Sleep Number (NASDAQ:SNBR) released first-quarter financial results and hosted an earnings call on Tuesday. Read the complete transcript below.
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Summary
Sleep Number secured an agreement with lenders for $55 million in incremental liquidity, including a $25 million term loan, to support its turnaround plan and evaluate long-term capital structure solutions.
Net sales for Q1 were $319 million, aligning with expectations, though down 19% year-over-year due to early quarter demand challenges and reduced media investment.
The company launched new products, including the Comfort Mode bed, which contributed to demand improvement and higher ARU in stores with the new lineup.
Gross profit margin was 57.9%, impacted by legacy product discounting and a mix shift to the new Comfort Mode bed; expectations are for margin recovery as new products replace legacy inventory.
Sleep Number introduced a new marketing campaign and expanded distribution with Costco, aiming to increase brand awareness and customer engagement.
Management remains cautious in its outlook due to macroeconomic conditions but is encouraged by customer response to new products and marketing efforts.
Full Transcript
OPERATOR
Welcome to sleep numbers first quarter 2026 earnings conference call at this time, all participants are in a listen only mode. As a reminder, this call is being recorded today, Tuesday, May 12, 2026. This conference call will be available on the company's website, ir.sleepnumber.com. Please refer to today's news release to access the replay. On today's call, we have Linda Findlay, President and CEO, and Amy O'Keefe, Chief Financial Officer of Sleep Number. Before handing the call over to the Company, we will review the Safe Harbor Statement. The primary purpose of this call is to discuss the results of the fiscal period ending on April 4, 2026. This call, including commentary and responses to questions, may include certain forward looking statements. These forward looking statements are subject to a number of risks and uncertainties outlined in the Company's earnings news release and discussed in some detail in the Annual report on Form 10K and other periodic filings with the SEC. The company's actual future results may vary materially. In addition, any forward looking statements represent the Company's views only as of today and should not be relied upon as representing its views as of any subsequent date. The Company specifically disclaims any obligation to update these statements. Please also refer to the Company's news release and SEC filings for a reconciliation of certain non-GAAP financial measures, where applicable, and for additional supplemental financial information included in the news release or that may be discussed on this call. I will now turn the call over to Linda Findlay, Sleep Numbers President and CEO.
Linda Findlay (President and CEO)
Good morning and thank you for joining us. I'll start with a brief update on our capital position. On April 27, we reached an agreement with our existing lenders that provides near term relief from certain financial covenants, adding $55 million of incremental liquidity, including a new $25 million term loan. This matters for two reasons. First, we believe it allows us to continue executing our turnaround plan for the business and actively market and sell our new products without disruption. Second, it gives us time to focus on a longer term solution for our capital structure, including evaluating a range of strategic and financing options best for the business. Amy will walk through the details shortly. Turning to the Quarter as we said in our last call, we saw a significant impact on sales in early January and February based on weather and macro conditions. However, demand improved as the quarter progressed. March Demand increased approximately 6%, marking our first year over year demand growth on a comparable basis in two years. That improvement was driven by the launch of Comfort Mode updated marketing and promotions to clear legacy inventory we delivered net sales of $319 million in line with our expectations and adjusted EBITDA of $6 million ahead of our internal plan. While we just discussed the March demand metric, we recognize revenue when the bed is delivered. Since the majority of new products launched on March 23rd, most of the net sales will be reflected in Q2 rather than in Q1. Now let me talk about the progress we're seeing across the business and why we're encouraged by the early results. Let's start with the product. We completed a full product reset across all of our stores in less than four weeks. At the same time, our manufacturing and home delivery teams transitioned to the new lineup seamlessly and without disruption. The rollout also gave us an early read on product success. During the launch period, stores set with the new lineup saw 12% higher ARU than stores with previous product. Given the product rollout happened at the end of Q1, I'm going to share some metrics we are seeing in Q2 that help us determine progress. First, we have a successive comfort mode. The first best bed we launched in January. We are seeing 15 points of improvements in overall net Promoter score and when we compare to our prior entry level mattresses, the C series Net Promoter score improves by 27 points. With this improvement in NPS and with more than 100 days in market, we are seeing this flow through to our financials with 100 basis points reduction in return rate for comfort mode versus historical return rates of the product it replaces. Second, across the full portfolio we are seeing a strong attach in our premium Comfort Next line which features our unique Tribrid technology. More specifically, Comfort Next Luxe is now our top selling bed at approximately $4,000 for a queen size at a healthy margin and representing an early shift into the planned product mixed. To be clear, the new beds have a better average margin profile than the beds they replace and the planned mix of the new line should return us to historic gross margin levels once we get past all one time launch and clearance cost pressures. We also conducted in home user testing during the rollout and saw the direct and measurable impact of our beds compared to their original mattresses. 9 in 10 people slept better, 8 in 10 people got more sleep and 8 in 10 people experienced less pain on a sleep number bed. Shifting to marketing we continue to drive improvements in our website experience. This has improved organic search visibility and simplified the purchase process. E Commerce demand grew year over year by approximately 5% in April partly because of this work. In addition, our ongoing work in AI discoverability has improved AI citations, by approximately 25% year to date. To support the product launch, we introduced a new integrated brand campaign to a Good Life Sleep, which features brand spots along with product specific creative. These reinforce what differentiates Sleep Number a personalized bed that adapts to your life and sleep needs. As your life and sleep needs change, the early response is positive and is trending above benchmarks in the category. Lastly, we launched our first Travis Kelce content last week alongside expanded influencer activity, both designed to drive awareness and store traffic. We continue to see high engagement on our social content. For example, the Travis Kelce video garnered over 7 million views and high value engagement, especially in shares and saves. We continue to expand distribution in a disciplined way. A recent example is our test with Costco. We launched an exclusive online [email protected] and early indications are encouraging through both direct sales and increased visibility in our stores. We also remain focused on cost discipline. Since the start of 2025, we've identified over $235 million of annualized savings, $200 million of which has already been executed. With the cost savings implemented, we expect to stay on track for our EBITDA plan. Looking ahead, we are measured in our outlook, consistent with what we said on our last earnings call. April demand was in line with our internal expectations and seasonal trends. We continue to plan conservatively given ongoing consumer uncertainty and macro volatility. That said, we're encouraged by customer response to the new beds and the performance of our refreshed marketing which reinforces confidence in our plan. As I reflect on my one year anniversary as CEO, I want to step back for a moment. When I joined Sleep Number, I saw a powerful brand, a compelling mission and a deeply committed team. I also saw a cost structure, product offering, marketing approach and balance sheet that limited long term performance. Over the past year, we've taken meaningful steps to address those challenges, reducing costs, modernizing our marketing, and executing the most significant product reset we've had in years. We're confident in our marketing and product execution and our capital structure is the final major piece of the turnaround that we're focused on solving. Finally, I want to thank our Sleep Number team members. None of this progress happens without your focus, dedication and commitment to quality sleep. I'm grateful for your work and proud of the resilience you show every day. With that, I'll turn it over to Amy.
Amy O'Keefe (Chief Financial Officer)
Thank you Linda and good morning. We are pleased to have finalized negotiations with our lenders that resulted in approximately $55 million of near term incremental liquidity through covenant relief and $25 million of new capital as we disclosed in the 10K, our plan to alleviate the risk to continuing operations was threefold. Number one Execute on the turnaround strategy centered on product marketing and distribution while right sizing the fixed cost base 2 engage in negotiations with lenders with the goal of amending or waiving financial covenants and three Engage financial advisors to identify and secure additional capital and other comprehensive solutions to address the capital structure for the creation of long term value. We are progressing well against that plan. As Linda described, the turnaround strategy is well underway as we head into Memorial Day. Our new lineup of products has launched the the stores were fully reset as of April 17. A new marketing creative is live with significantly increased investment in Q2 compared to last year. Additionally, we are executing against our $50 million annualized cost savings plan. Having executed approximately 30% on a year to date basis related to the recently executed credit agreement amendment, we were able to alleviate the near term pressure on liquidity and covenants. The agreement provides for the 1 a new senior secured term loan facility of $25 million due June 30, 2026 relief from the $30 million minimum liquidity covenant through June 30, 2026 and 3 forbearance by the agent and lenders from exercising their rights under the credit agreement for specified covenant defaults as of April 4th. With respect to a long term solution to our capital structure, we have work to do over the next few months using the short term relief we receive from our lenders along with our advisors, we continue to progress plans to finalize the strategic transaction designed to maximize stakeholder value. Now let's get into Q1 results which were consistent with the expectations that we shared on our last earnings call. Net sales were 319 million in Q1, which was 19% below the same period in the prior year. Note that in Q1 consistent with our plan, investment in media was down 21%. In addition, as Linda mentioned and as we discussed on our last call, demand performance in January and early February was soft. However, we did see sequential improvement across the quarter culminating with year over year demand growth in March aided by discounting to move legacy SKUs in advance of the launch of new products on March 23. Gross profit margin was 57.9% in the quarter which was ahead of plan but 329 basis points below last year, primarily driven by a shift in mix to the new comfort mode bed and discounting of legacy inventory. As the full line of products are now in the market and as supply of legacy inventory diminishes, we expect that gross margin will improve to at or above historical levels. Adjusted operating expenses before restructuring and other non recurring costs were 195 million down 42 million or 18% year over year. The reduction was driven by ongoing cost savings initiatives to right size, the fixed cost base and lower variable selling expenses. Adjusted EBITDA was 5.8 million down 16 million versus the same period last year. Turning to the balance sheet and cash flow, total liquidity including cash and Revolver capacity was $40 million at the end of Q1 above the $30 million covenant floor which remained in place until the execution of the amendment to the credit agreement on April 27. Free cash flow in the quarter with a use of 13.2 million, which was just over $20 million. Favorable to expectations, however, was unfavorable by 6 million compared to the prior year, primarily due to top line pressure partially offset by favorable working capital. Capital expenditures in the quarter were 5.4 million looking ahead to Q2 and the balance of fiscal year 2026 starting with Q2. The demand improvement in March has translated to sequentially improved year over year performance and net sales for the Despite a promotional comparability headwind versus prior year, I expect that our media investment in Q2 will be roughly flat to Q1 but up significantly versus the prior year, which was a trough. Consistent with the indications of performance expectations that we provided on our last earnings call for the quarter, we expect net sales to be down in the range of low single digits to flat versus the prior year. Given our previously announced engagement of Guggenheim securities to evaluate strategic and financing options, we will not provide any further financial guidance at this time. But I will say that my expectations of performance are consistent with the indications that we provided on the last earnings call, and with that I will turn it back to the operator for Q and A.
OPERATOR
Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press *1 and your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press *1 again. If you're called upon to ask your question and are listening by a loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from the line of Peter Keith with Piper Sandler. Your line is now open.
Peter Keith (Equity Analyst at Piper Sandler)
Thanks. Good morning everyone. I wanted to focus on the Q2 because I guess our view has been that there's kind of a lot riding on Q2 to show meaningful improvement as you've got the full product line rolled out. And then the media spend sounds like it should should at least be flat, if not up, year on year. So I guess you are guiding sales down slightly in Q2, but how do you feel about the whole plan coming together with the media and the new products and driving positive demand growth over time?
Linda Findlay (President and CEO)
I'll start with that and then I can turn it over to Amy. So nothing's changed about our media spend plan really for Q2 and beyond, based on what we previously said. So we still anticipate, as we said on Q4, an improvement, but down. You know, as Amy just sort of illustrated, there is obviously a little bit of bumpiness in the media spend as far as how it's planned. I mean, it would be fairly standard for us to back weight it given the Memorial Day holiday, which is what we've done. So we are leaning in now that the products are fully set set and in market, and that's where most of the media spend is coming together, which is in the coming weeks. Okay.
Peter Keith (Equity Analyst at Piper Sandler)
And I guess with the new term loan that's due on June 30, is that should we think about it as some type of new financial plan or recapitalization should happen by that date?
Amy O'Keefe (Chief Financial Officer)
Yeah, that's the expectation here. So the short maturities, I mean, as we've talked about on the Q1 call and through this script, we've been working toward this goal for months and months. And so we hired advisors and we've been working in parallel. And so I think, given. I think that we're well positioned to be able to, you know, continue to progress those transactions. And, you know, our lenders are going to hold us accountable for that.
Peter Keith (Equity Analyst at Piper Sandler)
Okay, and last question. A popular topic these days is higher input costs. That was not mentioned in prepared remarks. Obviously, there's a lot of other things going on, but how are you managing through that environment right now? Do you have some flexibility around pricing or other cost?
Linda Findlay (President and CEO)
So I guess I would say that we have a bit of an advantage. And then I'll turn it over to Amy to talk about more detail. But we have a bit of an advantage in that we We just launched a new product line that was priced according to pretty current data when it came to either thinking about tariffs or other macro information. So I think we're in pretty good shape from a consumer standpoint. We'll continue to evaluate how that comes together, but we had actually anticipated a certain amount of pressure on inflation anyway, just because of the signals we were seeing earlier in the year. So that is already built into the plan as far as price pressure.
Amy O'Keefe (Chief Financial Officer)
Yeah, I mean, we definitely expect to see some headwind. It hasn't changed our view of internal performance expectations. And we're also executing cost savings initiatives against it. And so, you know, we expect to be able to be able to hold to our plan despite the input costs.
Peter Keith (Equity Analyst at Piper Sandler)
Yeah. Okay. Very good. Thanks so much. I'll pass it along.
Linda Findlay (President and CEO)
Thanks, Peter.
OPERATOR
Your next question comes from the line of Dan Silverstein with ubs. Your line is now open.
Dan Silverstein (Equity Analyst at UBS)
Good morning, Linda and Amy. Thanks so much for taking our question. Good morning, Amy. Could you just provide detail around your liquidity position as of today? And if Memorial Day kind of went to plan, which it sounds like April is trending in line with expectations, what would that mean for the cash flow dynamics in the second quarter?
Amy O'Keefe (Chief Financial Officer)
So I'm not going to comment on our liquidity position as of today. I will say that the support of our lenders, you know, we're in a trough of liquidity. I mean our business goes from, you know, President's Day through Memorial Day. And we're investing into new product launch, new creative, new sponsorships with Travis Kelce. And so we're definitely using cash. That should be no surprise. And we got support from our lenders to manage through the liquidity to execute our plans for Memorial Day. And so what I will say is that, you know, we manage liquidity very, very tightly and as we expect, you know, collections to ramp over the Memorial Day holiday, which is, which is consistent with our plan. And so we worked very closely with our lenders on our forecast and thus far we have been at or above the forecast that we provided. So we expect to continue to manage liquidity tightly through Memorial Day selling season.
Dan Silverstein (Equity Analyst at UBS)
Very helpful. Next, very encouraging. Start with the new product rollout. How many customers that are buying the Comfort Mode products just because there's a little more data there are new to file and how are they engaging with the brand and how could you capitalize on that for Memorial Day and later out?
Linda Findlay (President and CEO)
Yeah. So as we've discussed before, part of the strategy behind the new product launch was to attract new buyers to the products. And we have seen that play out. We're not giving exact numbers on that, but we have seen new buyers coming into the product at a higher rate than, than previously. We love our smart sleepers and our existing customers and we continue to nurture our existing customers as well as obviously upgrading and, or replacing, you know, old with new product is a behavior that we also want to encourage. But we're happy with the progress that we've made with new customer acquisition during this time.
Dan Silverstein (Equity Analyst at UBS)
Thank you and best of luck.
OPERATOR
Your next question comes from the line of Bobby Griffin with Raymond James. Your line is now open.
Bobby Griffin (Equity Analyst at Raymond James)
Good morning, buddy. Thanks for taking the questions and congrats on some of the early improvements there in March, I guess. Linda, I first want to start because this is the first time you guys have some of the new products out for Big Holiday as well as your team in place. So maybe can you just elaborate a little on how you're approaching the Memorial Day weekend holiday versus historical standards of sleep number and you know, anything there from a promotional aspect? You talked, you talked a little bit about marketing, but just anything more to kind of help us connect how you're going about this holiday season. Maybe a little different than what we're used to.
Linda Findlay (President and CEO)
Sure, I think at high level as we go through. But obviously part of our role and part of our job is to continue to adapt to whatever we see in market. So we will continue to be flexible as we get into the holiday on what's best for the business and what's best for the product. It is very early with the new products. Again, we are encouraged by what we're seeing from the simplified purchase process, both in discoverability as well as people moving into other beds in the line beyond the Comfort Mode launch, including our Comfort Next Lux, which we're very proud of. So we're seeing the patterns that we wanted to see when it comes to that. And we are also seeing, as I mentioned in our script, good response to the new brand campaign that we put out. It's early, so it's trending in the right direction. Takes time for those things to really take hold. But we are seeing good response from a promotional standpoint when we priced these beds. When we were creating the new product line, we priced these beds very competitively compared to their predecessors. While they are all premium price points, they are all premium price points that are slightly better than the beds that they replace and also with more comfort materials and value sort of moved into those. So that's really what we're leaning into for our selling for the holiday season is comfort, value, durability. As we, as we noted before, the simplified selling process allows people to try the individual fit process on one of the new beds. So they're trying it on Comfort mode luxury. And that IFIT process has been adapted for the simplified selling process of showing people the best bet for them as far as Promotions, honestly what we're doing is we're really moving towards what I would call more industry standard promotional approach which so far has worked well for us. But as I mentioned, we will continue to be flexible on how we think about promotions going into the holiday based on what we see with consumer behavior and the macro environment.
Bobby Griffin (Equity Analyst at Raymond James)
That's helpful. And then Amy, maybe a follow up on the gross margins for the quarter. How much of the decline year over year was the discounting of the legacy products? And then my apologies if I missed it in the script, but are we largely done with that discounting or will we be done by 2Q? Just anything on the timing of clearing out the legacy products?
Amy O'Keefe (Chief Financial Officer)
Yeah, so certainly supplies on the legacy products are diminishing. We continue to sell those. I mean we think it's really important to recover the component inventory cost. So we will continue to sell them until, you know, while the supplies last, so to speak. You know, in the, in the quarter of the 300 and call it 30 basis point change, the discounting was under 100 basis points of that change. It was really the Q1 because we had launched the comfort mode bed early in the quarter and had great success with that, you know, sort of outselling versus the prior year. Mix shifted in that direction and I would say closer to half of the basis point difference was as it relates to the mix shift as we launched the new products on March 23rd. We expect that mix, that mix to evolve and to balance out over time. And so as I, as I noted in my comments, you know, I. Well, gross margin, you know, was relatively flat on a sequential basis from Q4 to Q1. When you remove the impact of the inventory obsolescence charges that we've taken, we expect that to sequentially improve as mixed balances out for the, for the rest of the year.
Bobby Griffin (Equity Analyst at Raymond James)
Okay, that's helpful. I appreciate the details. Best luck here in this period trying to get some more long term financing and good luck over the holiday.
OPERATOR
Your next question comes from the line of Brad Thomas with Keybanc Capital Markets. Your line is now open.
Brad Thomas (Equity Analyst at KeyBanc Capital Markets)
Hey, good morning Linda and Amy. Thanks for the questions. I wanted to maybe follow up on, on one of Bobby's last questions. I know the company historically talks about aru. Can you maybe share a little more detail on how are you or maybe average ticket or the average transaction size has been trending of late and how you're thinking about that going forward.
Linda Findlay (President and CEO)
Yeah, on a year over year basis in Q1. So ARU for the quarter was about $6,021, which was up slightly versus the last versus versus prior year as we planned. So we have been, you know, we had planned these new product launches to expand aru and we certainly expect continued expansion of ARU as the rest of the product line rolls out. But we did see an improvement quarter over quarter versus last year. Yeah. And the only other thing I'll note is, you know, I mentioned in the scripts that when we did the rollout of the new bed starting March 23, stores that were set with the new bed did have a higher 12% higher ARU than the stores that were set with legacy inventory. And as I mentioned in our previous call, our new product design was really designed to create the right value at the right price point. But now with Comfort Mode being our entry price point into the line and previously having had two beds that were priced below that, that obviously also is part of the AR U mix we plan going forward because we will no longer have those lower end beds. So that. That's part of the improvement.
Brad Thomas (Equity Analyst at KeyBanc Capital Markets)
That's helpful. And then, you know, on the sales guidance, this is of course, with the store count being, you know, about 9% lower. So if we try to back into like a same store sales metric, it looks like that might be up mid to high single digits for 2q. Is that the right way of thinking about things?
Amy O'Keefe (Chief Financial Officer)
I mean, so we definitely, so we're definitely expecting through the Memorial Day season a return to demand growth like we saw in March. And so I think, I think that's prop. I think overall, as I mentioned, we'll be down low single digits to flat from a net revenue perspective in the quarter. And so later in the quarter through Memorial Day, you might see, you know, a return to growth in same store sales. That's kind of how I think about it.
Brad Thomas (Equity Analyst at KeyBanc Capital Markets)
Yep. And then just the last one for me on 2Q. Is there still a quantifiable amount of launch costs falling into 2Q? Just as we think about expense puts and takes here,
Amy O'Keefe (Chief Financial Officer)
for the most part, I would say, you know, as I think about launch costs, I think about inventory obsolescence, which I feel like is behind us. We took the biggest piece of that in Q4, which we talked about on the last call, we had a bit more, not to the magnitude that we took in Q4, a little bit more in Q1. You know, I would say that from a creative perspective, those costs have been borne already. And so I would say that it is. There are some in Q2, but not to the magnitude that they were in Q1.
Brad Thomas (Equity Analyst at KeyBanc Capital Markets)
That's really helpful. Thank you for all the questions and good luck during these important holidays and with your lender discussion.
OPERATOR
As we have no further questions, ladies and gentlemen, this will conclude today's question and answer session. I'd like to turn the conference back over to Linda for any closing comments.
Linda Findlay (President and CEO)
Thank you all for your time today. We remain focused on the work ahead, and I look forward to updating you on our continuing continued progress in the coming months. As always, if you have questions, please contact us directly. Thank you.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.
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