ITEM 1. BUSINESS
Overview
Sleep Number Corporation, based in Minneapolis, Minnesota, was incorporated in 1987 and became publicly traded in 1998. We are listed on the Nasdaq Stock Market LLC (Nasdaq Global Select Market) under the symbol SNBR. When used herein, the terms “Sleep Number,” “Company,” “we,” “us” and “our” refer to Sleep Number Corporation, including our consolidated subsidiaries.
At Sleep Number, our purpose is to improve the health and wellbeing of society through higher quality sleep. We are committed to leveraging the power of sleep, and sleep science, to improve lives and create a healthier, kinder, more inclusive world. And because of our team’s dedication to our mission, disciplined execution of our vertically integrated business model and differentiated consumer innovation strategy, Sleep Number is at the forefront of delivering this life-changing benefit. With our revolutionary Sleep Number 360® smart beds and SleepIQ® technology, we have improved 13 million lives.
Financial Highlights
In 2020, we increased net sales by 9% to $1.9 billion, earnings per diluted share (EPS) by 81% to $4.90 and cash from operations by 48% to $280 million. Our 2020 fiscal year included an extra week which we estimate benefited net sales by $41 million and EPS by $0.30. These results reflect the acceleration of three structural consumer shifts we anticipated at the inception of our consumer innovation strategy in 2012:
•First, consumers are prioritizing wellbeing – their own and that of their families, and they understand the strong link between sleep and overall health and wellness;
•Second, consumers are adopting digital products and services at a much faster and higher rate, and they are increasingly relying on digital health solutions; and
•Third, consumers have a heightened preference for brands that are characterized by authentic purpose and human empathy.
Each of these shifts is enduring, fueling permanent changes in consumer purchasing behavior and propelling our profitable growth.
With our strategic, enterprise-wide investments in innovation, technology, logistics, marketing and customer service, we have created a competitively advantaged strategy and a highly relevant brand – which together, are delivering superior shareholder value.
Proprietary Sleep Innovations
Sleep Number 360 smart beds effortlessly deliver proven quality sleep by allowing each sleeper to set their ideal firmness, support and pressure-relieving comfort – their Sleep Number® setting. SleepIQ technology optimizes the smart benefits of the bed, continually improving a sleeper’s restful time asleep – their SleepIQ® score – to deliver a life-changing difference to their overall health and wellness.
Every night, through our proprietary SleepIQ technology, we collect more than 19 billion data points from our real-world sleepers, generating comprehensive and longitudinal data at a scale never seen before in sleep science. To date, we have leveraged and learned from nine billion hours of sleep data gathered from more than one billion sleep sessions. We are using our proprietary longitudinal data and artificial intelligence capabilities to advance smart bed hardware and bio-signal features, enabling us to provide connected sleep solutions that deliver ongoing impact for consumers’ wellbeing. We are creating and introducing solutions and technology that will meaningfully impact sleep for a healthier society. In the future, our award-winning 360® smart beds could provide a form of preventative and proactive health care that one day may detect or prevent serious health conditions like sleep apnea, restless leg syndrome and heart disease.
Based on analysis of more than 25 million sleep sessions, Sleep Number research shows that sleepers who routinely use their 360 smart bed features and SleepIQ technology can improve quality sleep by over 15 minutes each night, nearly 100 hours each year. Third-party studies have shown that even 15 more minutes of quality sleep per night increase a body’s ability to stave off weight gain or a cold, and can increase productivity.
In 2020, we unveiled the next generation of 360 smart beds with technology to advance our health and wellness platform and made several new sleep innovations available through our SleepIQ technology platform, including:
•Nighttime Heart Rate Variability (HRV) – a measure of the variation of time between each heartbeat, which can be an indication of an individual’s overall health. A high HRV, for example, may indicate greater cardiovascular fitness and physical recovery ability. With a consistent nighttime HRV snapshot – free from the influence of daytime external factors – 360 smart bed sleepers may better understand their resilience, activity level and energy each day;
•Sleep Circadian Insights – automatically tracks sleep and wake times for each sleeper in the SleepIQ® platform application. Using artificial intelligence, SleepIQ technology learns a sleeper’s patterns and provides guidance to optimize sleep and wake times, such as what time of day they are most alert or their optimal times to work out and go to bed. Analysis shows that sleepers who engage with the new feature experience a 35-minute improvement to sleep timing (i.e., more consistent bedtime and wake time) and a 2-point improvement to their SleepIQ score; and
•Monthly Sleep Wellness Reports – provides an overview of personalized insights, highlighting sleep health, circadian stability and respiratory and cardiovascular health via HRV. The report helps sleepers effortlessly understand their sleep and see how their sleep health has changed over time. Initial research indicated that 8 out of 10 users found the Sleep Wellness Reports to be valuable, and 40 percent of those users changed sleep-related behaviors based upon information provided in the reports, such as going to bed earlier or changing their pre-bedtime routine. Sleep Number 360 smart bed sleepers can share their Sleep Wellness Reports with their healthcare providers, giving physicians unique access to individualized data that could help provide a more holistic picture of patient health.
In 2020, we also announced our forthcoming Sleep Number Climate360™ smart bed, the first-ever bed that uses advanced temperature technology to create a personalized, responsive microclimate with automatic firmness adjustability. Unveiled at CES 2020, both the Climate360 and new 360 smart beds won prestigious awards, including the CES 2020 “Best of Innovation” award.
Sleep Number also offers a full line of exclusive FlexFit™ smart adjustable bases that allow customers to raise the head or foot of the bed. These industry leading FlexFit bases seamlessly integrate with SleepIQ technology to deliver features like our Partner Snore™ technology, which allows a sleeping partner to temporarily relieve mild snoring by raising their companion’s head at the touch of a button.
The SleepIQ Kids® k2 bed extends Sleep Number’s DualAir™ adjustability and SleepIQ technology to the children’s mattress market. The k2 bed adjusts with children as they grow, giving them the best possible sleep.
Our exclusive Sleep Number® bedding collection features a full line of sleep products designed to improve sleep comfort and quality, including a broad assortment of pillow sizes and shapes that fit each individual’s preferred sleeping position.
We also offer a variety of temperature-balancing products including the DualTemp™ layer. This proprietary sleep innovation features active air technology that allows each sleeper to select their ideal temperature at the simple touch of a button and can be used with any mattress brand or adjustable base.
Research and Sleep Science
Research and sleep science are at the core of all Sleep Number innovations. With global R&D operations in the USA, Europe and Asia, we conduct extensive research to understand consumers’ needs and inspire the design and delivery of our award-winning sleep innovations, our proprietary SleepIQ technology platform and our customer experience.
Our Minneapolis, MN-based R&D team leads the innovation of our smart mattress, adjustable base design, and bedding solutions and is comprised of experts in mechanical engineering, comfort, adjustability, temperature, anthropometrics and test systems. Our Sleep Number Labs team in San Jose, CA supports the evolution of SleepIQ technology with leading experts in sleep research, data science, analytics and full-stack Internet of Things platform development.
We have accelerated our investments in R&D to enhance our competitive advantage. We continue to enhance our expertise and capabilities specific to the healthcare industry, forming an internal SleepIQ health team, advancing Sleep Number’s leadership in connected sleep health and further underscoring the commitment to innovation in health and wellness. As a result of our R&D and strategic efforts, we have continued to grow our patent portfolio, with a particular focus on smart features that improve sleep quality, and thermal solutions to solve temperature disruptions to sleep. Our world-wide patent portfolio now contains more than 350 patents, which enhances our protection of our exclusive and proprietary technologies. Our research and development expenses were $41 million in 2020, $35 million in 2019 and $29 million in 2018.
Aligned with our purpose of improving the health and wellbeing of society, our scientific foundation is continually expanding as we engage with health care providers, researchers and consumers:
•Extending upon our collaboration with the world-renowned Mayo Clinic, Sleep Number is funding a research with Mayo Clinic to understand sleep’s impact on health and wellbeing. Together, we hope to amplify our impact on improving society’s overall sleep and wellness and improving patient outcomes. By uniting our sleep knowledge and technology with world-class clinicians and researchers, we aim to make meaningful advancements to the science of sleep, with goals to materially foster better sleep and health for society;
•To support our research endeavors, we founded the Sleep Number Scientific Advisory Board, an interdisciplinary group of physicians, clinicians and researchers with expertise in sleep science and health. Our leadership team works with this collective of internationally-known experts to gather counsel on the latest sleep science and research programs and to leverage their knowledge to innovate new sleep-health solutions; and
•In 2020, we also established several important research and development projects aimed at identifying underlying physiological warning signs of health issues. The new Sleep Science Research capability within the SleepIQ technology platform provides the Company’s smart sleeper community (our “Insiders” – customers and SleepIQ technology users) the opportunity to help advance sleep science with real-world data to understand sleep behaviors and outcomes. By opting in through the SleepIQ® app, 360 smart bed sleepers answer periodic surveys about their health. This self-reported health history is analyzed alongside anonymized and aggregated sleep and biometric data, allowing us to gain additional insights on sleep’s impact on holistic health. It may also inform the development of new products, services and partnerships to advance the science of sleep and possibly even predict future health trends.
This collaboration of our integrated, experienced team, our external partners and our expert advisors will advance sleep research and science, and enable consumers to proactively and comprehensively improve their sleep health through superior sleep solutions.
Exclusive Direct-to-Consumer Distribution
At a time when people are recognizing the importance of sleep to their overall health and wellbeing, Sleep Number is hyper-relevant in consumers’ lives. Not only are we a leader in sleep innovation, we are linking sleep to wellness and creating a future where people live happier, healthier and more productive lives.
Our exclusive, direct-to-consumer distribution model builds lifelong relationships with our customers. We employ technology across our customer touchpoints to deliver a value-added retail experience that integrates our digital and physical touchpoints to meet customer needs, and our mission-driven, highly-trained sleep experts use our best-in-class relationship-based selling process, which is continually tested and refined, to deliver high conversions. We offer an engaging and dynamic online experience, which was heavily optimized in 2020, to educate consumers and advance their purchase path, driving highly-qualified traffic to all our retail touchpoints: Stores, Online, Phone and Chat.
As the exclusive distributor of Sleep Number® products, we target high-quality, convenient and visible store locations based on several factors, including each market’s overall sales potential and store geography, demographics and proximity to other brand experiences. Since 2010, we have invested in repositioning a large percentage of our mall stores to stronger, optimally sized, non-mall locations, adding stores in both existing and new markets. As of January 2, 2021, we operated 602 Sleep Number® stores, with locations in all 50 states. More than 42% of our stores (including remodels) are less than five years old and more than 56% are less than seven years old.
In 2020, our direct-to-consumer model and synergies from our vertical integration as the exclusive designer, manufacturer, marketer, retailer and servicer of Sleep Number® beds enabled us to deliver a better, faster, simpler, safer and more engaging experience for our customers and our team members. In early fiscal April, with forced temporary closures of more than 80% of our stores and sales declining by almost 80% versus the prior year due to the COVID-19 pandemic, we reinvented our integrated operational processes through fast “test, learn, and apply” exercises, quickly advancing technology and digital capabilities and reskilling frontline teams. We rolled out a “sell-from-anywhere” model, an agile go-to-market approach that leveraged our sleep professionals’ skills in building customer relationships and aligned seamlessly with our customers’ shopping preferences: in-store, online or by phone. These actions drove efficient new customer acquisition, strong average revenue per unit, growth in number of new customers, bed units and increased conversion, producing a sharp recovery in Sleep Number’s sales and profitability.
Our Stores accounted for 85% of net sales in 2020. Average annual net sales per store, based on Total Retail (which includes Stores, Online, Phone and Chat), were $3.1 million in 2020, a new record. In 2020, 67% of our Stores open for a full year generated net sales of greater than $2 million, and 29% of our Stores open for a full year generated more than $3 million in net sales. In 2020, our Online, Phone and Chat sales accounted for 15% of our net sales, representing 108% year-over-year growth.
Brand Communications
Relevant, engaging and individualized communications have helped Sleep Number to become a beloved brand built on a foundation of individuality and wellbeing. Our deep understanding of, and insights about, our target customers, including structural shifts in consumer behavior that we have anticipated since the inception of our consumer innovation strategy in 2012 – and which were accelerated by the global pandemic – have guided our brand marketing strategies. To drive both new customer acquisition and retention (Insiders) business, our brand communications strategies are designed to emotionally connect consumers with high-quality content about the benefits of life-changing sleep and the value of our 360 smart bed: (i) we amplify our brand through strategic partnerships; (ii) we engage consumers seamlessly across multiple touchpoints with an emphasis on digital; and (iii) we create lifelong customer relationships and brand advocacy by delivering an unparalleled sleep experience. Together, these actions result in strong brand health, heightened consumer consideration and engagement, high-quality traffic, and authentic advocacy for Sleep Number’s brand, products and services.
Strategic partnerships amplify the effectiveness, impact and scale of our brand and marketing efforts:
•We are in the third year of our strategic partnership as the Official Sleep and Wellness Partner of the National Football League (NFL) – one of the world’s largest marketing and fan-engagement platforms. Our partnership with the NFL broadens our brand reach, deepens our brand relevance and magnifies the benefits of our proprietary innovations. Most active NFL players now have a Sleep Number 360 smart bed, which helps them compete more effectively by measuring, understanding and maximizing the benefits of a great night’s sleep; and
•Our multi-year partnerships with content platform organizations like Thrive Global and Katie Couric Media also provide opportunities to influence and educate consumers about the benefits of proven quality sleep on a regular basis.
We leverage a sophisticated media mix to drive our performance-marketing and advertising communications on a local and national scale, contributing to improved media return on investment (ROI). High-profile video, including television and online streaming, is our most efficient media, followed by digital and social platforms. Our world-class, in-house digital capabilities, content marketing, online user experience and data-driven tools give us the flexibility to pivot quickly and optimize media investment, messages and audience by platform in real-time. Our promotional strategy focuses on simplicity and relevance, driving consumers to the brand at the exact time they are seeking a smart bed. In 2020, media expense represented 13.6% of net sales.
We leaned into customer acquisition in 2019 and rapidly accelerated our digital capabilities in early 2020. We strengthened our digital engagement by delivering a superior personalized customer connection with our highly-knowledgeable sleep professionals. A new platform featuring modern, cloud-based architecture accelerated our “sell-from-anywhere” capability that makes it easy for our customers to get the exact Sleep Number solution they are looking for, on their own terms. By the third quarter of 2020, our digital traffic had surpassed all of 2019 and we delivered 80 basis points of leverage in our media spending in that quarter. Overall, 2020 represented our third straight year of double-digit, digital-traffic growth.
We focus on building lifelong relationships with our Insiders. The more deeply engaged our Insiders are with the brand, the greater their advocacy. Our smart sleeper community, now 1.6 million strong, interacts with our brand every day through SleepIQ technology. Our award-winning InnerCircleSM Rewards program amplifies this engagement and drives acquisition of new customers through referral, and greater retention with repeat purchases. We expect brand loyalty to accelerate as we roll out new health and wellness features in SleepIQ technology that will continue to benefit our Insiders’ lives. Insider referral and repeat sales represent greater than 45% of our business and are the most efficient source of new customers to the brand.
Operations
Integrated Sourcing and Logistics
Sleep Number’s integrated supply chain is a competitive advantage. Our commitments to innovation and continuous improvement are employed to leverage our vertical-business model by optimizing culture, processes and technology. In addition to a network of global suppliers, we currently operate two component manufacturing plants (Irmo, SC and Salt Lake City, UT) and four assembly distribution centers (Irmo, SC; Salt Lake City, UT; Ontario, CA; and Baltimore, MD) with two additional locations (Dallas, TX and Tampa, FL) opening in early 2021. Primary operations at the manufacturing sites include cutting and sewing of the fabric covers for our beds and final assembly and packaging of mattresses and bases. We also assemble our electrical Firmness Control™ systems in our Utah plant. Our plants have consistently won awards for safety and manufacturing excellence. We also operate a national bedding fulfillment center in Minneapolis, MN.
We source the raw materials and components used in our products from third parties. Various components are sourced from suppliers who currently serve as our sole or primary source of supply. We believe we can obtain these raw materials and components from other sources of supply, although we could experience short-term disruption in order fulfillment in the event of an unexpected loss of supply. We have taken, and continue to take, various measures to mitigate the potential impact of an unexpected supply disruption from any sole-source or primary suppliers, including maintaining safety stocks and identifying potential alternate suppliers. Our key suppliers have in place either contingency or disaster recovery plans or redundant production capabilities to minimize any unforeseen disasters.
At the end of 2020, approximately 50% of our smart beds were pre-assembled for delivery to customers’ homes while the remaining deliveries were assembled in customers’ homes. We are pursuing a multi-year evolution of our supply chain to pre-assemble 100% of our beds in as many as eight planned assembly distribution centers around the U.S. by 2022. We are advancing our outbound logistics network to reduce product handling, hand-offs, damage and costs while in transit to customers’ homes. We see these initiatives providing a superior and reliable experience for customers with lower costs for the business.
Home Delivery Service
Our home delivery teams are another direct touchpoint with our customers. Since 2018, 100% of our 360 smart beds sold are delivered and installed by our home delivery technicians or by our third-party service providers.
Our home delivery teams across the nation embraced the challenges of the COVID-19 pandemic in 2020, adopting measures to safeguard customer and team member health, while ensuring that customers were still able to receive the quality sleep they needed.
Customer Service
Through our U.S.-based, in-house customer service team located in Minneapolis, MN and New Orleans, LA, we provide direct post-purchase support that improves the customer experience and drives our business. Through frequent service and support interactions with customers via phone, email, live chat and social media, these team members also provide a unique opportunity to gather insights that help us continuously improve our products, strengthen our service quality and advance our innovation. This integration enables operational synergies and drives organizational efficiencies.
Throughout the pandemic, serving our customers remained our focus. In order to keep our team members safe, yet continue to provide a superior customer experience, our customer service teams in Minneapolis and New Orleans were provided with the technology tools and training to work from home.
Information Systems
We use information technology systems to operate, analyze and manage our business, to reduce operating costs and to enhance our customers’ experience. Our major systems include an in-store order entry system, a retail portal system, a payment processing system, in-bound and out-bound telecommunications systems for direct marketing, delivery scheduling and customer service, e-commerce systems, a data warehouse system and an enterprise resource planning (ERP) system. These systems are primarily comprised of packaged applications licensed from various software vendors plus a limited number of internally developed programs.
Intellectual Property
We hold various U.S. and foreign patents and patent applications regarding certain elements of the design and function of our products, including air control systems, remote control systems, air chamber features, mattress construction, foundation systems, sensing systems, automated adjustments, in-bed temperature control, as well as other technology. We have numerous U.S. patents, expiring at various dates between July 2021 and April 2039, and numerous U.S. patent applications pending. We also have numerous foreign patents and patent applications pending. Notwithstanding these patents and patent applications, we cannot ensure that these patent rights will provide substantial protection or that others will not be able to develop products that are similar to, or competitive with, our products.
We have a number of trademarks and service marks registered with the U.S. Patent and Trademark Office, including Sleep Number®, SleepIQ®, Sleep Number 360®, 360®, SleepIQ Kids®, the Double Arrow logo, Select Comfort®, AirFit®, BAM Labs®, the “B” logo, Comfortaire®, ComfortFit®, Comfort.Individualized.®, Does Your Bed Do That?®, the DualTemp logo, the DualAir Technology Inside logo, FlexTop®, IndividualFit®, It®, Know Better Sleep®, Pillow[ology]®, PillowFit®, Probably the Best Bed in the World®, Responsive Air®, Sleep Is Training®, Sleep Number Inner Circle®, Sleep30®, Smart Bed For Smart Kids®, Tech-e®, The Only Bed
That Grows With Them®, This Is Not A Bed®, Tonight Bedtime. Tomorrow The World®, We Make Beds Smart® and What’s Your Sleep Number?®. We have several trademarks that are the subject of pending applications, including Auto Snore™, Climate360™, EnviroIQ™, HealthIQ™, HeartIQ™, Individualized Sleep Experiences™, RespiratoryIQ™, Retail Flow™, Sleep Number Labs logo, Sleep Number Labs Sleep For The Future logo, and WellnessIQ™. Each registered mark is renewable indefinitely as long as the mark remains in use and/or is not deemed to be invalid or canceled. We also have a number of common law trademarks, including ActiveComfort™, Comfortable. Adjustable. Affordable.™, CoolFit™, DualAir™, DualTemp™, Firmness Control™, FlexFit™, In Balance™, Partner Snore™, The Bed Reborn™, The Bed That Moves You™, The Best Bed For Couples™ and our bed model names.
Several of our trademarks have been registered, or are the subject of pending applications for registration, in various foreign countries. We also have other intellectual property rights related to our products, processes and technologies, including trade secrets, trade dress and copyrights. We protect and enforce our intellectual property rights, including through litigation as necessary.
Industry and Competition
Sleep disorders have been declared a public health epidemic by the U.S. Center for Disease Control. One in three adults suffer from a lack of adequate sleep. Sleep Number is focused on producing products to address this growing problem. The total U.S. sleep-health economy was estimated to be $30 billion to $40 billion in a 2017 report published by McKinsey & Company. This reflects the traditional view of the bedding industry which includes the sales of mattresses and foundations, as well as emerging solutions for insufficient sleep such as routine modification and therapeutic treatment. We believe the sleep economy will continue to evolve and grow as consumers look for products and reliable data sources to address sleep deprivation challenges.
The traditional view of the U.S. bedding industry, including mattresses and foundations (static and adjustable), is measured through data provided by the International Sleep Products Association (ISPA). According to ISPA, the industry has grown by approximately 4% annually over the last 20 years, including 4% annually, on average, over the past five years. According to ISPA and our estimates, industry wholesale shipments of mattresses and foundations (including imported products and adjustable bases) were approximately $10.9 billion in 2020 (approximately $22 billion at retail).
The retail bedding industry is commoditized and highly competitive. Sleep Number competes against regional and local specialty bedding retailers, home furnishing stores, mass merchants, national discount stores and online marketers. Furniture/Today, a furniture industry trade publication, has ranked Sleep Number as the 5th largest mattress manufacturer and 2nd largest U.S. bedding retailer for 2019, with an estimated 8% market share of industry retail revenue. Our consumer innovation strategy with proprietary sleep innovations and exclusive direct-to-consumer distribution is highly differentiated, resulting in lifelong customer relationships and contributing to our continued profitable growth.
Manufacturers in the bedding industry compete through retail partners on price, quality, brand name recognition, product availability and product performance, including the perceived levels of comfort and support provided by a mattress. There is a high degree of concentration among manufacturers, who produce innerspring, memory foam and hybrid beds, under nationally recognized brand names, including Tempur Sealy, Stearns & Foster, Serta and Simmons. In recent years, numerous direct-to-consumer companies and low-cost importers have entered the market, offering “bed-in-a-box” products to consumers, primarily through online distribution though many now partner with traditional mattress retailers. Their products are generally foam-based and undifferentiated in terms of sleep benefits.
Governmental Regulation and Compliance
As a vertically integrated manufacturer and retailer, we are subject to extensive federal, state and local laws and regulations affecting all aspects of our business.
As a manufacturer, we are committed to product quality and safety, including adherence to all applicable laws and regulations affecting our products and services. Compliance with health, safety and environmental laws and regulations, including the federal fire retardant standards developed by the U.S. Consumer Product Safety Commission, which requires rigorous and costly testing, has increased the cost and complexity of manufacturing our products and may adversely impact the speed and cost of product development efforts. Further, our manufacturing, distribution, delivery and other business operations and facilities are subject to additional federal, state or local laws or regulations including supply chain transparency, conflict minerals sourcing and disclosure, end-of-life disposal and recycling requirements, transportation and other laws or regulations relating to environmental protection and health and safety requirements, including COVID-19 safety and prevention.
As a retailer, we are subject to additional laws and regulations that apply to retailers generally and govern the marketing and sale of our products and the operation of both our retail stores and our e-commerce activities. Many of the statutory and regulatory requirements that impact our retail and e-commerce operations are consumer-focused and pertain to activities such as our promotions, advertising claims, pricing, credit-based promotional offers, truth-in-advertising, privacy, “do not call/mail” requirements, text messaging requirements, warranty disclosure, delivery timing requirements, accessibility and similar requirements.
Our operations are subject to federal, state and local labor laws including, but not limited to, those relating to occupational health and safety, employee privacy, wage and hour, overtime pay, harassment and discrimination, equal opportunity and employee leaves and benefits. We are also subject to existing and emerging federal and state laws relating to data security and privacy.
It is our policy and practice to comply with all legal and regulatory requirements and our procedures and internal controls are designed to promote such compliance.
Seasonality
Our business is modestly impacted by seasonal influences inherent in the U.S. bedding industry and general retail shopping patterns. The U.S. bedding industry generally experiences lower sales in the second quarter of the calendar year and increased sales during selected holiday or promotional periods.
Working Capital
We are able to operate with minimal working capital requirements because we sell directly to customers, utilize a primarily hybrid “make-to-stock” production process and operate retail stores that serve mainly as showrooms. We have historically generated sufficient cash flows to self-fund operations through an accelerated cash-conversion cycle. Our Credit Agreement provides a revolving credit facility for general corporate purposes with net aggregate availability of $450 million. The Credit Agreement contains an accordion feature that allows us to increase the amount of the credit facility from $450 million up to $600 million in total availability, subject to Lenders’ approval. The Credit Agreement matures in February 2024.
Qualified customers are offered revolving credit to finance purchases through a private-label consumer credit facility provided by Synchrony Bank. Approximately 52% of our net sales in 2020 were financed by Synchrony Bank. Our current agreement with Synchrony Bank expires December 31, 2023, subject to earlier termination upon certain events. We pay Synchrony Bank a fee for extended credit promotional financing offers. Under the terms of our agreement, Synchrony Bank sets the minimum acceptable credit ratings, interest rates, fees and all other terms and conditions of the customers’ accounts, including collection policies and procedures. As the receivables are owned by Synchrony Bank, at no time are the receivables purchased or acquired from us. We are not liable to Synchrony Bank for our customers’ credit defaults. In connection with all purchases financed under these arrangements, Synchrony Bank pays us an amount equal to the total amount of such purchases, net of promotional related discounts, upon delivery to the customer. Customers that do not qualify for credit under our agreement with Synchrony Bank may apply for credit under a secondary program that we offer through another provider.
Human Capital
Our Team Members
Individuality is our foundation. Our Company was founded under the name Select Comfort in 1987 (public company since 1998), on the premise that “one size doesn’t fit all.” We celebrate individuality in each other, in our own lives and in our customer’s lives. We strive to embrace every individual’s unique talents, perspectives and experiences, as we create an environment where we can be our best selves. Valuing diversity, equity and inclusion makes us stronger, smarter and fuels our innovation and teamwork. Individuality connects us to our vision of becoming one of the world’s most beloved brands by delivering an unparalleled sleep experience.
Throughout 2020, our purpose sustained us, inspired us and informed our business decisions and actions, including gifting a smart bed to all of our team members, partnering with Make-A-Wish to support critically ill children with life changing sleep and joining the United Nations Global Compact. At January 2, 2021, we employed a total of 4,679 team members, of which 108 were employed on a part-time or temporary basis. The breakdown of team members by area was as follows: 2,250 in retail sales and support, 833 in field services, 408 in customer service, 497 in manufacturing and logistics, and 691 in technology, corporate, management and administrative positions.
Talent Management
Our team members make a difference every day in improving society’s health and wellbeing through higher quality sleep. We engage our team members with an inclusive culture that is built on individuality and wellbeing. We celebrate individuality in each other, in our own lives and in our customers’ lives. We embrace every individual’s unique talents, perspectives and experiences and strive to create an environment where we can be our best selves. Valuing diversity, equity and inclusion makes us stronger, smarter and fuels our innovation and teamwork. Individuality connects us to our vision of becoming one of the world’s most beloved brands by delivering an unparalleled sleep experience.
Our culture embraces the shared values of passion, integrity, innovation, courage and teamwork. These values are central to who we are as a team and our ability to attract, engage, motivate and retain talent. Our holistic approach to talent management, as described below, is critical to the execution of our consumer innovation strategy. Talent management at Sleep Number is not a cyclical process but instead is a continuous lifecycle centered on learning and development. It comes to life through a 70/20/10 learning philosophy: (i) 70% of learning is on-the-job; (ii) 20% happens through managers, peers and others; and (iii) 10% is formal training or development. Our leaders have a strong commitment to seeing that this approach to talent management is successfully carried out every day. Some of the metrics that we use to gauge our progress include:
•We track numerous talent recruitment metrics to advance brand awareness and drive candidate traffic. This is used in our diversity hiring efforts. We also track retention and turnover of team members, including new hires on a monthly, quarterly and rolling 12-month basis. This is used to identify patterns and formulate talent strategies;
•We have a demographics dashboard that tracks race/ethnicity and gender by job grade, tenure and generation. This helps provide leaders with visibility to our progress on goals for diversity, equity and inclusion (DE&I). In 2020, we established a 13-member council of Sleep Number team members to advise the Company on advancing our DE&I initiatives;
•We have a continuous listening strategy to ensure we stay connected to the voice of our team members at critical times of the team member experience. The key survey touchpoints are at new hire, pulse check-in, annual engagement and exit. This allows leaders to monitor team member sentiment and key engagement metrics including an inclusion and belonging index. We also conducted a self-identification survey to learn how our team members identify and how they want to be appreciated as individuals;
•We benchmark at least annually all aspects of our total rewards program for team members. This ensures that we maintain a competitive rewards offering which is unique because all team members participate in some type of variable pay program (e.g., bonus, commissions) in addition to base pay. Our benefits package has been greatly expanded to support team member wellbeing including higher quality sleep by providing all 4,700 of our team members with a Sleep Number 360 smart bed in 2020, and a commitment to do so for all new Sleep Number team members going forward;
•We utilize our human capital management (HCM) system to track and follow team member performance assessments and development plans. We use our HCM system to monitor the completion of learning courses for our team members. Our enterprise learning management system provides all team members access to a training curriculum that is dynamic and mobile-accessible; and
•We collect and analyze workplace injury and accident information across all our locations. This enables our commitment to safety and dedication to reduce incident rates, number of workers’ compensation claims and lost workdays.
Social Impact Commitment
At Sleep Number, our purpose is to improve the health and wellbeing of society through higher quality sleep. We are committed to leveraging the power of sleep, and sleep science, to improve lives and create a healthier, kinder, more inclusive world. And because of our team’s dedication to our mission, disciplined execution of our vertically integrated business model and differentiated consumer innovation strategy, Sleep Number is at the forefront of delivering this life-changing benefit. With our revolutionary Sleep Number 360® smart beds and SleepIQ® technology, we have improved 13 million lives.
In 2018, we announced a social impact commitment to help one million young people achieve life-changing sleep through our products and sleep expertise by 2025. In 2020, we expanded our focus to broadly support children, families and communities, especially those who were deeply affected by the COVID-19 pandemic and social injustices. Our 2020 cash donations totaled over $600,000, and our team members donated their time and efforts to support individuals and families in need in their surrounding communities.
We improved the lives of nearly 100,000 individuals through continued partnerships with organizations including GENYOUth, Blue Star Families, American Cancer Society, Bridging and others. Additionally, we established new partnerships to make a greater
positive impact. On Giving Tuesday 2020, we announced a year-long partnership with Make-A-Wish to help critically ill Wish kids across the United States receive the quality sleep they need by providing new 360 smart beds. We also made a financial contribution to the National Urban League to support its important work to improve equality for Black Americans. In addition, because the health and wellbeing of our team members is a high priority, we provided all 4,700 Sleep Number team members with the gift of quality sleep in 2020, presenting each with a new Sleep Number 360 smart bed.
While our pioneering and award-winning innovations are designed to improve people's health and wellbeing through quality sleep, Sleep Number was able to improve the health and safety of frontline health-care workers in the early days of the COVID-19 pandemic in a different way. By leveraging resources at our Irmo South Carolina plant in early 2020, our manufacturing team supported the South Carolina Hospital Association by refurbishing nearly 50,000 N95 masks, fulfilling a much-needed supply amidst a personal protective equipment shortage.
Our Corporate Responsibility and Sustainability Report, posted within the Investor Relations section of our Company website, provides additional information about our commitment to talent management and human rights at Sleep Number, including strategy details, performance metrics and our engagement, beginning in 2020, with the United Nations Global Compact. The report highlights our commitments:
•Purpose driven Company committed to improving the health and wellbeing of society through higher quality sleep;
•Enterprise-wide commitment to measure, advance and report on ESG initiatives, informed by and integrated into our business strategy;
•Became signatory to the United Nations Global Compact, pledging intent to incorporate their Ten Principles into our strategy, culture and operations;
•Focused on accountable goal setting as we track performance on waste and energy management; and
•Effectively collaborate with our diverse, independent board to sustain our long-standing, highly admired strength in corporate governance.
This report may be accessed at www.sleepnumber.com, click on the “INVESTORS” link then click on the “ESG” link and “Sustainability Reports.” The information contained on our website or connected to our website is not incorporated by reference into this Form 10-K and should not be considered part of this report.
Information about our Executive Officers
SHELLY R. IBACH, 61
President and Chief Executive Officer (Joined the Company in April 2007 and was promoted to President and CEO in June 2012)
Shelly R. Ibach, Sleep Number® setting 40, serves as the President and Chief Executive Officer (CEO) for Sleep Number (Nasdaq: SNBR). From June 2011 to June 2012, Ms. Ibach served as the Company’s Executive Vice President and Chief Operating Officer and from October 2008 to June 2011, she served as Executive Vice President, Sales & Merchandising. Ms. Ibach joined the Company in April 2007 as Senior Vice President of U.S. sales for Company-owned channels. Before joining the Company, Ms. Ibach was Senior Vice President and General Merchandise Manager for Macy’s home division. From 1982 to 2005, Ms. Ibach held various leadership and executive positions within Target Corporation.
DAVID R. CALLEN, 54
Executive Vice President and Chief Financial Officer (Joined the Company in 2014 and was promoted to current role in December 2020)
David R. Callen, Sleep Number® setting 50, serves as the Executive Vice President and Chief Financial Officer for Sleep Number. Prior to joining Sleep Number in April 2014, Mr. Callen served as the Principal Financial Officer for Ethan Allen Interiors, Inc., from 2007 to 2014. Mr. Callen has served for more than 30 years in several high-performing companies in increasingly responsible international financial management positions. His breadth of experience has emphasized global business, capital and financial strategy, all aspects of mergers and acquisitions, global brand support and operational excellence across multiple industries, including automotive, high-tech, dental, outdoor recreational products and public accounting.
MELISSA BARRA, 49
Executive Vice President and Chief Sales and Services Officer (Joined the Company in 2013 and was promoted to current role in December 2020)
Melissa Barra, Sleep Number® setting 30, serves as the Executive Vice President and Chief Sales and Services Officer. From June 2019 to December 2020, Ms. Barra was Senior Vice President, Chief Sales, Services and Strategy Officer. Ms. Barra was Senior Vice President and Chief Strategy and Customer Relationship Officer from January 2015 to June 2019 and Vice President, Consumer Insights and Strategy from February 2013 to January 2015. Her breadth of experience covers finance, mergers and acquisitions, strategy, sales, services, real estate, PR and communications. Prior to joining Sleep Number in February 2013, Ms. Barra held leadership positions in the U.S. and internationally in process reengineering, finance, strategic alliances and corporate development for Best Buy, Grupo Futuro S.A., Citibank and GE Capital.
ANDREA L. BLOOMQUIST, 51
Executive Vice President and Chief Innovation Officer (Joined the Company in 2008 and was promoted to current role in December 2020)
Annie L. Bloomquist, Sleep Number® setting 25, serves as Executive Vice President and Chief Innovation Officer. Ms. Bloomquist leads all innovation, including strategic development of the SleepIQ® technology platform, 360® smart bed strategy, research and development, sleep science research and innovation partnerships to further sleep science, health and wellbeing. Ms. Bloomquist was the Senior Vice President and Chief Product Officer from June 2012 to December 2020 and Chief Merchandising Officer from June 2011 to June 2012. Ms. Bloomquist joined Sleep Number in May 2008 as Vice President and General Merchandise Manager. Prior to Sleep Number, Ms. Bloomquist held leadership positions in product and merchandising at Macy’s and Marshall Field’s Department Stores for Target Corporation.
KEVIN K. BROWN, 52
Executive Vice President and Chief Marketing Officer (Joined the Company in 2014 and was promoted to current role in December 2020)
Kevin K. Brown, Sleep Number® setting 40, serves as Executive Vice President and Chief Marketing Officer and is responsible for building the Sleep Number brand through stories that set the Company apart, communicating Sleep Number’s innovation and driving brand advocacy across all customer touchpoints. Before joining Sleep Number in 2014, Mr. Brown served in executive leadership roles at Meijer, Inc., Sears Holdings Corporation, Jo-Ann Stores, Inc. and Accenture.
SAMUEL R. HELLFELD, 42
Senior Vice President and Chief Legal and Risk Officer and Secretary (Joined the Company in 2013 and was promoted to current role in September 2018)
Samuel R. Hellfeld, Sleep Number® setting 65, serves as the Senior Vice President and Chief Legal and Risk Officer and Secretary and leads legal, internal audit, corporate security and asset protection. From October 2015 to September 2018, Mr. Hellfeld served as Vice President, Associate General Counsel. Mr. Hellfeld joined Sleep Number in March 2013 as Corporate Counsel. Prior to joining
Sleep Number, Mr. Hellfeld was a Partner in the law firm of Fox Rothschild LLP (fka Oppenheimer Wolff & Donnelly LLP) practicing in the areas of intellectual property and litigation. Prior to 2010, Mr. Hellfeld was an Associate at several law firms and also served as Law Clerk in the United States Court of Appeals for the Ninth Circuit and the United States District Court, Southern District of California.
CHRISTOPHER D. KRUSMARK, 41
Senior Vice President and Chief Human Resources Officer (Joined the Company in 2005 and was promoted to current role in July 2020)
Christopher Krusmark, Sleep Number® setting 55, serves as the Senior Vice President and Chief Human Resources Officer, where he leads all human resources, training and learning functions. Prior to being promoted to his new role in July 2020, Mr. Krusmark served as Sleep Number’s Vice President of Sales Operations, Field Services and Training where he led retail operations, sales promotions and incentives, home delivery operations, the Company’s customer sales center and wholesale business development. From June 2005 to October 2015, Mr. Krusmark held a variety of leadership roles in finance at Sleep Number supporting sales, real estate, marketing and product. Prior to joining Sleep Number, Mr. Krusmark worked on the financial audit staff of EY and Arthur Andersen.
J. HUNTER SAKLAD, 51
Executive Vice President and Chief Supply Chain Officer (Joined the Company in 2004 and was promoted to current role in January 2021)
Hunter Saklad, Sleep Number® setting 65, serves as the Executive Vice President and Chief Supply Chain Officer at Sleep Number. From December 2012 to December 2020, Mr. Saklad served as Senior Vice President and Chief Information Officer. From June 2011 to December 2012, Mr. Saklad served as the Vice President, Consumer Insight and Strategy at Sleep Number. From March 2006 to June 2011 he was Vice President of Finance and held a variety of positions across Finance serving business partners in marketing, sales, supply chain, FP&A, investor relations and treasury. Mr. Saklad joined Sleep Number in October 2004 as Sr. Director of Finance. Prior to joining Sleep Number, Mr. Saklad held finance leadership roles at Ford Motor Company and Visteon.
Available Information
We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the Securities and Exchange Commission (SEC).
Our corporate website is www.SleepNumber.com. Through a link to a third-party content provider, our corporate website provides free access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. These documents are posted on our website at www.SleepNumber.com — select the “Investors” link, the “Financials” link, and then the “SEC Filings” link. The information contained on our website or connected to our website is not incorporated by reference into this Form 10-K and should not be considered part of this report.
We also make available, free of charge on our website, the charters of the Audit Committee, Compensation Committee and Corporate Governance Committee, as well as our Code of Business Conduct (including any amendment to, or waiver from, a provision of our Code of Business Conduct) adopted by our Board. These documents are posted on our website — select the “Investors” link, the “Governance” link and then the “Governance Documents” link. The information contained on our website or connected to our website is not incorporated by reference into this Form 10-K and should not be considered part of this report.
Copies of any of the above-referenced information will also be made available, free of charge, upon written request to:
Sleep Number Corporation
Investor Relations Department
1001 Third Avenue South
Minneapolis, MN 55404
ITEM 1A. RISK FACTORS
An investment in our common stock involves a high degree of risk. You should carefully consider the specific risks set forth below and other matters described in this Annual Report on Form 10-K before making an investment decision. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties, including risks and uncertainties that impact the business environment generally, those not presently known to us, or those that we currently see as immaterial, may also harm our business. If any of these risks occur, our business, results of operations, cash flows and financial condition could be materially and adversely affected.
Risks Related to Consumer Sentiment and the Availability of Credit
The COVID-19 pandemic has had, and may continue to have, an adverse effect on our business and our financial results.
The COVID-19 pandemic has created significant volatility, uncertainty and economic disruption, which have adversely affected, and may continue to adversely affect, our business operations and our financial results. Consumer concern about becoming ill with the virus and recommendations and/or mandates from federal, state and local authorities to close certain businesses, stay at home, practice social distancing or self-quarantine resulted in the temporary closure of the majority of our stores nationwide for a period of time between mid-March and mid-May. Approximately 99% of our stores were open on average during the six months ended January 2, 2021. However, as the COVID-19 pandemic continues, we may need to further restrict the operations of our stores, delivery operations, and manufacturing and distribution facilities if we deem this necessary or if recommended or mandated by authorities, and these measures could have a further material impact on our sales and profits. Restrictions in 2020 adversely affected, and may in the future adversely affect, our business, operations, demand for our product, traffic to our stores, and macroeconomic factors that affect us, such as consumer confidence and spending, which have, in turn, resulted in a loss of sales and profits. Even as certain restrictions are eased or lifted, and vaccines and other treatments for COVID-19 become available, new or different restrictions may be implemented and consumers may continue to take additional precautions that could cause a reduction in foot-traffic to certain of our locations or other changes in consumer spending behavior over time. Moreover, as vaccines and other treatments for COVID-19 become available, consumer behavior may change, including spending more time away from home, and discretionary consumer spending on home goods such as our beds and related products may decrease.
With temporary closures to our retail store locations across the country at various points during 2020 and our delivery operations adversely impacted, we scaled our digital and “sell-from-anywhere” capabilities including: remote retail selling, customer service, private appointments, flexible work schedules, solutions for contactless delivery, and remote access for team members across the country. This shift to our team members working remotely has amplified certain risks to our business, including increased demand on our information technology resources and systems and increased risk of cybersecurity breaches and IT outages. In addition, as recommendations and/or mandates have been modified, eased or lifted across the country, we have implemented new health and safety policies at headquarters, stores, and our manufacturing and assembly locations as well as for our home delivery teams, which are intended to ensure the safety of our team members and customers and reduce the risk of contracting or spreading the coronavirus for team members, contractors, and customers who are unable to perform their roles or transact business remotely. The return to working in-person presents the risk that our new health and safety policies may not adequately protect our team members, contractors, and customers from contracting or spreading the coronavirus.
In response to the COVID-19 pandemic, including the significant reduction in customer visits to, and spending at, our stores caused by COVID-19, we did and in some situations continue to take actions to maintain liquidity and reduce costs. It is possible that our cost reduction efforts may be insufficient to maintain adequate liquidity if our operations are further restricted or disrupted due to the COVID-19 pandemic or governmental recommendations or mandates that may result in material impact on our sales and profits.
Additionally, if we do not respond appropriately to the pandemic, or if customers do not perceive our response to be adequate for a particular region or our Company as a whole, we could suffer damage to our reputation and our brand, which could adversely affect our business and financial results in the future.
We are highly dependent on the effectiveness of our marketing messages and the efficiency of our advertising expenditures in generating consumer awareness and sales of our products. In light of our adjustments due to COVID-19 and the overall fluid nature of the pandemic and the consumer environment, we may not be as successful in developing effective messages and achieving efficiency in our advertising expenditures.
Our business depends heavily on the uninterrupted operation of our two main manufacturing plants located in Irmo, SC and Salt Lake City, UT as well as our assembly distribution centers, two of which are co-located at the manufacturing plants and others located in Baltimore, MD and the greater Los Angeles, CA area. Our business also depends on the successful operation of our bedding collection fulfillment center in Brooklyn Park, MN and headquarters in Minneapolis, MN. The operation of all of our facilities is critically dependent on our team members who staff these locations, and COVID-19 could directly threaten or impact their health and/or ability to work, and, therefore, adversely affect the operations of our facilities. In addition, COVID-19 and governmental mandates or recommendations in these jurisdictions could require closures of our facilities and otherwise limit or adversely impact our ability to continue these operations.
In addition to our retail stores and home delivery operations, COVID-19 has also impacted, and may continue to impact, our logistics and domestic and foreign supply chain, including availability of raw materials and components we or our suppliers source from third parties as well as our sole source of supply for adjustable foundations, particularly as a result of governmental mandates or recommendations. We expect that these impacts will continue in 2021.
Our temporary reduction of discretionary spending across the Company and the inability or limitations of certain suppliers, both domestic and foreign, to operate due to governmental mandates or recommendations has delayed and may continue to delay the introduction of new product lines.
The situation surrounding COVID-19 remains fluid, and the potential for an adverse effect on our business and our financial results increases the longer the virus impacts activity levels in the United States and globally. For this reason, we cannot reasonably estimate with any degree of certainty the extent of the impact COVID-19 will have on our business. The extent and duration of the impact of COVID-19 on our business, operations, and financial results will depend on future developments, including the duration and spread of the outbreak, the availability, administration, and efficacy of vaccines, governmental mandates and recommendations, business and workforce disruptions, and the related impact on consumer confidence and spending, all of which are highly uncertain and unpredictable.
Current and future economic conditions could materially adversely affect our sales, profitability, cash flows and financial condition.
Our success depends significantly upon discretionary consumer spending, which is influenced by a number of general economic factors, including without limitation economic growth, consumer confidence, the housing market, employment and income levels, interest rates, inflation, taxation, consumer shopping trends and the level of customer traffic in malls and shopping centers, civil unrest, as well as the COVID-19 pandemic. Adverse trends in any of these economic factors may adversely affect our sales, profitability, cash flows and financial condition.
A reduction in the availability of credit to consumers generally or under our existing consumer credit programs could harm our sales, profitability, cash flows and financial condition.
A significant percentage of our sales are made under consumer credit programs through third parties. The amount of credit available to consumers may be adversely impacted by macroeconomic factors, including those related to or resulting from the COVID-19 pandemic, that affect the financial position of consumers, and as suppliers of credit adjust their lending criteria.
Synchrony Bank provides credit to our customers through a private label credit card agreement that is currently scheduled to expire on December 31, 2023, subject to earlier termination upon certain events. Synchrony Bank has discretion to control the content of financing offers to our customers and to set minimum credit standards under which credit is extended to customers.
Reduction of credit availability due to changing economic conditions, changes in credit standards under our private label credit card program or changes in regulatory requirements, or the termination of our agreement with Synchrony Bank, could harm our sales, profitability, cash flows and financial condition.
Risks Related to Our Marketing Strategy and Execution of Total Retail Distribution Strategy
Our future growth and profitability depend upon the effectiveness and efficiency of our marketing programs.
We are highly dependent on the effectiveness of our marketing messages and the efficiency of our advertising expenditures in generating consumer awareness and sales of our products. We continue to evolve our marketing strategies, adjust our messages, and
review the amount we spend on advertising and where we spend it. We may not always be successful in developing effective messages, as the consumer and competition change, or in achieving efficiency in our advertising expenditures.
We rely in part upon third parties, such as social media influencers and athletes, to market our brand, and we are unable to fully control their efforts. Influencers and athletes with whom we maintain a relationship could engage in behavior or use their platforms to communicate directly with our customers in a manner that reflects poorly on our brand, and these communications may be attributed to us or otherwise adversely affect us. It is not possible to prevent such behavior, and the precautions we take to detect or prevent this activity may not be effective.
Consumers are increasingly using digital tools as a part of their shopping experience. As a result, our future growth and profitability will depend in part on (i) the effectiveness and efficiency of our online experience, including without limitation advertising and search optimization programs, in generating consumer awareness and sales of our products; (ii) our ability to prevent confusion among consumers that can result from search engines that allow competitors to use our trademarks to direct consumers to competitors’ websites through confusing or misleading advertisements; (iii) our ability to prevent Internet publication of false or misleading information regarding our products or our competitors’ products; (iv) reviews of our products; (v) the nature and tone of consumer sentiment, including those published online or elsewhere; and (vi) the stability of our website. In recent periods, competitor spending on Internet-based marketing programs has increased, including without limitation from a number of direct-to-consumer, Internet-based retailers, which has and may continue to increase the cost of basic search terms and the cost of our Internet-based marketing programs.
If our marketing messages are ineffective or our advertising expenditures and other marketing programs, including digital programs, are inefficient in creating awareness and consideration of our products and brand name, and in driving consumer traffic to our website, call centers, or stores, our sales, profitability, cash flows and financial condition may be adversely impacted. In addition, if we are not effective in preventing the publication of confusing, false or misleading information regarding our brand or our products, or if there is publication online or elsewhere of significant negative consumer sentiment regarding our Company, brand or our products, our sales, profitability, cash flows and financial condition may be adversely impacted.
Our future growth and profitability depend on our ability to execute our Total Retail distribution strategy.
The vast majority of our sales occur through Total Retail, including our retail stores and our website. Total Retail represents our largest opportunity for growth in sales and improvement in profitability. Our retail stores carry significant fixed costs. We also make significant capital expenditures as we open new stores and remodel or reposition existing stores. We are highly dependent on our ability to maintain and increase sales per store to cover these fixed expenses, provide a return on our capital investments and improve our operating margins.
Some of our stores are mall-based. We depend on the continued popularity of malls as shopping destinations and the ability of mall anchor tenants and other attractions to generate customer traffic for our mall-based retail stores. Any decrease in mall traffic, including due to governmental recommendation or mandates related to COVID-19, could adversely affect our sales, profitability, cash flows and financial condition.
Our Total Retail distribution strategy results in relatively few points of distribution, including 602 retail stores in 50 U.S. states as of the end of 2020, Online, Phone and Chat. Several of the mattress manufacturers and retailers with which we compete have significantly more brick-and-mortar points of distribution than we do, which makes us highly dependent on our ability to drive consumers to our points of distribution to gain market share.
Our longer-term Total Retail distribution strategy is also dependent on our ability to renew existing store leases and to secure suitable locations for new store openings, in each case on a cost-effective basis. We may encounter higher than anticipated rents and other costs in connection with managing our retail store base. We may also be unable to find or obtain suitable new locations.
Failure to achieve and maintain a high level of product quality could negatively impact our sales, profitability, cash flows and financial condition.
Our products are highly differentiated from traditional innerspring mattresses and from viscoelastic and other foam mattresses, which have little or no technology and do not rely on electronics and air control systems. As a result, our beds may be susceptible to failures that do not exist with traditional or foam mattresses. Failure to achieve and maintain acceptable quality standards could impact consumer acceptance of our products or result in negative media and Internet reports or owner dissatisfaction that could negatively impact our brand image and sales levels.
In addition, a decline in product quality could result in an increase in return rates and a corresponding decrease in sales, or an increase in product warranty claims in excess of our warranty reserves. An unexpected increase in return rates or warranty claims could harm our sales, profitability, cash flows and financial condition.
As a consumer innovation Company with differentiated products, we face an inherent risk of exposure to product liability claims or regulatory actions if the use of our products is alleged to have resulted in personal injury or property damage. If any of our products proves to be defective or non-compliant with applicable regulations such as the federal Consumer Product Safety Commission flammability standards, we may be required to recall or redesign such products. We have at times experienced increased returns and adverse impacts on sales, as well as product liability litigation, as a result of media reports related to the alleged propensity of our products to develop mold. We may experience additional adverse impacts on sales and additional litigation if any similar media reports were to occur in the future. We maintain insurance against some forms of product liability claims, but such coverage may not be applicable to, or adequate for, liabilities actually incurred. A successful claim brought against us outside of, or in excess of, available insurance coverage, or any claim or product recall that results in significant adverse publicity about us, may have a material adverse effect on our sales, profitability, cash flows and financial condition.
Our future growth and profitability depend in part on our ability to continue to improve and expand our product line and to successfully execute new product introductions.
As described in greater detail below, the bedding industry, as well as the market for sleep monitoring products, are both highly competitive, and our ability to compete effectively and to profitably grow our market share depend in part on our ability to continue to improve and expand our product line of adjustable firmness air beds, SleepIQ technology and related accessory products. We incur significant research and development and other expenditures in the pursuit of improvements and additions to our product line. If these efforts do not result in meaningful product improvements or new product introductions, or if we are not able to gain widespread consumer acceptance of product improvements or new product introductions, our sales, profitability, cash flows and financial condition may be adversely affected. In addition, if any significant product improvements or new product introductions are not successful, our reputation and brand image may be adversely affected.
Our intellectual property rights may not prevent others from using our technology or trademarks in connection with the sale of competitive products. We are from time to time subject to claims that our products, processes or trademarks infringe intellectual property rights of others.
We own various U.S. and foreign patents and patent applications related to certain elements of the design and function of our beds and related products. We own numerous registered and unregistered trademarks and trademark applications, including in particular our Sleep Number, Sleep Number 360, 360, and SleepIQ trademarks, as well as other intellectual property rights, including trade secrets, trade dress and copyrights, which we believe have significant value and are important to the marketing of our products. These intellectual property rights may not provide adequate protection against infringement or piracy, may not prevent competitors from developing and marketing products that are similar to or competitive with our beds or other products, and may be costly and time-consuming to protect and enforce. Our patents are also subject to varying expiration dates. In addition, the laws of some foreign countries may not protect our intellectual property rights and confidential information to the same extent as the laws of the United States. If we are unable to protect and enforce our intellectual property, we may be unable to prevent other companies from using our technology or trademarks in connection with competitive products, which could adversely affect our sales, profitability, cash flows and financial condition.
We are from time to time subject to claims that our products, processes, advertising, or trademarks infringe the intellectual property rights of others. The defense of these claims, even if we are ultimately successful, may result in costly litigation, and if we are not successful in our defense, we could be subject to injunctions and liability for damages or royalty obligations, and our sales, profitability, cash flows and financial condition could be adversely affected.
Risks Related to Our Reliance on Third Parties and Reliance on a Global Supply Chain
We could be vulnerable to shortages in supply of components necessary to manufacture our products due to our manufacturing processes which operate with minimal levels of inventory or due to global shortages of supply of electronic componentry or other materials, which may harm our ability to satisfy consumer demand and may adversely impact our sales and profitability.
A significant percentage of our products are assembled after we receive orders from customers utilizing manufacturing processes with minimal levels of raw materials, work-in-process and finished goods inventories. Lead times for ordered components may vary significantly, and some components used to manufacture our products are provided on a sole source basis. In addition, with the
increasing prevalence of and consumer demand for electronic products, the global supply of electronic componentry is increasingly strained, which may lead to shortages in supply and increased prices. Any unexpected shortage of materials caused by any disruption
or unavailability of supply or an unexpected increase in the demand for our products, could lead to delays in deliveries of our products to customers and increased costs. Any such delays could adversely affect our sales, customer satisfaction, profitability, cash flows and financial condition.
We rely upon several key suppliers and third parties that are, in some instances, the only source of supply or services currently used by us for particular materials, components, products or services. A disruption in the supply or substantial increase in cost of any of these products or services could harm our sales, profitability, cash flows and financial condition.
We currently obtain all the materials and components used to produce our beds from outside sources including some that are located outside the United States. In several cases, including our air chambers, integrated non-adjustable foundations, adjustable foundations, various components for our Firmness Control systems, certain foam formulations, as well as our fabrics and zippers, we have chosen to obtain these materials, components and products from suppliers who serve as the only source of supply, or who supply the vast majority of our needs of the particular material, component or product. While we believe that these materials, components and products, or suitable replacements, could be obtained from other sources in the event of a disruption or loss of supply, we may not be able to find alternative sources of supply or alternative sources of supply on comparable terms. If our relationship with the primary supplier of our air chambers or the supplier of our adjustable foundations is terminated, we could have difficulty in replacing these sources since there are relatively few other suppliers presently capable of manufacturing these components and products. Constraints on the ability of certain of our suppliers to timely meet commitments in an environment of increased demand for consumer products and reduced labor during the COVID-19 pandemic, which has, and may continue to, adversely impact our ability to meet our product demand, result in additional costs, or may otherwise adversely impact our business, operations and financial condition.
Similarly, we rely on third parties to deliver some of our products to our facilities and customers on a timely and cost-effective basis. These third-party providers could be vulnerable to labor shortages, liquidity concerns or other factors that may result in delays in deliveries or increased costs of deliveries. Any significant delay in deliveries to our customers could lead to increased returns and cause us to lose sales. Any increase in freight charges or other costs of deliveries could increase our costs of doing business and harm our sales, profitability, cash flows and financial condition.
Fluctuations in commodity prices or third-party logistics costs could result in an increase in component costs and/or delivery costs.
Our business is subject to significant increases or volatility in the prices of certain commodities, including but not limited to electronic componentry, fuel, oil, natural gas, rubber, cotton, plastic resin, corrugate, steel and chemical ingredients used to produce foam, as well as third-party logistic costs. Increases in prices of these commodities or logistics costs or other inflationary pressures may result in significant cost increases for our raw materials and product components, as well as increases in the cost of delivering our products to our customers. To the extent we are unable to offset any such increased costs through value engineering and similar initiatives, or through price increases, our profitability, cash flows and financial condition may be adversely impacted. If we choose to increase prices to offset the increased costs, our sales volumes could be adversely impacted.
Our business is subject to risks inherent in global sourcing activities.
Our air chambers and some of our other components are manufactured outside the United States, and therefore are subject to risks associated with foreign sourcing of materials, including but not limited to:
•Existing or potential duties, tariffs or quotas on certain types of goods that may be imported into the United States;
•Political instability resulting in disruption of trade;
•Disruptions in supply or transportation due to acts of terrorism, outbreaks of pandemics or contagious diseases (such as the COVID-19 pandemic), shipping delays, foreign or domestic strikes, customs inspections or other factors;
•Foreign currency fluctuations; and
•Economic uncertainties, including inflation.
We cannot predict whether the countries in which some of our components are manufactured, or may be manufactured in the future, will be subject to new or additional trade restrictions imposed by the United States or other foreign governments, including the likelihood, type, or effect of any such restrictions. The United States government has commenced certain trade policies, including imposing tariffs on certain goods imported from China and other countries, and may take further actions with respect to these policies
in the future. These factors could increase our costs of doing business with foreign suppliers, lead to inadequate inventory levels or delays in shipping beds to our customers, which could harm our sales, customer satisfaction, profitability, cash flows and financial condition.
Our operations and those of our suppliers are located in various regions of the U.S. and across the globe, which subjects us to regional risks, such as adverse weather conditions and other natural or man-made disasters.
The locations where we and our suppliers operate have experienced, and may experience in the future, adverse regional events such as extreme weather conditions and other natural and man-made disasters, which could have a material adverse effect on us and our ability to source necessary materials, components and products. Climate change may increase the frequency and severity of adverse weather conditions and other natural disasters. The western and southern regions of the U.S. and warmer climates globally may be particularly impacted by extreme weather, such as hurricanes, natural disasters, wildfires and rising sea levels. These events may disrupt our operations and ability to source components and products.
Climate change continues to draw scientific, governmental, and public attention. Many scientists, legislators and others attribute climate change to increased levels of greenhouse gas emissions, including carbon dioxide, which has led to legislative and regulatory efforts to limit such emissions. The enactment of new laws and regulations, or changes to existing laws and regulations, could mandate more restrictive standards or require such changes on a more accelerated time frame. There continues to be a lack of consistent climate legislation, which creates economic and regulatory uncertainty. The consequences of climate change and the ensuing patchwork of governmental regulations and orders could disrupt our operations or harm our ability to source necessary materials and components and manufacture our products. If public perception of our compliance with laws and regulations related to climate change is negative, it could adversely affect our business and reputation.
Risks Related to Our Vertically Integrated Business
Significant competition could adversely affect our business.
Because of the vertical integration of our business model, our products and distribution face significant competition from both manufacturers of different types of mattresses and a variety of retailers. Our SleepIQ technology also faces significant competition from various manufacturers and retailers of sleep tracking and monitoring products.
The mattress industry is characterized by a high degree of concentration among the largest manufacturers of innerspring mattresses and foam mattresses and one dominant national mattress retailer. In recent years, numerous direct-to-consumer companies and low-cost importers have entered the market, offering “bed-in-a-box” or similar products primarily through online distribution directly to consumers though many now also partner with traditional mattress retailers. The emergence of these new competitors has significantly increased the costs of search terms and digital advertising.
A variety of sleep tracking and monitoring products that compete with our SleepIQ technology have been introduced by various manufacturers and retailers, both within and outside of the traditional mattress industry.
Some of our competitors have substantially greater financial, marketing and manufacturing resources and greater brand name recognition than we do and sell products through broader and more established distribution touchpoints. Our national, exclusive distribution competes with other retailers who generally provide a wider selection of mattress alternatives than we offer. A number of these retailers also have more points of distribution, greater marketing resources, and greater brand name recognition than we do.
These manufacturing and retailing competitors, or new entrants into the market, may compete aggressively and gain market share with existing or new products, and may pursue or expand their presence in the adjustable firmness air bed segment of the market as well as in the market for sleep tracking and monitoring products. We have limited ability to anticipate the timing and scale of new product introductions, advertising campaigns or new pricing strategies by our competitors, which could inhibit our ability to retain or increase market share, or to maintain our profit margins.
If we are unable to effectively compete with other manufacturers and retailers of mattress and sleep tracking and monitoring products, our sales, profitability, cash flows and financial condition may be adversely impacted.
Disruption of operations in our main manufacturing facilities or assembly facilities could increase our costs of doing business or lead to delays in shipping our beds.
We have two main manufacturing plants, which are located in Irmo, South Carolina and Salt Lake City, Utah. We have several assembly distribution centers, which assemble the final mattress product before delivery to the customer, across the US. A significant
percentage of our products are assembled to fulfill orders rather than stocking finished goods inventory in our plants or stores. Therefore, the disruption of operations of either of our two main manufacturing plants or our assembly distribution centers for a significant period of time may increase our costs of doing business and lead to delays in deliveries of our products to customers. Such delays could adversely affect our sales, customer satisfaction, profitability, cash flows and financial condition.
Risks Related to Legal Compliance and Legal Proceedings
Our business is subject to a wide variety of government laws and regulations. These laws and regulations, as well as any new or changed laws or regulations, could disrupt our operations or increase our compliance costs. Failure to comply with such laws and regulations could have further adverse impacts on our operations.
We are subject to a wide variety of laws and regulations relating to the bedding industry or to various aspects of our business. Laws and regulations at the federal, state and local levels frequently change and we cannot always reasonably predict the impact from, or the ultimate cost of compliance with, future regulatory or administrative changes. Changes in law, the imposition of new or additional regulations or the enactment of any new or more stringent legislation that impacts employment and labor, trade, advertising and marketing practices, pricing, consumer credit offerings, “do not call/mail” requirements, text messaging requirements, product testing and safety, transportation and logistics, health care, tax, accounting, privacy and data security, health and safety or environmental issues, warranty disclosures, delivery timing requirements, accessibility requirements, among others, could require us to change the way we do business and could have a material adverse impact on our sales, profitability, cash flows and financial condition. New or different laws or regulations could increase direct compliance costs for us or may cause our vendors to raise the prices they charge us because of increased compliance costs. Further, the adoption of a multi-layered regulatory approach to any one of the state or federal laws or regulations to which we are currently subject, particularly where the layers are in conflict, could require alteration of our manufacturing processes or operational parameters which may adversely impact our business.
Legislative or regulatory changes that impact our relationship with our workforce, such as minimum wage requirements or health insurance or other employee benefits mandates, could increase our expenses and adversely affect our operations. While it is our policy and practice to comply with legal and regulatory requirements and our procedures and internal controls are designed to promote such compliance, we cannot assure that all of our operations will comply with all such legal and regulatory requirements. Further, laws and regulations change over time and we may be required to incur significant expenses and/or to modify our operations in order to ensure compliance. This could harm our profitability or financial condition. If we are found to be in violation of any laws or regulations, we could become subject to fines, penalties, damages or other sanctions as well as potential adverse publicity or litigation exposure. This could adversely impact our business, reputation, sales, profitability, cash flows or financial condition.
Pending or unforeseen litigation and the potential for adverse publicity associated with litigation could adversely impact our business, reputation, financial results or financial condition.
We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. We currently do not expect the outcome of any pending matters to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more pending claims asserted against us, or claims that may be asserted in the future that we are currently not aware of, or adverse publicity resulting from any such litigation, could adversely impact our business, reputation, sales, profitability, cash flows and financial condition.
Risks Related to Our Information Systems and Cybersecurity
Information systems that contain confidential Company data, consumers’ private data, and team members’ private data may be subject to attacks by hackers or other cyber threats that could compromise the confidentiality, integrity, and availability of the data, which could substantially disrupt our business and could result in a breach of the data.
Our information systems and information systems of third-party vendors we use to assist in the storage and management of information contain personal information related to our customers and team members in the ordinary course of our business, such as credit card and demographic information of our customers, SleepIQ® data, including biometric data (e.g., sleep, physiological), from our customer base and social security numbers and demographic information of our team members. These information systems also contain confidential Company data regarding our business and innovations. While we maintain and require our third-party vendors to maintain security measures to protect this information, a breach of these security measures, such as through third-party action and
attacks, team member error, access to our data and systems, malfeasance or otherwise, could compromise the security of our data and customers’ and team members’ personal information. As the techniques used to breach such security measures change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. Any failure of our systems and processes or our third-party vendors’ systems and processes to adequately protect our data or customer or team member personal information from exposure, theft or loss could adversely impact our business, reputation, sales, profitability, cash flows and financial condition.
Any improvements or upgrades to information systems that may be required to meet the evolving needs of our business and cybersecurity needs as well as existing and emerging regulatory requirements may be costly to implement and may take longer or require greater resources than anticipated, and may result in disruptions to our systems or business.
We depend on our information systems for many aspects of our business. If our information systems are disrupted in any material way, or improvements or upgrades are required to meet the evolving needs of our business, cybersecurity needs, and existing and emerging regulatory requirements, we may be required to incur significant capital expenditures in the pursuit of improvements or upgrades to our information systems. These efforts may take longer and may require greater financial and other resources than anticipated, may cause distraction of key personnel, and may cause short-term disruptions or security vulnerabilities to our existing systems and our business. Any of these outcomes could impair our ability to achieve critical strategic initiatives and could adversely impact our sales, profitability, cash flows and financial condition.
Risks Related to Our Stock
A substantial amount of our stock is held by a small number of large investors and significant sales of our common stock by one or more of these holders could cause our stock price to fall, which could cause investors to lose all or a portion of their investment in our stock.
As of December 31, 2020, we believe the nine largest holders of common stock were institutional investors who held approximately 53% of our outstanding shares of common stock in the aggregate, with BlackRock Fund Advisors being our largest shareholder with approximately 14% of our outstanding shares of common stock. These investors may sell their shares at any time for a variety of reasons, and such sales could depress the market price of our common stock, which could cause investors to lose all or a portion of their investment in our stock. In addition, any such sales of our common stock by these entities could also impair our ability to raise capital through the sale of additional equity securities.
The stock price of our Company may fluctuate significantly in response to numerous factors such as: the overall performance of the equity markets and the economy as a whole; changes in the financial projections we or third parties may provide to the public or our failure to meet these projections; actual or anticipated changes in our growth rate relative to that of our competitors; failure of securities analysts to maintain coverage of us, changes in financial estimates by any securities analysts who follow our Company or our failure to meet these estimates or the expectations of investors; and sales of share of our common stock by us or our shareholders particularly sales by our directors, executive officers and significant shareholders or the perception that these sales could occur.
General Risks
Our future growth and profitability depend in part upon our ability to attract, retain and motivate qualified personnel.
As a vertically integrated manufacturer and retailer, our future growth and profitability will depend in part upon our ability to attract, retain and motivate qualified personnel in a wide variety of areas to execute our growth strategy, including qualified management and executive personnel and qualified retail sales professionals and managers. The failure to attract, retain and motivate qualified personnel may hinder our ability to execute our business strategy and growth initiatives and may adversely impact our sales, profitability, cash flows and financial condition.