Enhanced Investments - Financial Portal

Published: 2023-11-08 16:06:03 ET

snbr-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-25121

_______________________________________________________________________

SLEEP NUMBER CORPORATION

(Exact name of registrant as specified in its charter)


Minnesota						41-1597886
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

1001 Third Avenue South

Minneapolis,

Minnesota

55404

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (763) 551-7000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading
Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

SNBR

Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of September 30, 2023, 22,228,000 shares of the registrant’s Common Stock were outstanding.

Table of contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

INDEX


		Page
PART I: FINANCIAL INFORMATION		1

Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Shareholders' Deficit	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26

PART II: OTHER INFORMATION		27

Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	29
SIGNATURES		30


i \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of contents

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited - in thousands, except per share amounts)


	September 30, 2023		December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	906	$	1,792
Accounts receivable, net of allowances of $1,408 and $1,267, respectively	18,631		26,005
Inventories	116,224		114,034

Prepaid expenses	21,076		16,006
Other current assets	41,230		39,921
Total current assets	198,067		197,758

Non-current assets:
Property and equipment, net	190,707		200,605
Operating lease right-of-use assets	401,564		397,755
Goodwill and intangible assets, net	66,690		68,065
Deferred income taxes	21,391		7,958
Other non-current assets	82,616		81,795
Total assets	$	961,035	$	953,936

Liabilities and Shareholders’ Deficit
Current liabilities:
Borrowings under revolving credit facility	$	488,000	$	459,600
Accounts payable	168,883		176,207
Customer prepayments	45,902		73,181
Accrued sales returns	23,012		25,594
Compensation and benefits	24,281		31,291
Taxes and withholding	27,198		23,622
Operating lease liabilities	83,143		79,533
Other current liabilities	58,907		60,785
Total current liabilities	919,326		929,813

Non-current liabilities:

Operating lease liabilities	356,579		356,879
Other non-current liabilities	105,817		105,421
Total liabilities	1,381,722		1,392,113

Shareholders’ deficit:
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding	—		—
Common stock, $0.01 par value; 142,500 shares authorized, 22,228 and 22,014 shares issued and outstanding, respectively	222		220
Additional paid-in capital	12,769		5,182
Accumulated deficit	(433,678)		(443,579)
Total shareholders’ deficit	(420,687)		(438,177)
Total liabilities and shareholders’ deficit	$	961,035	$	953,936

See accompanying notes to condensed consolidated financial statements.


1 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited - in thousands, except per share amounts)


	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
Net sales	$	472,648	$	540,566	$	1,457,964	$	1,616,769
Cost of sales	201,537		237,479		612,343		686,439
Gross profit	271,111		303,087		845,621		930,330

Operating expenses:
Sales and marketing	221,143		239,656		649,410		700,405
General and administrative	31,948		36,003		111,144		116,049
Research and development	12,633		14,786		42,521		46,908
Total operating expenses	265,724		290,445		803,075		863,362
Operating income	5,387		12,642		42,546		66,968
Interest expense, net	10,958		5,606		30,008		11,352
(Loss) Income before income taxes	(5,571)		7,036		12,538		55,616
Income tax (benefit) expense	(3,253)		2,003		2,637		13,576
Net (loss) income	$	(2,318)	$	5,033	$	9,901	$	42,040

Basic net (loss) income per share:
Net (loss) income per share – basic	$	(0.10)	$	0.23	$	0.44	$	1.87
Weighted-average shares – basic	22,479		22,218		22,412		22,444

Diluted net (loss) income per share:
Net (loss) income per share – diluted	$	(0.10)	$	0.22	$	0.44	$	1.83
Weighted-average shares – diluted	22,479		22,573		22,558		22,959

See accompanying notes to condensed consolidated financial statements.


2 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Deficit

(unaudited - in thousands)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total
	Shares	Amount
Balance at December 31, 2022	22,014	$	220	$	5,182	$	(443,579)	$	(438,177)
Net income	—	—		—		11,465		11,465
Exercise of common stock options	17	—		389		—		389
Stock-based compensation	271	3		4,636		—		4,639
Repurchases of common stock	(118)	(1)		(3,362)		—		(3,363)
Balance at April 1, 2023	22,184	$	222	$	6,845	$	(432,114)	$	(425,047)
Net income	—	—		—		754		754
Exercise of common stock options	3	—		39		—		39
Stock-based compensation	33	—		5,251		—		5,251
Repurchases of common stock	(6)	—		(138)		—		(138)
Balance at July 1, 2023	22,214	$	222	$	11,997	$	(431,360)	$	(419,141)
Net (loss)	—	—		—		(2,318)		(2,318)
Exercise of common stock options	—	—		—		—		—
Stock-based compensation	22	—		982		—		982
Repurchases of common stock	(8)	—		(210)		—		(210)
Balance at September 30, 2023	22,228	$	222	$	12,769	$	(433,678)	$	(420,687)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total
	Shares	Amount
Balance at January 1, 2022	22,683	$	227	$	3,971	$	(429,151)	$	(424,953)
Net income	—	—		—		2,074		2,074
Exercise of common stock options	21	—		531		—		531
Stock-based compensation	341	3		4,130		—		4,133
Repurchases of common stock	(813)	(8)		(8,632)		(42,358)		(50,998)
Balance at April 2, 2022	22,232	$	222	$	—	$	(469,435)	$	(469,213)
Net income	—	—		—		34,933		34,933
Exercise of common stock options	2	—		54		—		54
Stock-based compensation	26	1		3,909		—		3,910
Repurchases of common stock	(296)	(3)		(3,963)		(8,680)		(12,646)
Balance at July 2, 2022	21,964	$	220	$	—	$	(443,182)	$	(442,962)
Net income	—	—		—		5,033		5,033
Exercise of common stock options	19	—		413		—		413
Stock-based compensation	30	—		542		—		542
Repurchases of common stock	(12)	—		(497)		—		(497)
Balance at October 1, 2022	22,001	$	220	$	458	$	(438,149)	$	(437,471)

See accompanying notes to condensed consolidated financial statements.


3 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited - in thousands)


	Nine Months Ended
	September 30, 2023		October 1, 2022
Cash flows from operating activities:
Net income	$	9,901	$	42,040
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	55,196		49,342
Stock-based compensation	10,872		8,585
Net loss on disposals and impairments of assets	464		274
Deferred income taxes	(13,433)		(6,955)
Changes in operating assets and liabilities:
Accounts receivable	7,374		(1,029)
Inventories	(2,190)		(11,080)
Income taxes	3,571		4,530
Prepaid expenses and other assets	(5,903)		20,082
Accounts payable	5,199		28,889
Customer prepayments	(27,279)		(34,225)
Accrued compensation and benefits	(6,923)		(23,735)
Other taxes and withholding	5		4,744
Other accruals and liabilities	(5,038)		(1,340)
Net cash provided by operating activities	31,816		80,122

Cash flows from investing activities:
Purchases of property and equipment	(48,022)		(52,808)
Issuance of note receivable	(1,317)		—
Proceeds from sales of property and equipment	10		49

Net cash used in investing activities	(49,329)		(52,759)

Cash flows from financing activities:
Net increase in short-term borrowings	20,334		34,781
Repurchases of common stock	(3,711)		(64,141)
Proceeds from issuance of common stock	428		998
Debt issuance costs	(424)		(42)
Net cash provided by (used in) financing activities	16,627		(28,404)

Net decrease in cash and cash equivalents	(886)		(1,041)
Cash and cash equivalents, at beginning of period	1,792		2,389
Cash and cash equivalents, at end of period	$	906	$	1,348

See accompanying notes to condensed consolidated financial statements.


4 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of Contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Business and Summary of Significant Accounting Policies

Business & Basis of Presentation

The Company prepared the condensed consolidated financial statements as of and for the three and nine months ended September 30, 2023 of Sleep Number Corporation and its 100%-owned subsidiaries (Sleep Number or the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and they reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly its financial position as of September 30, 2023 and December 31, 2022, and the consolidated results of operations and cash flows for the periods presented. The historical and quarterly consolidated results of operations may not be indicative of the results that may be achieved for the full year or any future period.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the most recent audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and other recent filings with the SEC.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of sales, expenses and income taxes during the reporting period. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates will be reflected in the consolidated financial statements in future periods and could be material. The Company’s critical accounting policies consist of stock-based compensation, warranty liabilities and revenue recognition.

The condensed consolidated financial statements include the accounts of Sleep Number Corporation and its 100%-owned subsidiaries. All significant intra-entity balances and transactions have been eliminated in consolidation.

2. Fair Value Measurements

At both September 30, 2023 and December 31, 2022, the Company had $17 million of debt and equity securities that fund the deferred compensation plan and are classified in other non-current assets. The Company also had corresponding deferred compensation plan liabilities of $17 million at both September 30, 2023 and December 31, 2022, which are included in other non-current liabilities. The majority of the debt and equity securities are Level 1 as they trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis. Unrealized gains/(losses) on the debt and equity securities offset those associated with the corresponding deferred compensation plan liabilities.


5 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of Contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

3. Inventories

Inventories consisted of the following (in thousands):


	September 30, 2023		December 31, 2022
Raw materials	$	8,835	$	7,785
Work in progress	124		102
Finished goods	107,265		106,147
	$	116,224	$	114,034

4. Goodwill and Intangible Assets, Net

Goodwill and Indefinite-lived Intangible Assets

Goodwill was $64 million at September 30, 2023 and December 31, 2022. Indefinite-lived trade name/trademarks totaled $1.4 million at September 30, 2023 and December 31, 2022.

Definite-lived Intangible Assets


	September 30, 2023				December 31, 2022
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Developed technologies	$	18,851	$	18,851	$	18,851	$	17,641
Patents	1,972		725		1,972		559
	$	20,823	$	19,576	$	20,823	$	18,200

Developed technologies - amortization expense for the three months ended September 30, 2023 and October 1, 2022, was $0.4 million and $0.5 million, respectively, and for the nine months ended September 30, 2023 and October 1, 2022 was $1.4 million and $1.6 million, respectively.

Patents - amortization expense for both the three months ended September 30, 2023 and October 1, 2022, was $55 thousand, and for both the nine months ended September 30, 2023 and October 1, 2022, was $0.2 million.

Annual amortization for definite-lived intangible assets for subsequent years are as follows (in thousands):


2023 (excluding the nine months ended September 30, 2023)	$	55
2024	222
2025	226
2026	222
2027	222
2028	156
Thereafter	144
Total future amortization for definite-lived intangible assets	$	1,247


6 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of Contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

5. Credit Agreement

As of September 30, 2023, the Company’s credit facility had a total commitment amount of $825 million. The credit facility is for general corporate purposes, to meet seasonal working capital requirements and to repurchase its stock. The Credit Agreement includes an accordion feature which allows the Company to increase the amount of the credit facility from $825 million to $1.2 billion, subject to lenders’ approval. The Credit Agreement provides the lenders with a collateral security interest in substantially all of the Company’s assets and those of its subsidiaries and requires the Company to comply with, among other things, a maximum net leverage ratio (5.0x) and a minimum interest coverage ratio (3.0x).

The Company amended the Credit Agreement on October 26, 2022. The amendment, among other things, (a) provides relief from the requirement that the net leverage ratio not exceed 3.75x for certain corporate actions including Permitted Capital Distributions for Performance or Taxes (as defined in the Credit Agreement) and certain acquisition activity; (b) increases the permissible net leverage ratio to 5.0x for the three consecutive quarterly reporting periods ending July 1, 2023; (c) increases the commitment fee rate to 50 basis points and the margin applicable to interest rates for all borrowings by an additional 50 basis points, in each case if the net leverage ratio is greater than or equal to 4.5x; and (d) replaces the option to borrow at an interest rate based on London Interbank Offered Rate (LIBOR) to one based on a Term SOFR Rate. The Term SOFR Rate equals the sum of (x) the Term SOFR Screen Rate (as defined in the Credit Agreement) for the applicable interest period (but in no event less than zero), plus (y) 0.10%, plus (z) the margin based on Sleep Number’s net leverage ratio.

The Company amended the Credit Agreement on July 24, 2023. The amendment, among other things, extends the increased permissible net leverage ratio to 5.0x to include the quarterly reporting period ending September 30, 2023. For the quarterly reporting period ending December 30, 2023, and subsequent quarterly reporting periods, the maximum leverage ratio will be 4.5x.

Under the terms of the Credit Agreement, the Company pays a variable rate of interest and a commitment fee based on its leverage ratio. The Credit Agreement matures in December 2026. The Company was in compliance with all financial covenants as of September 30, 2023.

The following table summarizes the Company’s borrowings under the credit facility ($ in thousands):


	September 30, 2023			December 31, 2022
Outstanding borrowings	$	488,000		$	459,600
Outstanding letters of credit	$	7,147		$	5,947
Additional borrowing capacity	$	329,853		$	359,453
Weighted-average interest rate	8.2		%	6.7		%

The Company amended the Credit Agreement on November 2, 2023. This Tenth Amendment, among other things, (a) decreases the total aggregate commitment under the Credit Agreement from $825 million to $685 million, (b) decreases the $625 million revolving loan commitment to $485 million, (c) decreases the accordion from $400 million to $342.5 million, (d) increases the Applicable Commitment Fee Rate to 50 basis points when the Net Leverage Ratio is greater than or equal to 3.50 to 1.00 (as each is defined in the Credit Agreement), (e) increases the Applicable Margin by 25 to 75 basis points for each respective range of Net Leverage Ratios (as each is defined in the Credit Agreement), (f) deems our Net Leverage Ratio as greater than or equal to 4.00 to 1.00 but less than 4.50 to 1.00 as of the Tenth Amendment effective date to set pricing for the Applicable Commitment Fee Rate and Applicable Margin until receipt of the compliance certificate for the quarterly reporting period ending December 30, 2023, (g) amends the definition of Consolidated EBITDA (as defined in the Credit Agreement) to include cash add backs, capped at $30 million for the quarterly reporting periods ending December 30, 2023, March 30, 2024, June 29, 2024, September 28, 2024, and December 28, 2024 and capped at $20 million for each quarterly reporting period ending thereafter, (h) amends the definitions of each of Net Leverage Ratio and Senior Secured Leverage Ratio (as each is defined in the Credit Agreement) to include the total operating lease liabilities of borrower, as calculated in accordance with ASC 842 accounting guidance (as of the end of the most recently completed quarterly reporting period) replacing the prior


7 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of Contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

language of six multiplied by Consolidated Rent Expense (for the most recently completed four quarterly reporting periods), (i) adjusts the permissible maximum Net Leverage Ratio (as defined in the Credit Agreement) to (I) 5.00 to 1.00 for the quarterly reporting periods ending December 30, 2023 and March 30, 2024, (II) 5.50 to 1.00 for the quarterly reporting period ending June 29, 2024, (III) 5.00 to 1.00 for the quarterly reporting period ending September 28, 2024, (IV) 4.80 to 1.00 for the quarterly reporting period ending December 28, 2024, and (V) 4.00 to 1.00 for each quarterly reporting period occurring thereafter, (j) adjusts the permissible maximum Interest Coverage Ratio (as defined in the Credit Agreement) to (I) 1.50 to 1.00 for the quarterly reporting periods ending December 30, 2023 and March 30, 2024, (II) 1.25 to 1.00 for the quarterly reporting period ending June 29, 2024, (III) 1.50 to 1.00 for the quarterly reporting periods ending September 28, 2024 and December 28, 2024, and (IV) 3.00 to 1.00 for each quarterly reporting period occurring thereafter, and (k) decreases the requisite Net Leverage Ratio from 3.75 to 1.00 down to 3.00 to 1.00 (under the new applicable definitions) before any Acquisitions (with the exception of the Specified Acquisition) or Restricted Payments (as each is defined in the Credit Agreement) may be made. A fee for the amendment is payable to the approving lenders in an amount equal to 20 basis points multiplied by the sum of such lender's Revolving Credit Commitment and outstanding Term Loans (as each is defined in the Credit Agreement). The foregoing description of the Tenth Amendment is qualified in its entirety by reference to the complete terms of the Tenth Amendment, which is filed as an exhibit to this Quarterly Report on Form 10-Q.

6. Leases

The Company leases its retail, office and manufacturing space under operating leases which, in addition to the minimum lease payments, may require payment of a proportionate share of the real estate taxes and certain building operating expenses. While the Company’s local market development approach generally results in long-term participation in given markets, the retail store leases generally provide for an initial lease term of five to 10 years. The Company’s office and manufacturing leases provide for an initial lease term of up to 15 years. In addition, the Company’s mall-based retail store leases may require payment of variable rent based on net sales in excess of certain thresholds. Certain leases may contain options to extend the term of the original lease. The exercise of lease renewal options is at the Company’s sole discretion. Lease options are included in the lease term only if exercise is reasonably certain at lease commencement. The Company’s lease agreements do not contain any material residual value guarantees. The Company also leases vehicles and certain equipment under operating leases with an initial lease term of three to six years.

The Company’s operating lease costs include facility, vehicle and equipment lease costs, but exclude variable lease costs. Operating lease costs are recognized on a straight-line basis over the lease term, after consideration of rent escalations and rent holidays. The lease term for purposes of the calculation begins on the earlier of the lease commencement date or the date the Company takes possession of the property. During lease renewal negotiations that extend beyond the original lease term, the Company estimates straight-line rent expense based on current market conditions. Variable lease costs are recorded when it is probable the cost has been incurred and the amount can be reasonably estimated.

At September 30, 2023, the Company’s finance right-of-use assets and lease liabilities were not significant.

Lease costs were as follows (in thousands):


	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
Operating lease costs(1)	$	28,517	$	27,821	$	84,889	$	81,925
Variable lease costs	$	48	$	54	$	230	$	647

___________________________

(1)Includes short-term lease costs which are not significant.


8 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of Contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

The maturities of operating lease liabilities as of September 30, 2023, were as follows(1) (in thousands):


2023 (excluding the nine months ended September, 2023)	$	27,541
2024	106,087
2025	94,907
2026	82,259
2027	66,565
2028	54,584
Thereafter	95,460
Total operating lease payments(2)	527,403
Less: Interest	87,681
Present value of operating lease liabilities	$	439,722

___________________________

(1)Future payments for real estate taxes and certain building operating expenses for which the Company is obligated are not included in the operating lease liabilities. Total operating lease payments exclude $44 million of legally binding minimum lease payments for leases signed but not yet commenced.

(2)Includes the current portion of $83 million for operating lease liabilities.

Other information related to operating leases was as follows:


	September 30, 2023		December 31, 2022
Weighted-average remaining lease term (in years)	5.9		6.2
Weighted-average discount rate	6.4	%	6.2	%


	Nine Months Ended
(in thousands)	September 30, 2023		October 1, 2022
Cash paid for amounts included in present value of operating lease liabilities	$	80,650	$	74,189
Right-of-use assets obtained in exchange for operating lease liabilities	$	54,172	$	56,048

7. Repurchases of Common Stock

Repurchases of the Company’s common stock were as follows (in thousands):


	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
Amount repurchased under Board-approved share repurchase program	$	—	$	—	$	—	$	54,868
Amount repurchased in connection with the vesting of employee restricted stock grants	210		497		3,711		9,273
Total amount repurchased (based on trade dates)	$	210	$	497	$	3,711	$	64,141

As of September 30, 2023, the remaining authorization under the Board-approved $600 million share repurchase program was $348 million.


9 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of Contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

8. Revenue Recognition

Deferred contract assets and deferred contract liabilities are included in the condensed consolidated balance sheets as follows (in thousands):


	September 30, 2023		December 31, 2022
Deferred contract assets included in:
Other current assets	$	28,219	$	28,121
Other non-current assets	55,727		55,564
	$	83,946	$	83,685


	September 30, 2023		December 31, 2022
Deferred contract liabilities included in:
Other current liabilities	$	36,141	$	36,335
Other non-current liabilities	70,727		70,999
	$	106,868	$	107,334

Deferred revenue and costs related to SleepIQ® technology are currently recognized on a straight-line basis over the product's estimated life of 4.5 to 5.0 years because the Company’s inputs are generally expended evenly throughout the performance period. During the three months ended September 30, 2023 and October 1, 2022, the Company recognized revenue of $10 million and $9 million, respectively, that was included in the deferred contract liability balances at the beginning of the respective periods. During the nine months ended September 30, 2023 and October 1, 2022, the Company recognized revenue of $28 million and $26 million, respectively, that was included in the deferred contract liability balances at the beginning of the respective periods.

Revenue from goods and services transferred to customers at a point in time accounted for approximately 98% of revenues for both the three months ended September 30, 2023 and October 1, 2022 and 98% and 99% for the nine months ended September 30, 2023 and October 1, 2022, respectively.

Net sales were as follows (in thousands):


	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
Retail stores	$	409,268	$	466,632	$	1,270,076	$	1,401,789
Online, phone, chat and other	63,380		73,934		187,888		214,980
Total Company	$	472,648	$	540,566	$	1,457,964	$	1,616,769

Obligation for Sales Returns

The activity in the sales returns liability account was as follows (in thousands):


	Nine Months Ended
	September 30, 2023		October 1, 2022
Balance at beginning of year	$	25,594	$	22,368
Additions that reduce net sales	82,718		79,353
Deductions from reserves	(85,300)		(76,070)
Balance at end of period	$	23,012	$	25,651


10 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of Contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

9. Stock-based Compensation Expense

Total stock-based compensation expense (benefit) was as follows (in thousands):


	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
Stock awards (1)	$	(82)	$	(435)	8,031		$	5,778
Stock options	1,064		977		2,841		2,807
Total stock-based compensation expense (1)	982		542		10,872		8,585
Income tax benefit	118		133		1,305		2,112
Total stock-based compensation expense, net of tax	$	864	$	409	$	9,567	$	6,473

___________________________

(1) Changes in stock-based compensation expense include the cumulative impact of the change in the expected achievements of certain performance targets.

10. Profit Sharing and 401(k) Plan

Under the Company’s profit sharing and 401(k) plan, eligible employees may defer up to 50% of their compensation on a pre-tax basis, subject to Internal Revenue Service limitations. Each pay period, the Company makes a contribution equal to a percentage of the employee’s contribution. During both the three months ended September 30, 2023 and October 1, 2022, the Company’s contributions, net of forfeitures, were $2.3 million, and during the nine months ended September 30, 2023 and October 1, 2022, were $7.5 million and $7.6 million, respectively.

11. Net Income per Common Share

The components of basic and diluted net (loss) income per share were as follows (in thousands, except per share amounts):


	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
Net (loss) income	$	(2,318)	$	5,033	$	9,901	$	42,040
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	22,479		22,218		22,412		22,444
Dilutive effect of stock-based awards	—		355		146		515
Diluted weighted-average shares outstanding	22,479		22,573		22,558		22,959
Net (loss) income per share – basic	$	(0.10)	$	0.23	$	0.44	$	1.87
Net (loss) income per share – diluted	$	(0.10)	$	0.22	$	0.44	$	1.83

For the three months ended September 30, 2023, otherwise dilutive stock-based awards have been excluded from the calculation of diluted weighted-average shares outstanding, as their inclusion would have had an anti-dilutive effect on our net loss per diluted share. Additional potential dilutive stock-based awards totaling 1.1 million and 0.5 million for the three months ended September 30, 2023 and October 1, 2022, respectively, and 1.2 million and 0.5 million for the nine months ended September 30, 2023 and October 1, 2022, respectively, have been excluded from the diluted net (loss)/income per share calculations because these stock-based awards were anti-dilutive.


11 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of Contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

12. Commitments and Contingencies

Warranty Liabilities

The activity in the accrued warranty liabilities account was as follows (in thousands):


	Nine Months Ended
	September 30, 2023		October 1, 2022
Balance at beginning of year	$	8,997	$	10,069
Additions charged to costs and expenses for current-year sales	12,327		13,093
Deductions from reserves	(12,543)		(13,210)
Changes in liability for pre-existing warranties during the current year, including expirations	40		(546)
Balance at end of period	$	8,821	$	9,406

Legal Proceedings

The Company is involved from time to time in various legal proceedings arising in the ordinary course of its business, including primarily commercial, product liability, employment and intellectual property claims. In accordance with U.S. generally accepted accounting principles, the Company records a liability in its consolidated financial statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. If a material loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. With respect to currently pending legal proceedings, the Company has not established an estimated range of reasonably possible material losses either because it believes that is has valid defenses to claims asserted against it, the proceeding has not advanced to a stage of discovery that would enable it to establish an estimate, or the potential loss is not material. The Company currently does not expect the outcome of pending legal proceedings to have a material effect on its consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more claims asserted against the Company could adversely impact its consolidated results of operations, financial position or cash flows. The Company expenses legal costs as incurred.

Shareholder Class Action Complaints

On December 14, 2021, purported Sleep Number shareholder, Steamfitters Local 449 Pension & Retirement Security Funds (Steamfitters), filed a putative class action complaint in the United States District Court for the District of Minnesota (the District of Minnesota) on behalf of all purchasers of Sleep Number common stock between February 18, 2021 and July 20, 2021, inclusive, against Sleep Number, Shelly Ibach and David Callen, the Company’s former Executive Vice President and Chief Financial Officer. Steamfitters alleges material misstatements and omissions in certain of Sleep Number’s public disclosures during the purported class period, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act). The complaint seeks, among other things, unspecified monetary damages, reasonable costs and expenses and equitable/injunctive or other relief as deemed appropriate by the District of Minnesota.

On February 14, 2022, a second purported Sleep Number shareholder, Ricardo Dario Schammas, moved for appointment as lead plaintiff in the action. On March 24, 2022, the District of Minnesota heard argument on Schammas’s motion, and subsequently appointed Steamfitters and Schammas as Co-Lead Plaintiffs (together, Co-Lead Plaintiffs). On July 19, 2022, Co-Lead Plaintiffs filed a consolidated amended complaint, which, like the predecessor complaint, asserts claims against Sleep Number, Shelly Ibach, and David Callen under Sections 10(b) and 20(a) of the Exchange Act. Co- Lead Plaintiffs purport to assert these claims on behalf of all purchasers of Sleep Number common stock between February 18, 2021 and July 20, 2021. Defendants moved to dismiss the consolidated amended complaint on September 19, 2022, which motion was heard by the Court on January 17, 2023. On July 10, 2023, the Court issued an order dismissing the Plaintiffs’ consolidated amended complaint with prejudice.


12 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Table of Contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

Shareholder Derivative Complaint

On May 12, 2022, Gwendolyn Calla Moore, as the appointed representative of purported Sleep Number shareholder Matthew Gelb, filed a derivative action (the Derivative Action) in the District of Minnesota against Jean-Michel Valette, Shelly Ibach, Barbara Matas, Brenda Lauderback, Daniel Alegre, Deborah Kilpatrick, Julie Howard, Kathleen Nedorostek, Michael Harrison, Stephen Gulis, Jr., David Callen, and Kevin Brown. Moore purports to assert claims on behalf of Sleep Number for breaches of fiduciary duty, waste, and contribution under Sections 10(b) and 21(d) of the Exchange Act. Moore’s allegations generally mirror those asserted in the securities complaint described above. The Moore complaint seeks damages in an unspecified amount, disgorgement, interest, and costs and expenses, including attorneys’ and experts’ fees.

On September 13, 2022, the District of Minnesota entered a joint stipulation staying all proceedings in the Derivative Action pending the outcome of any motion to dismiss the Steamfitters consolidated amended complaint.

Stockholder Demand

On March 25, 2022, Sleep Number received a shareholder litigation demand (the “Demand”), requesting that the Board investigate the allegations in the securities class action complaint and pursue claims on Sleep Number’s behalf based on those allegations. On May 12, 2022, the Board established a special litigation committee to investigate the demand.

On October 5 and October 12, 2022, Sleep Number received two additional shareholder litigation demands, which adopted and incorporated the allegations and requests in the Demand. Both of these additional litigation demands were referred to the special litigation committee.

The special litigation committee has concluded that it would not be in the best interests of Sleep Number and its shareholders to take any of the actions requested in the demands at this time.

13. Subsequent Event

On November 6, 2023, in light of the demand trajectory change in August, the Company initiated business restructuring actions which are expected to reduce 2024 operating expenses by approximately $50 million and accelerate gross margin initiatives, in addition to the approximate $80 million of operating expense reductions expected to be realized in 2023. These actions are broad-based and include a headcount reduction of approximately 10% or 500 team members across all areas of the organization, including in corporate and research and development functions. These actions also include a rationalization of the store portfolio with a planned closure of 40 to 50 stores by the end of 2024, a slower rate of new store openings and remodels, and a reduction of the Company's 2024 capital expenditures. Gross margin improvement actions include value engineering and cost optimization strategies, including driving additional efficiencies through the Company's manufacturing and home delivery network. These business restructuring actions are expected to result in up to $20 million of one-time costs, with an estimated $10 million of the costs being recorded in the fourth quarter of 2023.


13 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of the Company’s condensed consolidated financial statements with a narrative from the perspective of management on its financial condition, results of operations, liquidity and certain other factors that may affect the Company’s future results. MD&A is presented in seven sections:

•Forward-Looking Statements and Risk Factors

•Business Overview

•Results of Operations

•Liquidity and Capital Resources

•Non-GAAP Data Reconciliations

•Off-Balance-Sheet Arrangements and Contractual Obligations

•Critical Accounting Policies

Forward-looking Statements and Risk Factors

The discussion in this Quarterly Report contains certain forward-looking statements that relate to future plans, events, financial results or performance. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “predict,” “intend,” “potential,” “continue” or the negative of these or similar terms. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company’s historical experience and its present expectations or projections. These risks and uncertainties include, among others:

•Current and future economic conditions and consumer sentiment;

•Ability to realize expected cost savings and other benefits related to business restructuring actions and to avoid unexpected adverse effects on the Company;

•Increases in interest rates, which have increased the cost of servicing the Company’s indebtedness;

•Availability of attractive and cost-effective consumer credit options;

•The effectiveness of the Company’s marketing strategy and promotional efforts;

•The execution of Sleep Number’s Total Retail distribution strategy;

•Operating with minimal levels of inventory, which may leave the Company vulnerable to supply shortages;

•Bank failures or other events affecting financial institutions;

•Sleep Number’s dependence on, and ability to maintain strong working relationships with, key suppliers and third parties;

•Rising commodity costs or third-party logistics costs and other inflationary pressures;

•Risks inherent in global-sourcing activities, including tariffs, geo-political turmoil, war, strikes, labor challenges, government-mandated work closures, outbreaks of pandemics or contagious diseases, and resulting supply shortages and production and delivery delays and disruptions;

•Risks of disruption due to health epidemics or pandemics or COVID-19 variants;

•Regional risks related to having global operations and suppliers, including climate and other disasters;

•Ability to achieve and maintain high levels of product quality;

•Ability to improve and expand Sleep Number’s product line and execute successful new product introductions;

•Ability to prevent third parties from using the Company’s technology or trademarks, and the adequacy of its intellectual property rights to protect its products and brand;

•Ability to compete;

•Risks of disruption in the operation of any of the Company’s main manufacturing, distribution, logistics, home delivery, product development or customer service operations;

•The Company’s ability to comply with existing and changing government regulation;

•Pending or unforeseen litigation and the potential for associated adverse publicity;


14 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

•The adequacy of the Company’s and third-party information systems and costs and disruptions related to upgrading or maintaining these systems;

•The Company’s ability to withstand cyber threats that could compromise the security of its systems, result in a data breach or business disruption;

•Sleep Number’s ability, and the ability of its suppliers and vendors, to attract, retain and motivate qualified personnel;

•The volatility of Sleep Number stock;

•Environmental, social and governance (ESG) risks, including increasing regulation and stakeholder expectations; and

•The Company’s ability to adapt to climate change and readiness for legal or regulatory responses thereto.

Additional information concerning these, and other risks and uncertainties is contained under the caption “Risk Factors” in Part I, Item 1A. in the Company’s Annual Report on Form 10-K and in Part II. Item 1A. in subsequent Quarterly Reports on Form 10-Q.

The Company has no obligation to publicly update or revise any of the forward-looking statements contained in this Quarterly Report on Form 10-Q.

Business Overview

Sleep Number is a wellness technology company. It is guided by its purpose is to improve the health and wellbeing of society through higher quality sleep; to date, Sleep Number’s innovations have improved 15 million lives. Its wellness technology platform helps solve sleep problems, whether it’s individualized temperature control for each sleeper through Climate360® or applying its 23 billion hours of longitudinal sleep data and expertise to research with global institutions.

Sleep Number’s smart bed ecosystem drives best-in-class engagement through dynamic, adjustable, and effortless sleep with personalized digital sleep and health insights; its millions of Smart Sleepers are loyal brand advocates. And the Company’s almost 4,500 mission-driven team members passionately innovate to drive value creation through its vertically integrated business model, including its exclusive direct-to-consumer selling in over 650 stores and online.

Sleep Number generates revenue by marketing and selling its innovations directly to new and existing customers through exclusive, direct-to-consumer retail touch points including Stores, Online, Phone, and Chat (Total Retail). Sleep Number is committed to creating long-term superior value for all stakeholders as it focuses on the Company’s three performance drivers: (1) increasing consumer demand; (2) leveraging its vertically integrated business model; and (3) deploying capital efficiently.

Results of Operations

Quarterly and Year-to-Date Results

Quarterly and year-to-date operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in sales, timing, amount and effectiveness of advertising expenditures, changes in sales return rates or warranty experience, timing of investments in growth initiatives and infrastructure, timing of store openings/closings and related expenses, changes in net sales resulting from changes in the Company’s store base, timing of new product introductions and related expenses, timing of promotional offerings, competitive factors, changes in commodity costs, disruptions in global supplies or third-party service providers, seasonality of retail and bedding industry sales, consumer sentiment and general economic conditions. The extent to which these external factors will impact the Company’s business and its consolidated financial results will depend on future developments, which are highly uncertain and cannot be predicted. Therefore, the historical results of operations may not be indicative of the results that may be achieved for any future period.


15 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Highlights

Financial highlights for the three months ended September 30, 2023 were as follows:

•Net sales for the three months ended September 30, 2023 of $473 million decreased from $541 million for the same period one year ago. Demand was impacted by ongoing macro challenges with consumers’ increased focus on price to value as their purchasing power moved to its lowest level on record. The bedding industry remains at recessionary levels with low consumer sentiment.

•The net sales change consisted of a 14% comparable sales decrease in Total Retail, slightly offset by additional sales from 16 net new stores opened in the past 12 months that added 1 percentage point (ppt.) of growth. For additional details, see the components of total net sales change on page 17.

•Sales per store (sales for stores open at least one year, Total Retail, including online, phone and chat) on a trailing twelve-month basis for the period ended September 30, 2023 totaled $2,952, compared with $3,302 for the same period last year.

•Operating income for the three months ended September 30, 2023 was $5 million, compared with $13 million in the prior-year period. The $7 million decrease in operating income was driven by the lower net sales offset by a 1.3 ppt. increase in the gross profit rate and a $25 million reduction in operating expenses.

•The 1.3 ppt. gross profit rate increase was primarily due to pricing actions taken over the last twelve months and easing commodity costs. See the Gross profit discussion on page 19 for additional details.

•The $25 million reduction in the Company’s operating expenses was due to lower marketing, general and administrative and research and development expenses.

•Net loss for the three months ended September 30, 2023 was $2 million, compared with net income of $5 million for the same period one year ago. Net loss per diluted share was $0.10, compared with net income per diluted share of $0.22 last year.

•The Company’s adjusted return on invested capital (Adjusted ROIC) was 14.9% on a trailing twelve-month basis for the period ended September 30, 2023, compared with 22.3% for the comparable period one year ago.

•The Company generated $32 million in cash from operating activities for the nine months ended September 30, 2023, compared with $80 million for the same period one year ago.

•As of September 30, 2023, the Company had $488 million of borrowings under its revolving credit facility.


16 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

The following table sets forth the Company’s results of operations expressed as dollars and percentages of net sales. Figures are in millions, except percentages and per share amounts. Amounts may not add due to rounding differences.


	Three Months Ended								Nine Months Ended
	September 30, 2023				October 1, 2022				September 30, 2023				October 1, 2022
Net sales	$	472.6	100.0	%	$	540.6	100.0	%	$	1,458.0	100.0	%	$	1,616.8	100.0	%
Cost of sales	201.5		42.6	%	237.5		43.9	%	612.3		42.0	%	686.4		42.5	%
Gross profit	271.1		57.4	%	303.1		56.1	%	845.6		58.0	%	930.3		57.5	%
Operating expenses:
Sales and marketing	221.1		46.8	%	239.7		44.3	%	649.4		44.5	%	700.4		43.3	%
General and administrative	31.9		6.8	%	36.0		6.7	%	111.1		7.6	%	116.0		7.2	%
Research and development	12.6		2.7	%	14.8		2.7	%	42.5		2.9	%	46.9		2.9	%
Total operating expenses	265.7		56.2	%	290.4		53.7	%	803.1		55.1	%	863.4		53.4	%
Operating income	5.4		1.1	%	12.6		2.3	%	42.5		2.9	%	67.0		4.1	%
Interest expense, net	11.0		2.3	%	5.6		1.0	%	30.0		2.1	%	11.4		0.7	%
(Loss) Income before income taxes	(5.6)		(1.2	%)	7.0		1.3	%	12.5		0.9	%	55.6		3.4	%
Income tax (benefit) expense	(3.3)		(0.7	%)	2.0		0.4	%	2.6		0.2	%	13.6		0.8	%
Net (loss) income	$	(2.3)	(0.5	%)	$	5.0	0.9	%	$	9.9	0.7	%	$	42.0	2.6	%

Net (loss) income per share:
Basic	$	(0.10)			$	0.23			$	0.44			$	1.87
Diluted	$	(0.10)			$	0.22			$	0.44			$	1.83

Weighted-average number of common shares:
Basic	22.5				22.2				22.4				22.4
Diluted	22.5				22.6				22.6				23.0

The percentage of total net sales, by dollar volume, was as follows:


	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023				October 1, 2022
Retail stores	86.6	%	86.3	%	87.1	%			86.7	%
Online, phone, chat and other	13.4	%	13.7	%	12.9	%			13.3	%
Total Company	100.0	%	100.0	%	100.0	%	—	%	100.0	%

The components of total net sales change, including comparable net sales changes, were as follows:


	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
Sales change rates:
Retail comparable-store sales (1)	(14	%)	(21	%)	(11	%)	(10	%)
Online, phone and chat	(14	%)	0	%	(13	%)	3	%
Total Retail comparable sales change (1)	(14	%)	(18	%)	(11	%)	(8	%)
Net opened/closed stores and other	1	%	2	%	1	%	3	%
Total Company	(13	%)	(16	%)	(10	%)	(5	%)

___________________________

(1)Stores are included in the comparable-store calculations in the 13th full month of operations. Stores that have been remodeled or repositioned within the same shopping center remain in the comparable-store base.


17 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Other sales metrics were as follows:


	Three Months Ended						Nine Months Ended
	September 30, 2023			October 1, 2022			September 30, 2023		October 1, 2022
Average sales per store (1) (in thousands)	$	2,952		$	3,302
Average sales per square foot (1)	$	963		$	1,093
Stores > $2 million in net sales (2)	67		%	77		%
Stores > $3 million in net sales (2)	27		%	38		%
Average revenue per smart bed unit (3)	$	5,640		$	5,083		$	5,822	$	5,416

___________________________

(1)Trailing-twelve months Total Retail comparable sales per store open at least one year.

(2)Trailing-twelve months for stores open at least one year (excludes online, phone and chat sales).

(3)Represents Total Retail net sales divided by Total Retail smart bed units.

The number of retail stores operating was as follows:


	Three Months Ended		Nine Months Ended
	September 30, 2023	October 1, 2022	September 30, 2023	October 1, 2022
Beginning of period	672	659	670	648
Opened	8	12	27	35
Closed	(2)	(9)	(19)	(21)
End of period	678	662	678	662


18 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Comparison of Three Months Ended September 30, 2023 with Three Months Ended October 1, 2022

Net sales

Net sales for the three months ended September 30, 2023 of $473 million decreased from $541 million for the same period one year ago. Demand was impacted by ongoing macro challenges with consumers’ increased focus on price to value as their purchasing power moved to its lowest level on record. The bedding industry remains at recessionary levels with low consumer sentiment.

The net sales change consisted primarily of a 14% comparable sales decrease in Total Retail slightly offset by additional sales from 16 net new stores opened in the past 12 months that added 1% percentage points (ppt.) of growth.

The $67.9 million net sales decrease compared with the same period one year ago was comprised of the following: (i) a $61.4 million decrease in Retail comparable net sales; (ii) a $10.4 million decrease from phone, online and other sales; offset by (iii) a $3.9 million increase from net store openings. Total Retail smart bed unit sales decreased 21% compared with the prior year. Total Retail average revenue per smart bed unit increased by 11% to $5,640, compared with $5,083 in the prior-year period. Current year average revenue per smart bed unit benefited from pricing actions taken over the last year and the introduction of our latest next generation smart beds. The prior year average revenue per smart bed unit was negatively impacted by a limited product offering of adjustable bases due to constrained supply of semiconductor chips.

Gross profit

Gross profit of $271 million for the three months ended September 30, 2023 decreased by $32 million, or 11%, compared with $303 million for the same period one year ago. The gross profit rate increased to 57.4% of net sales for the three months ended September 30, 2023, compared with 56.1% for the prior-year comparable period.

The current-year gross profit rate increase of 1.3 ppt. was mainly due to: (i) favorable pricing actions taken over the last twelve months that increased the rate by 2.5 ppt.; (ii) improvement in commodity prices and operating efficiencies improved the rate by 1.6 ppt.; partially offset by (iii) product mix of our FlexFit smart adjustable bases, pressured the rate by 1.9 ppt.; (iv) higher returns and warranty costs, primarily related to the returnability of the integrated adjustable base as part of the Climate360 smart bed, impacted the rate by 0.6 ppt; and (v) lower delivered smart bed volume deleveraged the rate by 0.5 ppt. In addition, the gross profit rate may fluctuate from quarter to quarter due to a variety of other factors, including changes in manufacturing and supply chain operations and performance-based incentive compensation.

Sales and marketing expenses

Sales and marketing expenses for the three months ended September 30, 2023 were $221 million, or 46.8% of net sales, compared with $240 million, or 44.3% of net sales, for the same period one year ago. The current-year sales and marketing expenses rate increase of 2.5 ppt. was primarily due to the deleveraging impact of 13% lower net sales partially offset by a 17% decrease in consumer financing costs as the Company adjusted promotional offers to mitigate increased costs associated with the higher interest rate environment. Media spend was 12% lower year-over-year.

General and administrative expenses

General and administrative (G&A) expenses totaled $32 million, or 6.8% of net sales, for the three months ended September 30, 2023, compared with $36 million, or 6.7% of net sales, in the prior-year period. The $4.1 million decrease in G&A expenses consisted mainly of: (i) a $3.0 million decrease in company-wide performance-based incentive compensation; (ii) a $0.7 million reduction in employee compensation on lower headcount; (iii) a $0.7 million decrease in other miscellaneous expenses; and (vi) $0.6 million reduction in professional and consulting fees; partially offset by (v) a $0.9 million increase in technology investments. The G&A expenses rate increased by 0.1 ppt. in the current-year period, compared with the same period one year ago due to the items discussed above and the deleveraging impact of lower net sales.


19 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Research and development expenses

Research and development (R&D) expenses decreased to $13 million for the three months ended September 30, 2023, compared with $15 million with the same period last year on lower outside services. While the Company’s consumer innovation pipeline remains robust, it is reprioritizing R&D resources in this highly constrained environment.

Interest expense, net

Interest expense, net increased to $11 million for the three months ended September 30, 2023, compared with $6 million for the same period one year ago. The $5 million increase was mainly driven by a higher weighted-average interest rate compared with the same period one year ago.

Income tax (benefit)/expense

Income tax benefit totaled $3.3 million for the three months ended September 30, 2023, compared with expense of $2.0 million last year. The effective income tax rate for the three months ended September 30, 2023 was 58.4%, compared with 28.5% for the comparable period last year. The change in effective income tax rate was primarily due to the reduction in projected full-year income before income taxes.

Comparison of Nine Months Ended September 30, 2023 with Nine Months Ended October 1, 2022

Net sales

Net sales for the nine months ended September 30, 2023 decreased by $159 million, or 10%, to $1.46 billion, compared with $1.62 billion for the same period one year ago. Demand was impacted by ongoing macro challenges with consumers’ increased focus on price to value as their purchasing power moved to its lowest level on record. The bedding industry remains at recessionary levels with low consumer sentiment.

The 10% net sales decrease consisted of an 11% comparable sales decrease in Total Retail, partially offset by 1 percentage point (ppt.) of sales growth from net new stores opened in the past 12 months. For additional details, see the components of total net sales change on page 17.

The $159 million net sales decrease compared with the same period one year ago was comprised of the following: (i) a $150 million decrease in Retail comparable net sales; (ii) a $27 million decrease in online, phone and other sales; partially offset by (iii) an $18 million increase resulting from net store openings. Total smart bed unit sales declined 16% compared with the prior year. Average revenue per smart bed unit in Total Retail increased by 7% to $5,822, compared with $5,416 in the prior-year period.

Gross profit

Gross profit of $846 million for the nine months ended September 30, 2023 decreased by $85 million, or 9%, compared with $930 million for the same period one year ago. The gross profit rate was 58.0% of net sales for the nine months ended September 30, 2023, compared to 57.5% in the prior-year comparable period.

The current-year gross profit rate increase of 0.5 ppt. was impacted by: (i) favorable pricing actions taken over the past twelve months and the introduction of our next generation smart beds increased the rate by 2.1 ppt.; (ii) improvement in commodity prices and operating efficiencies increased the rate by 0.9 ppt.; partially offset by (iii) product mix of our FlexFit smart adjustable bases, pressured the rate by 1.5 ppt.; (iv) higher returns and warranty costs, primarily related to the returnability of the integrated adjustable base as part of the Climate360 smart bed, decreased the rate by 0.6 ppt; and (v) lower delivered smart bed volume deleveraged the rate by 0.3 ppt. The gross profit rate may fluctuate from quarter to quarter due to a variety of other factors, including changes in manufacturing and supply chain operations and performance-based incentive compensation.

Sales and marketing expenses

Sales and marketing expenses for the nine months ended September 30, 2023 were $649 million, or 44.5% of net sales, compared with $700 million, or 43.3% of net sales, for the same period one year ago. The current-year sales and marketing expenses rate increase of 1.2 ppt. was primarily due to: (i) deleveraging impact of a 10% sales decline; (ii) the additional costs associated with operating 16 net new stores; partially offset by (iii) a 12% decrease in media spend year-over-year resulting in 0.3 ppt. of leverage; and (iv) a 13% decrease in consumer financing costs as the Company adjusted


20 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

promotional offers to mitigate increased costs associated with the higher interest rate environment resulting in 0.2 ppt. of leverage.

General and administrative expenses

General and administrative (G&A) expenses totaled $111 million, or 7.6% of net sales, for the nine months ended September 30, 2023, compared with $116 million, or 7.2% of net sales, in the prior-year period. The $5 million decrease in G&A expenses consisted of: (i) a $6.6 million reduction in employee compensation on lower headcount; (ii) a $2.3 million reduction in professional and consulting fees; (iii) a $2.2 million decrease in other miscellaneous expenses; and (iv) a $0.5 million decrease in travel and training expenses; partially offset by (v) a $3.9 million increase in company-wide, performance-based incentive compensation due to the achievement of first half of the fiscal year performance targets in the current year; and (vi) a $2.6 million increase in technology investments. The G&A expenses rate increased by 0.4 ppt. in the current-year period, compared with the same period one year ago due to the deleveraging impact of the 10% net sales decrease partially offset by the net expense reductions discussed above.

Research and development expenses

Research and development (R&D) expenses decreased by 9% to $43 million for the nine months ended September 30, 2023, compared with $47 million for the same period one year ago on lower outside services and headcount. While the Company’s consumer innovation pipeline remains robust, it is reprioritizing R&D resources in this highly constrained environment.

Interest expense, net

Interest expense, net increased to $30 million for the nine months ended September 30, 2023, compared with $11 million for the same period one year ago. The $19 million increase was mainly driven by a higher weighted-average interest rate compared with the same period one year ago.

Income tax expense

Income tax expense totaled $3 million for the nine months ended September 30, 2023, compared with $14 million last year. The effective income tax rate for the nine months ended September 30, 2023 decreased to 21.0%, compared with 24.4% for the comparable period last year.

Liquidity and Capital Resources

Managing liquidity and capital resources is an important part of the Company’s commitment to deliver superior shareholder value over time. The Company’s primary sources of liquidity are cash flows provided by operating activities and cash available under its $685 million revolving credit facility, as amended. As of September 30, 2023, the Company does not have any off-balance sheet financing other than its $7 million in outstanding letters of credit. The cash generated from ongoing operations and cash available under the revolving credit facility are expected to be adequate to maintain operations, and fund anticipated expansion, strategic initiatives and contractual obligations such as lease payments and capital commitments for new retail stores for the foreseeable future.

Changes in cash and cash equivalents during the nine months ended September 30, 2023 primarily consisted of $32 million of cash provided by operating activities and an $20 million increase in short-term borrowings, offset by $48 million of cash used to purchase property and equipment and $4 million of cash used to repurchase its common stock (based on settlement, in connection with the vesting of employee restricted stock grants).


21 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

The following table summarizes cash flows (in millions). Amounts may not add due to rounding differences:


	Nine Months Ended
	September 30, 2023		October 1, 2022
Total cash provided by (used in):
Operating activities	$	31.8	$	80.1
Investing activities	(49.3)		(52.8)
Financing activities	16.6		(28.4)
Net (decrease) in cash and cash equivalents	$	(0.9)	$	(1.0)

Cash provided by operating activities for the nine months ended September 30, 2023 was $32 million, compared with $80 million for the nine months ended October 1, 2022. Significant components of the year-over-year change in cash provided by operating activities included: (i) a $32 million decrease in net income for the nine months ended September 30, 2023, compared with the same period one year ago; (ii) a $24 million fluctuation in accounts payable due to lower expenses in the current year’s third quarter and the timing of payments; (iii) a $17 million fluctuation in accrued compensation and benefits primarily related to year-over-year changes in company-wide performance-based compensation that was earned in 2021 and paid in the first quarter of 2022, compared with no company-wide performance-based compensation earned in 2022 and paid in the first quarter of 2023; and (iv) a $26 million fluctuation in prepaid expenses and other assets primarily due to the amount and timing of rebate payments.

Net cash used in investing activities to purchase property and equipment was $48 million for the nine months ended September 30, 2023, compared with $53 million for the same period one year ago.

Net cash provided by financing activities was $17 million for the nine months ended September 30, 2023, compared with net cash used in financing activities of $28 million for the same period last year. During the nine months ended September 30, 2023, the Company repurchased $4 million of its stock (based on settlement dates, in connection with the vesting of employee restricted stock awards), compared with $64 million (based on settlement dates, $55 million under the Board-approved share repurchase program and $9 million in connection with the vesting of employee restricted stock awards) during the same period one year ago. Short-term borrowings increased by $20 million during the current-year period due to a $28 million increase in borrowings under the revolving credit facility to $488 million offset by a $8 million decrease in book overdrafts, which are included in the net change in short-term borrowings. Short-term borrowings increased by $35 million during the prior-year period due to a $24 million increase in borrowings under the credit facility to $406 million and an $11 million increase in book overdrafts.

In the second quarter of fiscal 2022, the Company suspended share repurchases under its Board-approved share repurchase program. At September 30, 2023, there was $348 million remaining authorization under the Board-approved $600 million share repurchase program. There is no expiration date governing the period over which the Company can repurchase shares.

At September 30, 2023, the Company had $488 million of borrowings under its revolving credit facility, $7 million in outstanding letters of credit and net liquidity available under the credit facility of $330 million. At September 30, 2023, the Company’s leverage ratio as defined in the credit agreement was 4.8x versus the permissible net leverage ratio of 5.0x, the weighted-average interest rate on borrowings under the credit facility was 8.2% and the Company was in compliance with all financial covenants.


22 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

definitions of each of Net Leverage Ratio and Senior Secured Leverage Ratio (as each is defined in the Credit Agreement) to include the total operating lease liabilities of borrower, as calculated in accordance with ASC 842 accounting guidance (as of the end of the most recently completed quarterly reporting period) replacing the prior language of six multiplied by Consolidated Rent Expense (for the most recently completed four quarterly reporting periods), (i) adjusts the permissible maximum Net Leverage Ratio (as defined in the Credit Agreement) to (I) 5.00 to 1.00 for the quarterly reporting periods ending December 30, 2023 and March 30, 2024, (II) 5.50 to 1.00 for the quarterly reporting period ending June 29, 2024, (III) 5.00 to 1.00 for the quarterly reporting period ending September 28, 2024, (IV) 4.80 to 1.00 for the quarterly reporting period ending December 28, 2024, and (V) 4.00 to 1.00 for each quarterly reporting period occurring thereafter, (j) adjusts the permissible maximum Interest Coverage Ratio (as defined in the Credit Agreement) to (I) 1.50 to 1.00 for the quarterly reporting periods ending December 30, 2023 and March 30, 2024, (II) 1.25 to 1.00 for the quarterly reporting period ending June 29, 2024, (III) 1.50 to 1.00 for the quarterly reporting periods ending September 28, 2024 and December 28, 2024, and (IV) 3.00 to 1.00 for each quarterly reporting period occurring thereafter, and (k) decreases the requisite Net Leverage Ratio from 3.75 to 1.00 down to 3.00 to 1.00 (under the new applicable definitions) before any Acquisitions (with the exception of the Specified Acquisition) or Restricted Payments (as each is defined in the Credit Agreement) may be made. A fee for the amendment is payable to the approving lenders in an amount equal to 20 basis points multiplied by the sum of such lender's Revolving Credit Commitment and outstanding Term Loans (as each is defined in the Credit Agreement). The foregoing description of the Tenth Amendment is qualified in its entirety by reference to the complete terms of the Tenth Amendment, which is filed as an exhibit to this Quarterly Report on Form 10-Q.

Sleep Number has an agreement with Synchrony Bank to offer qualified customers revolving credit arrangements to finance their purchases from the Company (Synchrony Agreement). The Synchrony Agreement contains financial covenants consistent with the credit facility, including a maximum net leverage ratio and a minimum interest coverage ratio. As of September 30, 2023, the Company was in compliance with all financial covenants.


23 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

Non-GAAP Data Reconciliations

Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)

The Company defines earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation and asset impairments. Management believes Adjusted EBITDA is a useful indicator of its financial performance and its ability to generate cash from operating activities. The Company’s definition of Adjusted EBITDA may not be comparable to similarly titled definitions used by other companies. The table below reconciles Adjusted EBITDA, which is a non-GAAP financial measure, to the comparable GAAP financial measure.

Adjusted EBITDA calculations are as follows (in thousands):


	Three Months Ended				Trailing-Twelve Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
Net (loss) income	$	(2,318)	$	5,033	$	4,471	$	53,181
Income tax (benefit) expense	(3,253)		2,003		1,346		15,247
Interest expense	10,958		5,606		37,641		13,196
Depreciation and amortization	18,200		17,180		72,338		64,217
Stock-based compensation	982		542		15,511		12,097
Asset impairments	292		95		491		338
Adjusted EBITDA	$	24,861	$	30,459	$	131,798	$	158,276

Free Cash Flow

The Company’s “free cash flow” data is considered a non-GAAP financial measure and is not in accordance with, or preferable to, “net cash provided by operating activities,” or GAAP financial data. However, the Company is providing this information as it believes it facilitates analysis for investors and financial analysts.

The following table summarizes free cash flow calculations (in thousands):


	Nine Months Ended				Trailing-Twelve Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
Net cash provided by (used in) operating activities	$	31,816	$	80,122	$	(12,168)	$	87,448
Subtract: Purchases of property and equipment	48,022		52,808		64,668		70,338
Free cash flow	$	(16,206)	$	27,314	$	(76,836)	$	17,110


24 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

Non-GAAP Data Reconciliations (continued)

Return on Invested Capital (Adjusted ROIC)

(dollars in thousands)

Adjusted ROIC is a financial measure the Company uses to determine how efficiently it deploys its capital. It quantifies the return the Company earns on its adjusted invested capital. Management believes Adjusted ROIC is also a useful metric for investors and financial analysts. The Company computes Adjusted ROIC as outlined below. Its definition and calculation of Adjusted ROIC may not be comparable to similarly titled definitions and calculations used by other companies.

The tables below reconcile adjusted net operating profit after taxes (Adjusted NOPAT) and total adjusted invested capital, which are non-GAAP financial measures, to the comparable GAAP financial measures (in thousands):


	Trailing-Twelve Months Ended
	September 30, 2023			October 1, 2022
Adjusted net operating profit after taxes (Adjusted NOPAT)
Operating income	$	43,458		$	81,625
Add: Operating lease expense (1)	27,497			25,419


Less: Income taxes (2)	(1,168)			(24,306)
Adjusted NOPAT	$	69,787		$	82,738

Average adjusted invested capital
Total deficit	$	(420,687)		$	(437,471)
Add: Long-term debt (3)	488,338			406,750
Add: Operating lease obligations (4)	439,722			427,613
Total adjusted invested capital at end of period	$	507,373		$	396,892

Average adjusted invested capital (5)	$	469,782		$	371,674

Adjusted return on invested capital (Adjusted ROIC) (6)	14.9		%	22.3		%

___________________________

(1) Represents the interest expense component of lease expense included in the Company’s financial statements under ASC 842, Leases.

(2) Reflects annual effective income tax rates, before discrete adjustments, of 1.6% and 22.7% for September 30, 2023 and October 1, 2022, respectively.

(3) Long-term debt includes existing finance lease liabilities.

(4) Reflects operating lease liabilities included in the Company’s financial statements under ASC 842.

(5) Average adjusted invested capital represents the average of the last five fiscal quarters’ ending adjusted invested capital balances.

(6) Adjusted ROIC equals Adjusted NOPAT divided by average adjusted invested capital.

Note - the Company’s adjusted ROIC calculation and data are considered non-GAAP financial measures and are not in accordance with, or preferable to, GAAP financial data. However, the Company is providing this information as it believe it facilitates analysis of the Company's financial performance by investors and financial analysts. The Company updated its Adjusted ROIC calculation effective beginning with the reporting period ended December 31, 2022, to reflect adjustments consistent with ASC 842. The prior period has been updated to reflect this calculation.

GAAP - generally accepted accounting principles in the U.S.

Critical Accounting Policies

The Company discusses its critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. There were no significant changes in the Company’s critical accounting policies since the end of fiscal 2022.


25 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to changes in market-based short-term interest rates that will impact net interest expense. If overall interest rates were one percentage point higher than current rates, annual net income would decrease by $4.3 million based on the $488 million of borrowings under the credit facility at September 30, 2023. The Company does not manage the interest-rate volatility risk of borrowings under the credit facility through the use of derivative instruments.

ITEM 4. CONTROLS AND PROCEDURES

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, with the participation of its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, its principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in Internal Control

There were no changes in the Company’s internal control over financial reporting during the fiscal quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


26 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company’s legal proceedings are discussed in Note 12, Commitments and Contingencies, Legal Proceedings, in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

ITEM 1A. RISK FACTORS

In addition to the risks discussed below and other information set forth in this Quarterly Report on Form 10-Q, the Company’s business, financial condition and operating results are subject to a number of risks and uncertainties, including both those that are specific to the Company’s business and others that affect all businesses operating in a global environment. Investors should carefully consider the information in this report under the heading, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and also the information under the heading, Risk Factors, in the Company’s most recent Annual Report on Form 10-K and in subsequent Quarterly Reports on Form 10-Q. The risk factors discussed in the Annual Report on Form 10-K and in subsequent Quarterly Reports on Form 10-Q including this Quarterly Report on Form 10-Q do not identify all risks that the Company faces because its business operations could also be affected by additional risk factors that are not presently known to the Company or that it currently considers to be immaterial to its operations.

The Company may not fully realize the expected cost savings and other benefits related to its business restructuring actions and such actions could have unexpected adverse effects on the Company.

The Company’s recently announced business restructuring actions, including headcount reduction, store portfolio rationalization, including slower rate of store openings and remodels, capital expenditures reductions, and other cost saving actions and initiatives, are based on a number of assumptions and expectations which, if achieved, are expected to improve profitability and cash flows from operating activities. However, there can be no assurance the expected results will be achieved. These and any future cost actions may have unexpected negative impacts to the business, including, but not limited to, operations, team members, systems and resources, sales, profitability, cash flows and financial condition.


27 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) – (b) Not applicable.


Period	Total Number of Shares Purchased(1)(2)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(3)
July 2, 2023 through July 29, 2023	719	$	30.45	—	$	348,071,000
July 30, 2023 through August 26, 2023	715	$	27.28	—	$	348,071,000
August 27, 2023 through September 30, 2023	6,426	$	26.26	—	$	348,071,000
Total	7,860	$	26.74	—	$	348,071,000

___________________________

(1)The Company did not purchase any shares under its Board-approved $600 million share repurchase program (effective April 4, 2021), during the three months ended September 30, 2023.

(2)In connection with the vesting of employee restricted stock grants, the Company repurchased 7,860 shares of its common stock at a cost of $0.2 million during the three months ended September 30, 2023.

(3)There is no expiration date governing the period over which the Company can repurchase shares under it’s Board-approved share repurchase program. Any repurchased shares are constructively retired and returned to an unissued status.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

During the quarter ended September 30, 2023, none of the Company’s directors or officers adopted, modified or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”


28 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

ITEM 6. EXHIBITS


Exhibit Number						Description
10.1*						Seventh Amendment to Retailer Program Agreement, dated effective as of August 28, 2023 by and between Synchrony Bank, Sleep Number Corporation and Select Comfort Retail Corporation
10.2*						Eighth Amendment to Retailer Program Agreement, dated effective as of October 16 , 2023 by and between Synchrony Bank, Sleep Number Corporation and Select Comfort Retail Corporation(1)
10.3*						Ninth Amendment to Retailer Program Agreement, dated effective as of October 16 , 2023 by and between Synchrony Bank, Sleep Number Corporation and Select Comfort Retail Corporation(1)
10.4*						Tenth Amendment to Amended and Restated Credit and Security Agreement(1)
10.5						Cooperation A greement , dated November 7 , 2023, between Sleep Number Corporation and Stadium Capital Management, LLC (incorporated by reference to Exhibit 10.1 contained in Sleep Number’s Current Report on Form 8-K filed N o vember 7 , 2023 (File No. 000-25121))
31.1*						Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*						Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*						Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
32.2*						Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
101.INS*						Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH*						Inline XBRL Taxonomy Extension Schema Document
101.CAL*						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*						Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*Filed Herein.

† Management contract or compensatory plan or arrangement.

(1) Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10).


29 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION

Index

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		SLEEP NUMBER CORPORATION
		(Registrant)

Dated:	November 8, 2023	By:	/s/ Shelly R. Ibach
			Shelly R. Ibach
			Chief Executive Officer
			(principal executive officer)

		By:	/s/ Joel J. Laing
			Joel J. Laing
			Chief Accounting Officer
			(principal accounting officer)


30 \| 3Q 2023 FORM 10-Q						SLEEP NUMBER CORPORATION