Sleep Number’s Resilience in a Challenging Market

Overview Sleep Number Corporation is a leading wellness technology company that designs, manufactures, and sells innovative sleep solutions. The company’s purpose is to improve the health and well-being of society through higher quality sleep. Sleep Number’s smart beds combine physical and digital innovations to provide individualized sleep experiences that can lead to improved sleep health and wellness.

Despite facing ongoing challenges in the mattress industry, Sleep Number has demonstrated resilience in 2024. While net sales declined 11% to $1.7 billion, the company was able to maintain operating income at $23 million by reducing total operating expenses by $86 million. Sleep Number also generated $27 million in cash from operating activities, a significant improvement from the $9 million used in 2023.

Revenue and Profit Trends Sleep Number’s net sales declined 11% in 2024 compared to the prior year, driven by a 10% decrease in Total Retail comparable sales. This was due to the continued weakness in the mattress industry and consumers scrutinizing their spending amid economic pressures.

However, the company was able to improve its gross profit margin by 1.9 percentage points to 59.6%. This was primarily due to product cost reductions through value engineering and supplier negotiations, as well as efficiency gains in home delivery and logistics operations. While sales and marketing expenses decreased 10%, the expense rate increased slightly to 45.6% of net sales due to the deleveraging impact of lower sales.

General and administrative (G&A) expenses increased 2% to $150 million, with the expense rate rising to 8.9% of net sales. This was mainly due to higher miscellaneous expenses, increased performance-based incentive compensation, and the deleveraging impact of lower sales, partially offset by lower employee compensation costs.

Research and development (R&D) expenses decreased 20% to $45 million as the company re-prioritized resources in the constrained environment. Restructuring costs increased to $18.1 million in 2024 as the company continued its business restructuring actions initiated in the fourth quarter of 2023.

Despite the revenue decline, Sleep Number was able to maintain operating income at $23 million in 2024, the same as the prior year. This was achieved through the company’s cost reduction efforts, which helped offset the deleveraging impact of lower sales. Net loss for the year increased to $20.3 million, or $0.90 per diluted share, compared to a net loss of $15.3 million, or $0.68 per diluted share, in 2023.

Strengths and Weaknesses One of Sleep Number’s key strengths is its ability to improve gross margins even in a challenging market environment. The company’s focus on value engineering, supplier negotiations, and operational efficiencies has allowed it to maintain profitability despite the sales decline.

Another strength is Sleep Number’s vertically integrated, direct-to-consumer business model, which provides greater control over the customer experience and product development. This model, combined with the company’s innovative smart bed technology, has helped differentiate Sleep Number from competitors and build a loyal customer base.

However, a weakness for the company is its reliance on the broader mattress industry, which has been in a recession for three years. Sleep Number’s sales are heavily dependent on consumer spending and sentiment, which have been negatively impacted by factors such as high interest rates and inflation.

Additionally, the company’s significant investment in research and development, while a strength in terms of product innovation, has also been a drag on profitability during the downturn. Sleep Number will need to carefully balance its R&D spending with cost-cutting measures to maintain financial resilience.

Outlook and Future Prospects Looking ahead, Sleep Number faces a challenging market environment, with the mattress industry expected to remain under pressure. However, the company’s actions to reduce fixed expenses and improve margins should help it weather the downturn and position it for future growth.

The company’s focus on its individualized, digital sleep wellness platform, vertically integrated operating model, and culture of innovation remain key strengths. As the broader economy and housing market stabilize, Sleep Number’s ability to provide a differentiated, high-quality sleep experience could help it capture market share and drive long-term growth.

To further strengthen its financial position, Sleep Number has amended its credit facility to provide more flexibility, including adjustments to its leverage and interest coverage ratios. The company also plans to continue its restructuring efforts, which are expected to result in an additional $5 million to $7 million in costs in 2025, primarily related to lease contract terminations.

Overall, while Sleep Number faces near-term headwinds, the company’s focus on operational efficiency, product innovation, and financial discipline should help it navigate the current challenges and position it for success when market conditions improve. Investors will be closely watching the company’s ability to maintain profitability and generate positive cash flow in the coming years.