce reductions across the organization as we enter 2024 with 25% less 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 down market environment, we also seize the opportunity to reduce our store density in selected markets and accelerate the closing of lower performing stores with natural lease expirations.

Speaker 3

This includes 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. We expect the net impact of store closures to be about a 1 point drag to the 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.

Speaker 3

We expect to grow our gross margin rate 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 actions. Now let me turn to 2024. 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 2 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.

Speaker 3

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. 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.

Speaker 3

Our net sales guidance assumes 3 percentage points of headwind from year over year backlog changes and 1 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 basis point 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. We are also expecting benefit from further optimization of our fulfillment network, including facility closures and using temporary labor where it makes sense.

Speaker 3

Headwinds for the year include fixed cost deleverage from slightly declining delivered units for the year. We expect operating expenses to be down $40,000,000 to $45,000,000 versus last year with the cost savings spread across the P and L. We are estimating restructuring costs of approximately $12,000,000 to be incurred in 2024 with approximately $10,000,000 of the costs falling in Q1. We expect interest rates of approximately $45,000,000 for the year. The above assumptions support our adjusted EBITDA outlook range for the year of $125,000,000 to $145,000,000 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.

Speaker 4

We expect

Speaker 3

to generate $90,000,000 to $110,000,000 of operating cash flow with $30,000,000 of planned capital expenditures. This results in $60,000,000 to $80,000,000 of free cash flow for the year, which we intend to use to pay down our credit line. Working capital changes are expected to be a source of cash in 2024 versus a significant use of cash the last 2 years. We expect non cash charges to be a combined $90,000,000 or similar to 2023 levels. We also want to provide some clarity regarding our Q1 2024 performance expectations.

Speaker 3

We are expecting net sales to be down approximately 10% versus the prior year's quarter, including 3 to 4 points of headwind from year over year backlog changes. We expect Q1 adjusted EBITDA to be just over $30,000,000 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 EBITDAR leverage to in Q2 of this year and end the year below 3.75x under our covenant levels. As the industry recovers, we see a significant opportunity for our business to accelerate.

Speaker 3

By building a more durable operating model with greater financial resilience, we industry cycle. We are at a cycle low right now and expect to generate $60,000,000 to $80,000,000 of free cash flow this year. 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 questions.

Operator

Thank you, sir. We'll take the first question from Bobby Griffin, Raymond James.

Speaker 4

Good afternoon, everybody. Thanks for taking my questions. And appreciate 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.

Speaker 4

So can you give us a little detail on what you're seeing on recapture rates as you're closing some of these stores?

Speaker 2

Yes, Bobby, thanks for the question. First, it's early on that, but what we have is a very detailed store transfer strategy to be able to capture those sales and expect 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 on store transfer. And then over the years as we've been executing our portfolio to keep a very current retail strategy of stores and online, we look at the DMAs, we relocate stores, we understand how to capture the consumer digitally and pull her through and develop relationships.

Speaker 2

And so we're bullish on what we can do here and therefore expect only one point of pressure due to our net stores this year.

Speaker 4

Okay. That's helpful. And I guess, Kelly, maybe to kind of step back and talk a little bit on 4Q and some of the changes you guys 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.

Speaker 4

So can we talk about the progression 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 were roughly about the same last year?

Speaker 2

Yes. Thanks, Bobby. We did make better progress in both generating demand and reducing costs than we had expected in the Q4. Regarding demand, it was about strengthening our competitive positioning. We had a low single digit decline for the quarter, pretty consistent performance across the 3 months.

Speaker 2

And we took many actions, integrated actions in the back half of at the end of September and heading into October, which focused on messaging, media, selling process and promotions. And these the integrated work led to improved brand metrics and also traffic and media ROI and therefore our demand performance.

Speaker 4

How is the demand trended so far in 2024? 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?

Speaker 2

Sure. This speaks to the highly reactive consumer that I spoke about in my prepared remarks. You're right. It's been widely reported that January demand trends for the mattress industry 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 probably tied to purchasing power. We were also impacted by these same factors in January and had a double digit decline in January.

Speaker 2

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 industry. 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 a low single digit growth as we lap easier compares particularly against Q3.

Speaker 4

Okay. I appreciate that detail. I'll jump back in the queue and turn it over to others. But thank you and best of luck here.

Speaker 2

Thank you, Bobby.

Operator

We'll go to Brad Thomas, KeyBanc Capital Markets.

Speaker 5

Hi, good afternoon. Thanks for taking my question. Shelley, I was wondering if

Speaker 3

you could just talk a little bit about

Speaker 5

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?

Speaker 2

Hi, Brad. Thanks. I'll start with our consumer innovation strategy, which reshapes really what consumers should be expecting platform continuing to set pace for this category and certainly for the consumer. We continue to have value added solutions that not only delivered the highest quality sleep, our platform also has the opportunity with digital innovation to solve many untapped opportunities in the future around sleep and the continuum of care. 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 sleep.

Speaker 2

You asked specifically about some of the messaging and promotion strategy that's resonating. And we still are operating with a scrutinizing consumer in the marketplace. And we worked on a lot of took a lot of actions in the 3rd Q4 to be able to refine our messaging to be able to reach this consumer, breakthrough with a strong value equation. And we're liking what we're seeing. And I think 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 to effectively reach the consumer.

Speaker 2

And specifically,

Operator

this is one of

Speaker 2

the advantages around our Verdeca model where we're able to integrate our plans and look at total variable margin inclusive of promotional dollars, financing and media investments and structure our promotional plan accordingly being able to manage discounts in a way that drives higher mix, which we're seeing as well as attach and overall focused on optimizing our variable margin and still delivering media efficiency in a challenged environment.

Speaker 5

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's some issues with comparability and everything. But ARU ticked down a little bit from where it's been the last several quarters, gross margins up, but the comparisons play into it. And then you mentioned the units going positive.

Speaker 5

In case all of this maybe implies that you got a bit more promotional here. Is that accurate? Did you get more promotional? And is that going to be a strategy that you push on more in 2024 to drive the business?

Speaker 2

Yes. Thanks for asking the additional specific questions. We did in Q4. You can see that in our ARU. And then as you noted, units were positive and offset that.

Speaker 2

But for us, even though ARU was up, we were a few 100 below where we were forecasting. And we've continued to iterate and really happy with the progression since that time and right on what we would expect right now in February and for the President's weekend where we're seeing some good movement in ARU and at the same time having units fairly flattish. So it's advancing. And 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, fully loaded variable margin using discounts to drive mix, using financing differently, we look at discounts and financing as a total bucket.

Speaker 2

We actually have year over year reduction in dollars and in some favorability in the variable margin.

Speaker 5

That's very helpful, Shaili. Thank you so much. I'll turn it over to others. Good luck.

Operator

Thanks. And we'll go back to Bobby Griffin, Raymond James.

Speaker 4

Hey, guys. Thanks for letting me back in here. Shelly, just to clarify, the positive unit comment in 4Q, is that on the demand basis, so excluding the moving parts with the backlog year over year?

Speaker 2

Yes, demand basis. Thank you for clarifying that. And my comments here about ARU in demand and our current performance here in the quarter. It's all demand related.

Speaker 4

In Francis and David, is the backlog comparison largely just a 1Q issue or does it going to impact all the quarters in 2024?

Speaker 3

Hey, Bobby, thanks for asking. We have the backlog comparison will largely impact the front half of the year and be weighted toward Q1 for 2024.

Speaker 4

And then I want to circle back, I think Bobby, I'll just say that. So if you think about

Speaker 1

the first half of the year, we're probably looking at about, as Shelly said, a 3 to 4 point drag on net sales growth year over year with the backlog changes. The back half of the year, it's probably less than a point the way we see it now.

Speaker 4

Okay. Just pure backlog headwinds. Okay.

Speaker 1

Yes, pure backlog headwinds. It's exclusively really focused on the first half of the year.

Speaker 4

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 things going on inside gross margins that are impacting the timing throughout the year?

Speaker 3

Yes. I think the underlying gross margin shifts will be largely 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 improvement and profitability improvement overall. I'll say that, I've been here for several months now and as a new CFO, one of my top priorities is to build more durable operating model. And we've left no stone unturned as we look across all elements of our cost structure with gross margin and the initiatives we're putting in place.

Speaker 1

Some of those will take hold in

Speaker 3

the second half of the year and be annualizing and give us even more benefit in 2025.

Speaker 4

Okay. And then I guess lastly for me is just you guys are tightening up on CapEx to drive cash flow and play down debt and that obviously is the right strategy. Just curious what is getting pulled out of CapEx to see it go down to $30,000,000 versus some of the historical rates? What are we deferring and things like that?

Speaker 3

Yes. Our CapEx is around $30,000,000 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 key systems.

Speaker 2

I would just add, so it's really a slowdown, a slowdown of store expansion and a slowdown of some of our infrastructure.

Speaker 4

Okay. That's helpful. That's what I was looking for. I appreciate you guys letting me ask some additional questions. Best of luck here in the Q1.

Speaker 3

Thank you.

Operator

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

Speaker 1

Thank you for joining us today. We look forward to discussing our Q1 2024 performance with you in April. Sleep well and dream big.

Operator

And again, everyone, that does conclude this conference. Thank you for your participation.

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Sleep Number Q4 2023
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