Sleep Number's 2023 Financial Results and 2024 Outlook
2024-02-23
The Sleep Number's Q4 and full year 2023 earnings conference call was attended by key individuals such as Dave Schwantes, the Vice President of Finance and Investor Relations, Shelly Ibach, the Chair, President, and CEO, and Francis Lee, the Chief Financial Officer. The primary objective of the call was to review the results of the just-ended fiscal period.
During the call, discussions revolved around the macroeconomic challenges affecting the mattress industry, including low consumer sentiment, slower new home purchases, elevated interest rates, and a decline in consumer purchasing power. In response to the challenging consumer demand environment in the fourth quarter of 2023, Sleep Number swiftly implemented measures to enhance demand and reduce costs, leading to significant progress during the quarter.
The call also emphasized three strategic imperatives aimed at repositioning Sleep Number's business, which included competing effectively, restoring profit margins, and reducing debt. Francis Lee, the Chief Financial Officer, was expected to delve further into Sleep Number's 2023 financial results and provide insights into the 2024 outlook during the call.
In addition to Sleep Number, the broader mattress industry encountered challenges in the fourth quarter due to the demanding demand environment. Industry net sales witnessed a 14% decline from the previous year. To bolster its competitive stance in response to consumers' emphasis on price and value, the mattress industry refined its marketing messages, restructured promotional strategies, and heightened brand awareness through partnerships.
The mattress industry observed an improvement in demand trajectory in the fourth quarter compared to the preceding quarter, with a low single-digit year-over-year decline. Strategic imperatives within the industry aimed at addressing the challenging demand environment and reducing costs included enhancing competitive positioning and trimming operating expenses, with actual cost reductions surpassing planned figures for the quarter and full year.
In terms of financial performance, Sleep Number reported net sales of $1.89 billion in 2023, marking an 11% decrease from the prior year. Operating expenses were reduced by $85 million or 7% year over year. The company reported a full-year diluted loss per share of $0.68 and a full-year adjusted loss per share of $0.14. Despite the decline in net sales, Sleep Number managed to partially offset the decrease through a higher gross margin rate and operating expense reductions.
The company's strategic focus on enhancing its business model and financial performance includes restructuring for a leaner, more efficient business model with higher margins and improved cash flow. Sleep Number increased its gross margin rate by 80 basis points in 2023 and aims to further expand it by approximately 100 basis points in 2024.
Sleep Number's strategic priorities concerning liquidity and debt management encompass prioritizing liquidity, debt reduction, lowering outstanding credit balances, and managing financial leverage. The company undertook key initiatives to enrich its ecosystem and boost customer engagement, including integrating loyalty rewards programs and customer support into the Sleep Number app, facilitating in-app shopping for smart sleepers, and achieving an average monthly engagement rate of 80%.
High engagement with Sleep Number's sleep wellness platform is anticipated to enhance customer lifetime value and reduce customer acquisition costs through referrals. The company's vertically integrated operating model is seen as contributing to margin efficiency opportunities through the smart bed ecosystem and optimized fulfillment network.
The company's culture, centered on individuality and well-being, plays a pivotal role in Sleep Number's successful business model transformation, sustained innovation, and profitable growth. In terms of net sales, Sleep Number reported a 14% decline in the fourth quarter of 2023, primarily driven by year-over-year changes in backlog and increased promotional offers targeting budget-conscious consumers.
Looking ahead to 2024, Sleep Number anticipates a mid-single-digit decrease in net sales, with a low single-digit demand decline and headwinds from backlog changes and net store closures. The company aims to further reduce operating expenses by $40 million to $45 million in 2024, resulting in a two-year cost reduction total of $125 million to $130 million.
Sleep Number is targeting the restoration of its gross margin rate to historical averages in the low 60s and aims to generate positive free cash flow in 2024 to facilitate debt repayment and reduce capital expenditures. The company's 2024 outlook encompasses expected in-year cost reductions, projected full-year operating expenses, and targets for adjusted EBITDA, operating cash flow, planned capital expenditures, and free cash flow.
For the first quarter of 2024, Sleep Number expects net sales to decrease by approximately 10% compared to the prior year's quarter, with adjusted EBITDA anticipated to be slightly over $30 million. The company plans to meet its liquidity requirements for 2024 from operating cash flow within its existing credit facility.
Sleep Number's consumer innovation strategy centers on reshaping consumer expectations regarding beds, with a Smart Bed platform designed to deliver high-quality sleep and offer digital innovation opportunities for future sleep solutions. The company operates with a discerning consumer approach in the marketplace, refining its promotional strategy to reach consumers with a compelling value proposition, effectively managing discounts, driving higher mix, optimizing variable margins, and enhancing media efficiency.
In terms of performance, Sleep Number witnessed a positive trend in units and gross margins in the fourth quarter, despite a slight decrease in Average Revenue per User (ARU). The company strategically utilized discounts to elevate mix during the President's weekend, resulting in reduced costs and favorable variable margin outcomes.
Shelly Ibach, the President and Chief Executive Officer of Sleep Number, foresees approximately 45% to 50% of sales transitioning upon store closures. The company's focus in the fourth quarter revolved around stimulating demand and reducing costs through integrated actions in messaging, media, selling processes, and promotions, leading to improved brand metrics, traffic, and media ROI, thereby enhancing demand performance.
The backlog comparison is expected to influence Sleep Number's sales growth in 2024, with a projected three- to four-point drag on net sales growth in the first half of the year. The company's capital expenditure for the current year is anticipated to decrease to $30 million compared to historical rates due to a slowdown in store expansion, closures, and an emphasis on critical tech investments.
The CFO of Sleep Number is dedicated to constructing a more resilient operating model through cost improvement and profitability enhancement initiatives, with the aim of reaping greater benefits in 2025. The progression of gross margins throughout the year will be influenced by the timing of cost initiatives, with some benefits expected in the second half of the year and further annualized in 2025.