sleep number corporation (snbr) february 2018€¦ · (1/1/2017 –12/30/2017) total shareholder...
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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
Increasing Consumer Demand:
10
™
Increasing Consumer Demand:
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
Increasing Consumer Demand:
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
Increasing Consumer Demand:
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
Increasing Consumer Demand:
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%
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