Sleep Number Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 9 speakers on the call.

Operator

Welcome Sleep Number's 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, you may disconnect at this time. I would like to introduce Dave Swantas, Vice President of Finance and Investor Relations.

Operator

Thank you. Dave, you may begin.

Speaker 1

Good afternoon, and welcome to Sleep Number Corporation's Q2 2024 Earnings Conference Call. Thank you for joining us. I am Dave Schwantes, Vice President of Finance and Investor Relations. With me today are Shelly Ibach, our Chair, President and CEO and Francis Li, our Chief Financial Officer. This telephone conference is being recorded and will be available on our website at sleepnumber.com.

Speaker 1

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. 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.

Speaker 1

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 on the Investor Relations section of our website. I will now turn the call over to Shelly for her comments.

Speaker 2

Good afternoon, everyone, and thank you for joining us. My SleepIQ score was 86 last night. 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 twenty twenty for both gross margin rate expansion and adjusted EBITDA despite facing a tougher sales environment than we anticipated.

Speaker 2

My comments today will highlight the actions we are taking to improve our operating margins and generate cash to pay down debt 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 $125,000,000 to $145,000,000 additional operating cost reductions of $40,000,000 to $45,000,000 which are on top of the $85,000,000 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. Through the 1st 6 months of 2024, we reduced operating expenses $44,000,000 versus the prior year. We drove 60 basis points of gross margin rate expansion year over year and we generated $9,000,000 of free cash flow as planned, a $21,000,000 improvement from last year.

Speaker 2

Our better than expected adjusted EBITDA for the first half of twenty twenty four was driven by sustainable improvement in our cost base across our operations, including reductions in material cost, efficiency improvements in our logistics and fulfillment networks and reductions in operating expenses supported by lower store operating costs and ongoing diligent G and A expense management. We are aggressively managing 4 principal areas that are within our control, including cost of acquisition, cost to serve, cost of goods sold and G and A, R and D leverage. 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. In cost to serve, we have outsourced select operational activities and further leverage third party expertise in information technology and services. These operating model changes give us additional flexibility in supporting peak volumes in our customer contact centers and home delivery operations.

Speaker 2

In 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 assessments and cost controls. In G and A and R and D expense management, we have incorporated additional rigor to streamline our organizational design, remove inefficiencies and increase productivity. 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 demand environment remains challenging amid low consumer sentiment, a notable decline in home sales and pressures on consumer purchasing power that include higher cost of living and interest rates that are reducing personal savings, tight consumer credit and uncertainty related to geopolitical events and the upcoming U.

Speaker 2

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. Mattress Industry sales for 2024 are estimated around 25,000,000 mattress units compared to a normalized level of about 32,000,000 units based on long term history and per capita spending trends. Our 2nd quarter demand performance represents a slight sequential improvement from 1st quarter.

Speaker 2

These results remained more pressured than we expected and were largely aligned with the reported industry trends. The scrutinizing consumer continues to concentrate their purchases during holiday promotional events like Memorial Day. 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 forecasts 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. This outlook still represents a sequential improvement from our first half demand performance, which was down mid single digits.

Speaker 2

We expect this improvement to result from easier compares, especially in the 3rd quarter, higher media investments than the first half and other demand driving initiatives we've implemented and honed over the last three quarters. 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 orientated cost of $9.99 with our C1 smart bed, amplifying our differentiated smart bed message, applying our models' 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 execution excellence focused on our relationship based approach. As we enter the Q4, 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. More than 2 thirds of sleepers report sleeping too hot or experiencing temperature fluctuation during the night. The new Climate Cool smart bed that builds on our successful Climate 360 smart bed technology actively cools by drawing warm air away from your body.

Speaker 2

This is very different than competitors' products to push air through warm foam or use water to cool. In fact, the Climate Cool smart bed cools over 20 times faster than competitors' 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 ClimateCool 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 for their needs.

Speaker 2

Sleepers will also be able to see the results in their Sleep Number app along with other sleep health insights. Our teams accelerated the commercialization of this area innovation to the Q4 of this year as part of our margin improvement initiatives. 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 4th quarter gross margin rate. The queen-size climate cool smart bed with integrated base will be priced at 54.99 dollars 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 $125,000,000 to $145,000,000 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 2

Industry units have contracted to 2016 unit levels and are currently around 6000000 to 7000000 units below expected consumption levels. With the actions we've taken in assuming the industry returns to normalized demand levels of nearly 32,000,000 units, we would expect to realize more than $500,000,000 of incremental net sales and about $175,000,000 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 $200,000,000 annually. 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 and strong execution of our operating model transformation has resulted in sustainable cost and gross margin improvement.

Speaker 2

Now Francis will provide additional details about our performance and outlook for the year.

Speaker 3

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 have 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 $9,000,000 $21,000,000 higher than prior year's first half, even with pressure from the year over year net sales decline. Now let's turn to a review of our 2nd quarter results.

Speaker 3

2nd quarter net sales of $408,000,000 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 6 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. We remain intently focused on restoring our gross margin rate to higher levels as evidenced by the 59.1% gross margin rate delivered in Some of the specific drivers of our year over year improvement for the Q2 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. For example, we redistributed our phone business across our partners, resulting in product cost reductions.

Speaker 3

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. 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 also made meaningful progress in reducing our operating costs, which were down $19,000,000 versus the prior year's Q2 before restructuring costs and down $44,000,000 year to date.

Speaker 3

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 and D spending. 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. Here are some specific examples of the transformation initiatives we have taken. We expanded our self-service customer content, saving over $5,000,000 annually. We also rationalized technology tools used across the business to reduce total vendors and deliver $1,000,000 of annual savings.

Speaker 3

Our R and 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 lap significant cost reductions in the back half of last year and increase our funding of media. We generated $28,000,000 of adjusted EBITDA in the quarter compared with CAD35 1,000,000 last year, with a year over year decrease due to the decline in net sales, partially offset by a higher gross margin rate and $19,000,000 of operating expense reductions. Our 2nd 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 3

For the full year, we now expect free cash flow of $50,000,000 to $70,000,000 which we intend to use to pay down our credit line. This is a $10,000,000 decrease than our prior expectations, primarily due to our reduced sales guidance, which negatively impacts our working capital expectations for the year. Our updated outlook implies $40,000,000 to $60,000,000 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. Turning to our 2024 outlook, we are reiterating our 2024 full year adjusted EBITDA outlook range of $125,000,000 to $145,000,000 Here are a few items to highlight regarding our expectations for the remainder of the year, including some specific color about Q3. We expect net sales to be down mid single digits for the year.

Speaker 3

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's driving initiatives. Our full year net sales guidance continues to assume 3 percentage points of headwind from year over year backlog changes and 1 percentage point of headwind from lower average store count. 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 $14,000,000 of restructuring costs for the year with less than $2,000,000 expected for the balance of the year. We continue to expect capital expenditures of approximately $30,000,000 for the year, down nearly 50% from the prior year.

Speaker 3

Turning to 3rd quarter performance. We are expecting net sales to be down low to mid single digits versus the prior year's Q3 with demand flat to down low single digits and with 3 to 4 points of headwind from year over year backlog changes. We expect Q3 adjusted EBITDA to be $25,000,000 to $30,000,000 We also want to provide an update on how we are performing against our bank covenants. Our debt to EBITDAR 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 EBITDAR leverage to improve the balance of the year and end the year below 3.75 times.

Speaker 3

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. 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 entering the year. For illustrative purposes, with the changes to our cost structure 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. Based on our current cost structure, we would require minimum net sales of approximately $1,800,000,000 to stay below our 4.0x covenant maximum in 2025.

Speaker 3

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.

Operator

Your first question comes from the line of Bobby Griffin with Raymond James. Bobby, your line is now open.

Speaker 4

Hey, good afternoon everybody. Thanks for taking the questions.

Speaker 2

Hi, Bobby.

Speaker 4

Hey, 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 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 4 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 of things.

Speaker 2

Great. Well, the election in the media remains a bit of a volatile process in itself. But let me take a step back and talk about our media spending here in the first half and how we're approaching the second half and 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 prior year.

Speaker 2

So that's an increase for us from first half of the year in how we're spending media. Having said that, we are focused on prioritizing media that is most effective and most efficient using our tech enabled tools that we talked about. 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 media if she's not.

Speaker 2

And that transpired in June. I think June or, Q2 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. 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.

Speaker 2

And therefore, April June 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 digits from a combination of initiatives, how we're applying media, 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 Q4, 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 is how we've built it into our expectations for the back half, driving 20 to 30 basis points of gross margin improvement in the Q4.

Speaker 2

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 4 years ago with agility and plans and contingency plans and in managing this very, very closely so that we can be effective and efficient with our spend.

Speaker 4

Thank you. I appreciate the extra details too about kind of how the quarter played out. That was actually one of my questions. I guess maybe next up for me then is probably for Francis or Dave. Just kind of on the I appreciate the details on 3Q, but the shape of the year is a little bit different than kind of consensus was modeling 3Q, let's say.

Speaker 4

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 that kind of back end or kind of 4Q weighted side of getting into the guidance?

Speaker 3

Hey, Bobby. Yes, 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 go into the second half.

Speaker 3

And then we've got some increased media spending, as Shelly mentioned, which is driving the overall EBITDA story. When we look at Q3 and Q4, there's some timing of demand that based on being closer to this based on being closer to the half that 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're asking about.

Speaker 1

Yes. So Bobby, I think one of the notable things is really around, 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 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 our Super Bowl, it's going to be delivered in the Q4.

Speaker 1

So you're going to see some movement there in terms of ultimately where that demand goes and you should see a pretty big differential if you will in terms of that total sales and marketing expense as you go from Q3 to Q4. So, based on our guide, the guide we provided of $25,000,000 to $30,000,000 for Q3, it is specifically signaling that we do expect Q4's EBITDA to be a little stronger than Q3's and I would largely chalk that up to just some of that demand that's going to be fulfilled in Q4 that we generate in Q3.

Speaker 4

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 2

Thank you.

Operator

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

Speaker 5

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 on strength across your different pricing bands. Are you seeing any deviation in units or in demand between higher priced items and the lower priced products?

Speaker 2

Thanks for the question, Alexia. Nice to meet you. We introduced the C1 in June and that played certainly played a role in our mix. We were happy with how it mix and how the C Series mixed in the Q2. But we were also up against the closeout of the C Series from prior year.

Speaker 2

So certainly a better margin profile this year on our C Series, but some unit pressure overall, as we lapped the closeout. So when we think about our different series, we had positive margin from our mix overall in the second quarter. So continued to see the initiatives that we've been driving the last three quarters play out and helping us move the consumer once she's in the store up the line and to where we're benefiting from a margin perspective.

Speaker 5

Great. Thank you. And then one more. How did demand trend throughout the quarter? And has there been any change?

Speaker 5

Well, I know you talked about your view on the state of the consumer, but how did sales kind of end in the quarter? And then how are sales trending quarter to date?

Speaker 2

Yes. The shape of Q2 was very similar to the shape of Q1. In the first half, the 2 strong months were the market share months, the months where we had the big holiday and that was February May. And the other months, the shoulders of the market share events remain weak. The scrutinizing consumers certainly focus when we have the best offers.

Speaker 2

We're seeing that in our business and from everything I've read on the industry reports, that's what the industry is experiencing as well. So we, as I mentioned before, April June were very similar down mid single digits and that's where we were for the quarter on demand. And we did have a couple of points of sequential improvement from Q1, but obviously still pressured overall. And we saw similar consumer behavior in the month of July, where July 4th was early on in the month into smaller holiday, small part of Q3, but positive July 4th, week, and then the consumer goes is very weak in her activity following that event and period. And we're looking forward to our big market share here in the Q3, which is a large part of August September.

Operator

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

Speaker 6

Hi. Thanks so much for taking the questions. Just a few housekeeping items maybe more from me, if I could squeeze in a few here. The first, Shelly, I was wondering if you talked a little bit about the current outlook for stores and how you're thinking about potentially 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? Just an update on how you're seeing the benefit from those closures playing out.

Speaker 3

Hey Brad, this is Francis. I'll answer your stores question. We entered our Q2 with 6 46 stores and we ended last year at 672. So we're progressing on our store closures. We don't have a lot more to be at the targeted store zone where we said we would be.

Speaker 3

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 type of performance.

Speaker 6

That's helpful, Francis. And just as a follow-up on that, has the company undergone a more rigorous real estate review at this time on perhaps maybe pushing towards profitability that might be obtainable here with incremental closures, perhaps an analysis that hadn't been done in some time, from 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.

Speaker 2

Yes, Brett, 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 $1,000,000 where right now our retail portfolio in total is very profitable and our stores average, I think our trailing 12 months is $2,700,000 So when we embarked on this endeavor in the second half of last year, we scrutinized the portfolio with the lens of 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. But overall, we were faced with a very healthy portfolio. This is an ongoing process of rigor that we have built into our regular management of our retail portfolio.

Speaker 2

That's why we have such a healthy one. And we do a lot of repositions every single year because the consumer and 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 real estate portfolio very healthy as a result of that. And when we do repositions, we get a nice lift with that. And that kind of movement has continued this year.

Speaker 2

So this is a very different situation than we were in before.

Speaker 6

That all makes sense, Shelly. That's helpful to hear. I think I was just trying to extrapolate on the comment that the transfer rates had ended up being favorable, but perhaps there might be a greater opportunity ahead here as

Speaker 2

you look closely at this.

Speaker 6

In any case, moving on to my next question around 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 you may be the way you would have thought about it 3 or 6 months ago and just what you're seeing as you rely on them as a key partner?

Speaker 3

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 with the current environment. So there's no substantive changes to report there.

Speaker 2

Brad, we also have, as you know, a very high quality customer base with Synchrony. So we over index in their portfolio in a very favorable perspective from that aspect.

Speaker 6

Got you. That makes sense. Okay. Thank you so much. I appreciate it.

Speaker 2

Yes. Brad, I wanted to comment you when you gave a little more color about your store question. 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 always pushing against our assumptions and testing different aspects. And that certainly probably contributes to positive transfer rates as we took out numerous tests where we were pressing on density.

Operator

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

Speaker 7

Good afternoon. This is Dan Silverstein on for Michael. Thank you so much for taking our questions. We just had two questions on

Speaker 8

kind

Speaker 7

of how to think about how 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 4 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's some areas you would need to reinvest in as the category backdrop improves? Thank you.

Speaker 2

Yes, great questions. You're asking about fixed and variable as we begin to recover and as Francis will cover that. You also asked about how we see that recovery as we approach the 4th year next year. Yes, we are anxious to and it's certainly inevitable that we will return to growth in this industry and taking a pretty conservative view on Page 29 of our IR deck showing that from 'five to 'nineteen, the industry grew about 1% in units. And so if we simply hold our share, it assumes $500,000,000 in sales and $175,000,000 in EBITDA.

Speaker 2

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 over 200,000,000 dollars annually along with that. So, certainly puts us in a much more favorable position with our transformation. 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 environment and also in a sustainable manner.

Speaker 2

So we've talked specifically in our prepared remarks about some examples of what that looks like. For example, when we move 50% to up some of our services to outsourcing so that we have greater flexibility, etcetera. So we see these as sustainable actions. And you're also right that we need to invest variable as the interest returns and we start to spend media, etcetera. And Francis can give you a little color on the fixed and variable.

Speaker 3

Yes. Hi, Don. Nice to meet you. The operating transformation that we are undertaking is more than simply addressing costs. It's about systematically examining how we do business.

Speaker 3

The result is that we're getting cost out, but we're also constantly looking for new ways to do things. And we gave some examples of those. To put some dimension around this year's 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, just even the technology tools, it delivers $1,000,000 That's $1,000,000 of savings that we would anticipate doesn'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.

Speaker 3

Other examples like changing our parcel providers, they 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 a full year period. So 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 7

Thank you so much and good luck.

Speaker 5

Thank you.

Operator

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

Speaker 8

Hi, thanks. I get 2 questions from Piper Sandler this evening. Maybe on the media spend, it seems to be kind of a popular topic amongst the community and 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 how much media spend is down versus say the pre pandemic level of 2019?

Speaker 2

I do not have a data point on that specifically.

Speaker 8

Okay. My sense is down quite a bit, but that's just a sense. Maybe you could also just talk to

Speaker 2

Yes, absolutely.

Speaker 6

Go ahead.

Speaker 2

Well, there are far fewer companies spending dollars on media in the industry at this time as well. And then there's also a pressure, Peter, of just a normal consumer sentiment environment where the sentiment is healthy. There's 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 layer on the overall category spend as well.

Speaker 8

Yes. Okay. And any color on some of the newer products that they're less than 12 months old. I know you talked about C1 earlier, but about like Climate 360, any of those, how are those resonating with consumers today?

Speaker 2

Yes, really well. Both the I mean, C1 is extremely early, but it seems to be playing its role that we expected where customers are coming in realizing that we do Sleep Number does offer a smart bed that is affordable for them. And even though we would often promote the C2 in the past at $9.99 or 10.99 dollars This is resonating in a different way and that's part of the role that we wanted the C1 to play. So more to come. And then Climate 360, we just continue to be very pleased with the performance.

Speaker 2

It is exceeding continues to exceed our expectations. We're super excited about our leadership in temperature overall. 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. You can purchase it for just one side of the bed. So it has a lot of flexibility.

Speaker 2

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 Q4 at $54.99 And this bed actively cools and of course adjust on each side and fleets up to 15 degrees cooler and it's integrated. The cooling is integrated into the smart bed, pulls the heat away from the customer. Our front lines are so excited about this new innovation and we think it will really resonate with consumers.

Speaker 8

All right. Thank you very much. Good luck.

Speaker 2

Thank

Operator

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

Speaker 1

Thank you for joining us today. We look forward to discussing our Q3 2020 4 performance with you in October. Sleep well and dream big.

Operator

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

Powered by Quartr
Earnings Conference Call
Sleep Number Q2 2024
00:00 / 00:00