Sleep Number Corporation (SNBR) February 2018 · 2019-03-25 · 53% 24% 47% Sleep Number S&P 400 Specialty Stores Index Peers* 40% (34%) (10%) Sleep Number S&P 400 Specialty Stores

Sleep Number Corporation (SNBR)February 2018

Statements used in this presentation relating to future plans, events, financial results or performance are forward‐lookingstatements subject to certain risks and uncertainties including, among others, such factors as current and future general andindustry economic trends and consumer confidence; the effectiveness of our marketing messages; the efficiency of ouradvertising and promotional efforts; our ability to execute our company‐controlled distribution strategy; our ability toachieve and maintain acceptable levels of product and service quality, and acceptable product return and warranty claimsrates; our ability to continue to improve and expand our product line; consumer acceptance of our products, product quality,innovation and brand image; industry competition, the emergence of additional competitive products, and the adequacy ofour intellectual property rights to protect our products and brand from competitive or infringing activities; availability ofattractive and cost‐effective consumer credit options; pending and unforeseen litigation and the potential for adversepublicity associated with litigation; our “just‐in‐time” manufacturing processes with minimal levels of inventory, which mayleave us vulnerable to shortages in supply; our dependence on significant suppliers and our ability to maintain relationshipswith key suppliers, including several sole‐source suppliers; the vulnerability of key suppliers to recessionary pressures, labornegotiations, liquidity concerns or other factors; rising commodity costs and other inflationary pressures; risks inherent inglobal sourcing activities; risks of disruption in the operation of either of our two primary manufacturing facilities; increasinggovernment regulations, which have added or may add cost pressures and process changes to ensure compliance; theadequacy of our management information systems to meet the evolving needs of our business and to protect sensitive datafrom potential cyber threats; the costs, distractions and potential disruptions to our business related to upgrading ourmanagement information systems; our ability to attract, retain and motivate qualified management, executive and other keyemployees, including qualified retail sales professionals and managers; and uncertainties arising from global events, such asterrorist attacks or a pandemic outbreak, or the threat of such events.

Additional information concerning these and other risks and uncertainties is contained in the company’s filings with theSecurities and Exchange Commission (SEC), including the Annual Report on Form 10‐K, and other periodic reports filed withthe SEC. The company has no obligation to publicly update or revise any of the forward‐looking statements in thispresentation.

© 2017 Select Comfort

Forward‐Looking Statements

2

Highly Differentiated Business Model

Improving lives by individualizing sleep experiencesMISSION

COMPETITIVEADVANTAGES

Proprietary sleep innovations, exclusive distributionand lifelong customer relationships

Consumer‐driven innovationSTRATEGY

Become one of the world’s most beloved brands by delivering an unparalleled sleep experience

VISION

Superior returns through sustainable, profitable growthSHAREHOLDERVALUE

3

53%

24%

47%

SleepNumber

S&P 400Specialty

Stores Index

Peers*

40%

(34%)

(10%)

SleepNumber

S&P 400Specialty

Stores Index

Peers*

66%

(23%)

(4%)

SleepNumber

S&P 400Specialty

Stores Index

Peers*

*See composition of our industry peer group on page 36 of the Company’s Definitive Proxy Statement filed on 4/4/17

5‐YEAR TSR(12/30/2012 – 12/30/2017)

3‐YEAR TSR(1/4/2015 – 12/30/2017)

1‐YEAR TSR(1/1/2017 – 12/30/2017)

Total Shareholder Return (TSR)

4

Consumer Innovation StrategyCompetitive advantages

PROPRIETARY SLEEP INNOVATIONS

• Individualized and effortless comfort

• Smart responsive technology

• Benefit‐driven sleep solutions

5

• Direct‐to‐consumer and vertically integrated

• Daily digital engagement with SleepIQ® technology

• Loyal customers – referral and repeat > 40% of sales

EXCLUSIVEDISTRIBUTION

LIFELONG CUSTOMERRELATIONSHIPS

• “Only at Sleep Number”

• Value‐added retail: cohesive online and store experience

• Highly productive stores

6

Accelerated Returns Post‐TransformationInvested nearly $1 billion in the business

Average invested capital ($ in millions)NOTE: See appendix for reconciliation of non‐GAAP financial measures

Return on Invested Capital (ROIC)EBITDA

EPS

$ in millions

*As‐adjusted EPS

NET SALES

$ in millions

$960

$1,157

2013 2014

$1,214

2015

$1,311

2016

$1,444

2017

$1.07*

$1.25

2013 2014 2015

$0.97

2016

$1.10

$1.55

2017

2013 2014

$125

$148

2015

$133

2016

$146

$169

2017

15.1% 15.1%

$560$639

2013 2014 2015

11.2%

$727

2016

12.2%

$700

14.3%

$686

2017

Mattress industry dynamics

Low consumer interest

Highly consolidated at the manufacturing/brand level

Numerous “bed‐in‐a‐box” brands are disrupting the low end (<$1,000)

Price/commodity driven “sea of sameness”

Industry has grown 5 to 7% on average over last 20 years

Innovation Leader in Sleep

7

Manufacturers’ Share

Serta/Simmons 38%Tempur/Sealy 31%Others 21%

TRADITIONAL(87% of retail, excluding direct to consumer brands)

Retailers’ Share

Mattress Firm 20%Others (excl. SNBR) 67%

DIRECT TO CONSUMER(13% of retail)

Sleep Number: 7% share(>$1000, Premium, highly differentiated)

Bed‐in‐a‐box brands: 5‐6% share (< $1000, over 100 companies, commoditized)

Source: Industry report (ISPA) & company estimates

$8.4

2016

$8.5

$7.0$7.5

2017E2013 2014

$8.1

2015

U.S. Wholesale mattress sales($ in billions)

Premium segment (>$1,000) percent of total

Sleep Number is Disrupting the Commoditized Mattress Industry

>50%

Deliver $2.75 EPS by 2019(Long‐range commitment issued early 2015)

MID‐TO‐HIGH SINGLE‐DIGIT NET SALES GROWTH

MID‐TO‐HIGH TEENS NOP FLOW THROUGH

MID‐TEENS ROIC LONG TERM

8

• Expanding brand reach efficiently with data‐driven tools

• Increasing consideration through compelling innovation & convenience

• Building lifelong customer advocacy with superior sleep experiences

• Generating strong cash flows with vertical model

• Delivering efficiencies through technology and lean initiatives

• Expanding margins through network efficiencies

• Prioritizing growth and productivity investments

• Returning excess cash through share repurchases

• Committed to delivering compelling TSR

8

SLOW GROWTH MACROECONOMIC ENVIRONMENT

INCREASING CONSUMER DEMAND

LEVERAGING THE BUSINESS MODEL

DEPLOYING CAPITAL EFFICIENTLY

EPS Drivers

Increasing Consumer Demand:

Digitally Connecting with Speed and Efficiency

OPTIMIZING MEDIA WITH DATA‐DRIVEN TOOLS

CONNECTING DIGITAL ACTIONS TO STORE SALES

ACTIVATING LOYAL INSIDERS

• Using econometric model to improve media allocation for efficiency and effectiveness

• TV optimization across day‐part, network, and national/local mix

• Targeted digital and social actions drive high‐quality traffic

• Real‐time adjustments to media, message and audience

• Simplified online experience driving improved consideration and conversion

• Dynamic lead capture and content creation

• Data analytics personalizes communications for higher engagement

• Digital referrals expand brand reach efficiently

• Robust loyalty platform uses centralized data and machine learning

9


10

™


Innovation Leadership Recognition

OFFICIAL SLEEP & WELLNESS PARTNERS AWARDS

NATIONAL FOOTBALL LEAGUE

DALLAS COWBOYS

MINNESOTAVIKINGS

2015 2016

Rated “Best bed for couples”by a leading Consumer Magazine

11


Smart Effortless Sleep with Daily Digital Engagement

Loyal customer base drives referrals and repeat business > 40% of sales

12

The Sleep Number 360™ smart bed adds value to our customer’s health and wellness, leading to lifelong relationships

• Automatically adjusts comfort based on sophisticated biometrics and bio‐signal analysis

• Provides personalized sleep insights through connectivity, algorithms, and machine learning

• Empowers customers by connecting to leading health, wellness, and smart home platforms


Proprietary SleepIQ® Technology Platform

Comprehensive database of biometric consumer sleep data

Full‐body measurements and proprietary algorithm informs deep understanding of sleep and health

• Measures five sleep‐critical metrics: heart rate, breathing, motion, presence, and sleep onset

• Uses artificial intelligence to detect sleep‐pattern disturbances or biometric changes

• Accuracy validated through proprietary in‐home trials and sleep center studies

• Informing future innovations

13


Exclusive DistributionDirect‐To‐Consumer Brand Experience

• Healthy portfolio: since 2011 delivered 12% sales CAGR and average comp of 7%, while growing stores at a 7% CAGR

• Cohesive online and store experience builds consideration and conversion

• Drive quality traffic to stores – connecting specific digital actions to store sales

High conversion through disciplined sales process and relationship building

Highly productive stores averaging over $2.4M per store at the end of 2017 (2‐3x traditional mattress stores)

Average four‐wall store profit of ~$800K for a $2.4M store, and ~$1.1M for a $3M store in 2017

14

Increasing Consumer Demand

High‐quality real estate portfolio optimized for our customer

• Disciplined approach balancing sales, profit, market share, and cannibalization

• Rigorous site selection focusing on increased awareness, economics, and proven market characteristics

• ~70% of our stores are new within five years – highly productive value added experience

• Integrated approach with real estate, local market development, marketing and field leadership

• Successful off‐mall and mall formats allow for optimal store placement by market – 57% of stores are off‐mall

• Densifying large DMA’s and proving out smaller markets

• Vertical model and agile strategy supports cohesive store experience/online shopping

• Store presence in all 50 states

Increasing Consumer Demand:Disciplined Execution of our Distribution Strategy

Store growth 5‐7% annually

Targeting up to 650 stores by 2019, with additional opportunities beyond

Exclusive distribution calls for “destination” approach

Luxury

Upscale homefurnishings

Mid‐range home goods Multi‐brand

mattress stores Convenience retailers

6,00050 200 500 1,000 3,000Store Count

Popu

latio

n pe

r store

10k

100k

500k

1M

3M Specialty

Mass

15

National footprint with local market development approach

Increasing Consumer DemandIncreasing Consumer Demand:Competitive Advantages Result in Growth from Both ARU and Units

Proprietary Sleep Innovations • Exclusive Distribution • Lifelong Relationships

16

Note: Company‐Controlled channel ARU and mattress units

Unit growthAverage Revenue per mattress unit (ARU)

2016

$4,046

2013 2014

$3,245

2015

$4,028

* 9% growth for first 9 months of 2015 prior to Q4‐15 ERP implementation

$3,6718%

20162014

(4%)

2013

8%

(4%)

2015*

2017

$4,283

5%

2017

Robust technology platforms

Leveraging efficient smart bed design

Implementing an agile supply chain network

• Support dynamic consumer interactions and innovation

• Enable sustainable sales and profit growth

• Provide efficiency and scalability

• Design for manufacturability enables factory versus in‐home mattress assembly

• Lean initiatives across the company for effectiveness and margin expansion

• Supplier partnerships to achieve quality, innovation and cost goals

• Advanced demand and supply planning enables cost effective logistics flexibility

• Evolving supply chain network for higher reliability and speed

• Network allows assembly closer to customer while improving quality and reducing total cost

Leveraging the Business Model:

Significant Operating Profit Improvement Opportunity

17

~6 Factory/Regional DCs(Assembly)

CURRENT STATE

Leveraging the Business Model:

Supply Chain Network Evolution

FUTURE STATE: 25% Less Square Feet of Warehousing Space

30% 70%

~80%

30‐40 DCs(Direct Transfers)

>120 Spokes (Cross Docks) 15 Hubs (Warehousing)

~70 Spokes(Cross Docks)

~20 %

Multiple product handoffs and transfers

Majority of Beds Delivered Fully Assembled

>300,000 Assemblies (In‐Home)

NETWORK

NETWORK 18

Deploying Capital Efficiently:

Accelerated Cash Generation and EPS Growth

2016‐2019Leverage the model

2012‐2015TransformationCapital emphasis

~$750M over 4 years$557M over 4 yearsAdjusted EBITDA

~$700M over 4 years$441M over 4 yearsCash from operations

~$40‐$60M / year + opportunistic$369M over 4 yearsCapital spending & acquisitions

Mid‐teens ROIC$721MEnding invested capital

Accretion$213M cash to shareholdersShare repurchases

19

Capital priorities•• Invest in the business•• Maintain sufficient liquidity•• Return cash to shareholders through share repurchases

Cash generation and deployment Return on invested capital (ROIC)

ROIC Average invested capital ($ in millions)Cash from operations Capital expendituresand acquisitions

Share repurchases

(2013 to 2017 cumulative dollars in millions)

201520142013 2016 2016

12.2%

2013 2014

15.1% 15.1%

11.2%

2015

$700

$560$639

$727

20

Deploying Capital Efficiently:

Advantaged Model Delivers Strong Cash Generation and ROIC

14.3%

$686

20172017

Leverage illustration: possible path

21

Committed to Deliver $2.75 EPS by 2019

2019 Range Leverage (from 2016)

100+ bps

100+ bps

~55%

62.5‐63.5%

Mid‐to‐high single‐digit CAGR Low single‐digit comps

Mid‐teens flow through 200+ bps

$2.75 Demand + leverage+ share repurchases

Net Sales

Gross Margin

Operating Expenses

NOP

EPS

Appendix

23

Accountable and Experienced Management Team

Brand: •All stores re‐branded as “Sleep Number”

Core Growth Initiatives:• Target customer expanded 4X• National broad reach advertising• Aggressive growth market pilot• Non‐mall pilot

Sleep Innovations:• New role: Chief Product Officer

• Initiated relationship with BAM Labs

Short‐term disruption;LT strategy intact• Q1 media misstep• Product innovation investments•Website and store investments• ERP development

Sleep Innovation Leader:•Most innovations in company history•“Know Better Sleep” campaign

Innovation & Infrastructure:• Implement ERP• Redesign digital experience

Investments:•Acquisition of Comfortaire•Investment in BAM Labs (SleepIQ®

sensor technology)

Senior Team:• New CMO• New CFO• New CHCO

2009 2010 20132011 2012 2014 2015 2016

Senior Team: • New Ops and Lean Officer

Investments:•Acquire BAM Labs now SleepIQ® LABS

Strategic and Governance Milestones

24

2017

Jean‐Michel Valette appointed new Board Chair

Two new Board members named (Michael Harrison& Kathleen Nedorostek)

Shelly Ibach named to newly created COO role

Shelly Ibach named CEO and Board member

New Board member named (Daniel Alegre)

Board Effectiveness Norms adopted in January

Engagement of Ram Charan to advance Board effectiveness

Engaged Ram Charan: Linking strategy & value creation

Two new Board members named (Vicki O’Meara & Barbara Matas )

Innovation:•Sleep Number 360™ smart bed

Strategic

Governance

Engaged Center for Board Excellence to advance Board effectiveness

Exclusive Distribution:• Exited all retail partners in U.S.• Closed 100+ underperforming stores

As Adjusted EPS

(Amounts in thousands, except per share amounts)

Net income and net income per share

Net income as reported1

Adjustments:CEO transition costs (benefit) net of tax2

Net income – as adjusted

Net income – per share as adjusted

Basic

Diluted

Basic shares

Diluted shares

2013 2014 2015 2016

x

$60,081

x(351)

$59,730

x

$1.09

$1.07

54,866

55,803

x

$67,974

x‐

$67,974

x

$1.27

$1.25

53,452

54,193

x

$50,519

x‐

$50,519

x

$0.99

$0.97

51,252

52,101

x

$51,417

x‐

$51,417

x

$1.11

$1.10

46,154

46,902

(1) Reflects annual effective tax rates, before discrete adjustments, of 34.7% for 2012 and 34.2% for 2013.(2) In February 2012, we announced that William R. McLaughlin, then President and CEO, would retire from the Company effective June 1, 2012. In recognition of Mr. McLaughlin’s contributions, the Compensation Committee approved the modification of Mr. McLaughlin’s unvested stock awards, including performance‐based stock awards. As a result of these modifications, we recorded incremental non‐cash compensation of $5.6 million in fiscal year 2012. The performance‐based stock awards are subject to applicable adjustments through 2014 based on actual performance versus performance targets. During the fiscal year ended December 28, 2013, we recorded a non‐cash compensation benefit of $0.5 million resulting from performance‐based stock award adjustments.

25

2017

x

$65,077

x‐

$65,077

x

$1.58

$1.55

41,212

42,085

Columns may not foot due to roundingNote: Our Adjusted EBITDA calculation is considered a non‐GAAP financial measure and is not in accordance with, or preferable to, “as reported,” or GAAP financial data.However, we are providing this information as we believe it facilitates analysis of the Company’s financial performance by investors and financial analysts.GAAP = generally accepted accounting principles

($ in millions)

Net income

Income tax expense

Interest expense

Depreciation and amortization

Stock‐based compensation

Asset impairments

Adjusted EBITDA

2013 2014 2015 2016

$60.1

30.9

0.1

29.6

4.2

0.1

$125.0

$68.0

34.1

0.1

38.8

6.8

0.5

$148.2

$50.5

24.9

0.2

46.9

10.3

0.3

$133.1

$51.4

24.5

0.8

56.9

12.0

0.1

$145.7

$65.1

26.0

1.0

61.1

15.8

0.2

$169.1

Adjusted EBITDA

26

2017

Return on Invested Capital (ROIC)

($ in millions) 2013 2014 2015 2016

ROIC is a financial measure that we use which quantifies the return we earn on our invested capital. Management believes ROIC is a useful metric for investors and financial analysts. Our definition of ROIC may not be comparable to similarly titled definitions used by other companies. The tables above reconcile net operating profit after taxes (NOPAT) and total invested capital, which are non‐GAAP financial measures, to the comparable GAAP financial measures. (1) Rent expense is added back to operating income to illustrate the impact of owning versus leasing the related assets. (2) Depreciation is based on of the average of the last five fiscal quarters ending capitalized operating lease obligations (see note 6) for the respective reporting periods with an assumed thirty‐year useful life. This is subtracted from operating income to illustrate the impact of owning versus leasing the related assets. (3) Reflects annual effective income tax rates, before discrete adjustments. (4) Cash greater than target is defined as cash, cash equivalents and marketable debt securities, less customer prepayments, in excess of $100 million. (5) Long‐term debt includes existing capital lease obligations. (6) A multiple of eight times annual rent expense is used as an estimate of capitalizing our operating lease obligations. The methodology utilized aligns with the methodology of a nationally recognized credit rating agency. (7) Average invested capital represents the average of the last five fiscal quarters ending invested capital balances. (8) ROIC equals NOPAT divided by average invested capital. Note ‐ Our ROIC calculation and data are considered non‐GAAP financial measures and are not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the company’s financial performance by investors and financial analysts. GAAP ‐ generally accepted accounting principles. Columns may not foot due to rounding.

Net operating costs after taxes (NOPAT)

Operating income

Add: Rent expense1

Add: Interest income

Less: Depreciation of capitalized operating leases2

Less: Income taxes3

NOPATAverage invested capital

Total equity

Less: cash greater than target4

Add: Long‐term debt5

Add: Capitalized operating lease obligations6

Total invested capital at end of period

Average invested capital7

Return on invested capital (ROIC)8

$90.7

50.3

0.4

(13.1)

(43.8)

$84.4

$225.2

(29.6)

0.0

402.3

$597.9

$560.1

15.1%

$101.7

57.6

0.4

(14.3)

(48.9)

$96.6

$256.9

(37.3)

‐

460.8

$680.4

$639.1

15.1%

$75.1

62.4

0.5

(16.2)

(40.4)

$81.4

$222.3

‐

‐

499.0

$721.3

$726.8

11.2%

$76.7

67.4

0.1

(17.2)

(41.9)

$85.0

$160.3

‐

‐

539.3

$699.6

$699.6

12.2%

27

2017

$91.9

74.0

0.1

(18.9)

(49.0)

$98.2

$89.2

‐

‐

592.2

$681.3

$686.4

14.3%

Sleep Number Corporation (SNBR) February 2018 · 2019-03-25 · 53% 24% 47% Sleep Number S&P 400 Specialty Stores Index Peers* 40% (34%) (10%) Sleep Number S&P 400 Specialty Stores

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