Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sleep Number Corp (SNBR, Financial) achieved better-than-expected adjusted EBITDA for the first half of 2024, driven by sustainable improvements in their cost base.
- The company reduced operating expenses by $44 million year-over-year and generated $9 million of free cash flow, a $21 million improvement from last year.
- Gross margin rate expanded by 60 basis points year-over-year, with a target to approach 60% for the back half of the year.
- The introduction of the new Climate Cool Smart Bed is expected to contribute 20 to 30 basis points of accretion to the fourth quarter gross margin rate.
- Sleep Number Corp (SNBR) is on track with its 2024 financial targets, including adjusted EBITDA of $125 to $145 million and additional operating cost reductions of $40 to $45 million.
Negative Points
- Net sales for the second quarter were down 11% year-over-year, and the company faced a tougher sales environment than anticipated.
- The mattress industry demand environment remains challenging, with a notable decline in home sales and pressures on consumer purchasing power.
- The company expects demand in the back half of the year to be flat to down low single digits, a revision from their prior estimate of low single-digit growth.
- Operating expenses for the back half of the year are expected to be in line with the prior year's second half, indicating limited room for further cost reductions.
- Debt to EBITDA ratio was 4.4 times at the end of the second quarter, with a covenant maximum of 5.5 times, indicating high leverage.
Q & A Highlights
Q: Can you talk about the higher media spending in light of the upcoming election and how it compares to previous cycles?
A: Shelly Ibach, Chair, President and CEO: The election and media environment are volatile. In the first half, our media spend was down 8%, but we plan to keep it flat year-over-year in the second half. We prioritize effective and cost-efficient media using tech-enabled tools. We will increase media spend if consumer demand is there and pull back if it’s not, as seen in June. We expect to benefit from our innovation leadership with the Climate Cool smart bed in Q4, despite the election timing.
Q: Can you explain the significant step-up in Q4 EBITDA compared to Q3?
A: Francis Lee, CFO: Our second half outlook for adjusted EBITDA is flat with our full-year guidance. This is driven by gross margin rate improvement and increased media spending. The heaviest marketing spend is in Q3 to support the Labor Day event, with demand generated in Q3 being fulfilled in Q4. This timing results in a stronger Q4 EBITDA.
Q: Are you seeing any deviation in demand between higher-priced and lower-priced items?
A: Shelly Ibach, Chair, President and CEO: We introduced the Stage One in June, which played a role in our mix. We were happy with how it mixed with the C Series, despite some unit pressure as we lapped the close-out of the previous C Series. Overall, we had positive margin from our mix in Q2, benefiting from initiatives that help move consumers up the line.
Q: How did demand trend throughout the quarter and into Q3?
A: Francis Lee, CFO: Q2 had a similar shape to Q1, with strong months during big holidays like February and May. The scrutinizing consumer focused on the best offers during these periods. April and June were down mid-single digits, similar to Q1. July followed the same pattern with a positive July 4th week but weak consumer activity afterward. We look forward to our big market share period in Q3.
Q: Can you provide an update on store closures and their impact on profitability?
A: Francis Lee, CFO: We entered Q2 with 646 stores, down from 672 at the end of last year. We’ve seen positive transfer sales rates, exceeding our plans, which benefits total sales and profitability. Shelly Ibach added that this is different from past rationalizations, as our current portfolio is very profitable with an average revenue of around $2.7 million per store.
Q: How is the partnership with Synchrony, especially in light of potential tightening in the financial sector?
A: Francis Lee, CFO: Synchrony remains a great partner with no material impact on financing. We have a high-quality customer base, which over-indexes favorably in Synchrony’s portfolio.
Q: How do you view the recovery of the mattress industry and Sleep Number’s operating expense savings?
A: Shelly Ibach, Chair, President and CEO: We expect the industry to return to growth, with a conservative view of 1% unit growth. Our transformation actions are focused on sustainable improvements. Francis Lee added that about 80% of this year’s cost savings are fixed, with 20% variable. Some savings, like technology tool rationalization, are permanent, while others, like parcel provider changes, will yield more savings next year.
Q: How much has media spend for the mattress industry decreased compared to pre-pandemic levels?
A: Francis Lee, CFO: We don’t have specific data, but there are fewer companies spending on media in the industry. Additionally, lower consumer sentiment adds about 12 points of pressure.
Q: How are newer products like the Climate 360 and C1 Smart Bed resonating with consumers?
A: Shelly Ibach, Chair, President and CEO: The C1 Smart Bed is playing its expected role, showing that Sleep Number offers affordable smart beds. The Climate 360 continues to exceed expectations, and we’re excited about our leadership in temperature control with products like the DualTemp layer and the upcoming Climate Cool smart bed.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
