Sleep Number’s Earnings Drop in 3rd Quarter

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Sleep Number recently reported that third-quarter net sales decreased 13% to $473 million compared to the previous year. Company officials said that demand decelerated abruptly in August and September, leading to a low double-digit demand decline for the quarter versus the prior year.

Gross margin of 57.4% was up 130 bp versus the prior year, primarily benefiting from pricing actions and easing commodity prices.

Operating expenses were reduced by $25 million to $266 million compared with $290 million last year. Loss per diluted share of $0.10 compared with diluted earnings per share of $0.22 last year.

The Minneapolis, Minnesota-based company initiated approximately $50 million of additional operating expense reduction actions for 2024 on top of an estimated $80 million for 2023.

It also updated its 2023 EPS outlook to a loss of up to $0.70 per share, which includes an estimated $10 million or $0.35 per share of restructuring charges to be recorded in the fourth quarter.

“The third quarter was challenging for Sleep Number and the bedding industry as the consumer demand trajectory changed abruptly midway through the quarter,” said Shelly Ibach, chair, president and CEO, of Sleep Number. “In response, we acted quickly to further reduce costs, recalibrate our sales and marketing approach, and amend our credit agreement to provide additional covenant flexibility through the end of 2024.

“We expect these actions and broad-based restructuring initiatives to result in a more durable operating model with improved profitability and cash flows in a range of economic environments. We remain confident in our strategic direction and ability to deliver superior value creation over time.”

Given the waning demand in August, the company initiated additional cost reduction actions, which are expected to reduce 2024 operating expenses by approximately $50 million, and also accelerated gross margin initiatives. The operating expense reductions are incremental to the $80 million of operating expense reductions expected in 2023.

The cost restructuring actions are broad-based and include a reduction in headcount across all areas of the organization, including in corporate and R&D functions, according to a news release.

Company officials said they are rationalizing the company’s store portfolio with a planned closure of 40 to 50 stores by the end of 2024, along with slowing the rate of new store openings and remodels, and also reducing 2024 capital expenditures.

Gross margin improvement actions include value engineering and cost optimization strategies, including driving additional efficiencies through its manufacturing and home delivery network.

The business restructuring actions are expected to result in up to $20 million of one-time restructuring costs, with an estimated $10 million of the costs being recorded in the fourth quarter of this year.

The company updated its full-year 2023 diluted EPS outlook to a loss of up to $0.70 per share. The updated EPS outlook includes an estimated $10 million, or $0.35 per share, of restructuring charges to be recorded in the fourth quarter. The 2023 outlook assumes net sales are down low double digits versus the prior year, with about 100 basis points of gross margin rate improvement year-over-year. The company anticipates 2023 capital expenditures of approximately $60 million.