ITEM 1. BUSINESS
Overview
Sleep Number is a wellness technology company. With a purpose to improve the health and wellbeing of society through higher quality sleep, the Company — along with its more than 5,000 passionate team members — is dedicated to improving lives and committed to lifelong relationships with Smart Sleepers. Over 14 million people have had their lives improved by Sleep Number‘s award-winning sleep innovations and are experiencing the physical, mental and emotional benefits of life-changing sleep performance. The Company’s proprietary smart beds combine the physical and digital worlds, integrating exceptional sleep with a highly advanced digital technology platform. This means only Sleep Number can provide a dynamic, adjustable and adaptive sleep experience that effortlessly responds to the needs of each sleeper. The Company’s millions of Smart Sleepers benefit from their smart bed changing with them, over time; it is unique, like they are.
The Company’s differentiated business model is guided by our purpose. Sleep Number partners with world-leading sleep and health institutions to bring the power of 18 billion hours of longitudinal sleep data to sleep science and research. The Company’s retail experience meets its consumers whenever and wherever they choose — through online and in-store touchpoints. And Sleep Number’s 5,000 mission-driven team members passionately deliver individualized sleep experiences for everyone.
Through investments in its consumer innovation strategy and vertically integrated business model, Sleep Number strengthens its competitive advantages and creates a digital flywheel for sustainable growth, driving consumer demand and performance. The Company is committed to delivering superior stakeholder value over time.
Financial Highlights
Sleep Number’s financial performance in 2022, reflects the sustained impact of external business and economic disruptions that began early in the year. Globally constrained semiconductor chips, Omicron, the war in Ukraine and rapid inflation drove record low consumer sentiment, which significantly reduced demand and pressured profits. Yet, even as the Company navigated a steady stream of macro challenges, its mission-driven team members achieved significant strategic priorities such as the introduction of the greatest innovation in the Company’s history — the Climate360™ smart bed — with a new technology platform and the transition to a fully integrated supply chain network. These strategic advancements are important milestones in strengthening the Company’s sleep health and wellness technology leadership for the future.
For the five-year period ending with fiscal 2022, the Company’s compound annual growth rate was 8% for net sales and 1% for EPS. With its strategic, enterprise-wide investments in innovation, technology, logistics, marketing and customer service, Sleep Number has built a competitively-advantaged, vertically-integrated business and a highly relevant brand.
Integrated Platform and Innovation
Smart Bed
Sleep Number’s ambitious vision is to become one of the world’s most beloved brands by delivering an unparalleled sleep experience. With a relentless focus on the consumer, the Company has continued to advance its award-winning Sleep Number® smart bed. Enhancing its trademark comfort, adjustability and highly accurate detection of sleep and biosignal data, the smart bed ecosystem has evolved into a progressive and adaptive wellness technology platform.
The Sleep Number smart bed’s proprietary “sense and do” technology digitally responds to each sleeper’s movements, automatically and effortlessly adjusting firmness, comfort and support to relieve pressure points throughout the night. Through the analysis of longitudinal sleep and biosignal data, the Sleep Number smart bed can deliver both real-time interventions — including effortless comfort adjustments during the night, with no action required by the sleeper – and personalized sleep insights. By combining artificial intelligence (AI) and machine learning (ML) technology – that "learn” from each sleeper over time — the Sleep Number smart bed ecosystem provides an adaptive, responsive and superior sleep experience as well as accurate identification of issues associated with sleep. The smart bed allows sleepers to
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understand metrics related to health and wellbeing during sleep and may ultimately enable the Company’s Smart Sleepers to take preventative and proactive wellness actions.
Additionally, the longitudinal data generated from Sleep Number’s wellness technology platform can be shared with sleepers’ physicians, leading to insights that may guide health-provider diagnostics. The smart bed delivers an extensible ecosystem that delivers real-time, connected sleep and wellness solutions. The Sleep Number smart bed provides a holistic sleep health solution and benefit for the sleeper over their lifetime, as day-to-day needs change.
Sleep Number’s product innovation roadmap is driven by proprietary data and research from its millions of Smart Sleepers, with a purpose to improve the health and wellbeing of society through higher quality sleep, addressing the most pressing sleep health needs. In October 2022, the Company introduced its award-winning Sleep Number Climate360 smart bed available at www.sleepnumber.com and all Sleep Number stores. In the future this groundbreaking innovation monitors microclimate and estimated skin temperature to facilitate temperature adjustments during the night.
Expected to launch in the first-half of 2023, a new Sleep Number smart bed ecosystem will enable advanced monitoring of personalized insights and one-day, health-risk evaluations – all from home. The next generation Sleep Number smart bed, the only smart bed that uses the science of an individual’s personal sleep to understand their one-of-a-kind needs, leads to ongoing and sustained improved sleep quality. Developed by sleep science experts with insights about how people sleep, it connects each sleeper with their best rest, night after night and through every phase of life.
The Sleep Number smart bed actively optimizes comfort and wellbeing by:
•Effortlessly adjusting to each person’s individual shape and position each night based on their unique and ever-evolving sleep needs;
•Monitoring vital personal health data (average heart rate, average breathing rate and motion) and sleep trends using research-grade sensors;
•Continuously analyzing and personalizing sleep insights for each Smart Sleeper in partnership with leading sleep health experts; and
•Providing longitudinal, highly-accurate sleep data delivered nightly from the comfort of home. By measuring and applying advanced AI algorithms to uncover sleep behaviors, average heart rate, average breathing rate and heart rate variability over time, sleepers can experience a new level of sleep with a smart bed that benefits from the latest in sleep science to ensure their individual sleep performance.
Sleep Number’s smart bed ecosystem includes a full line of exclusive FlexFit™ smart adjustable bases that seamlessly integrate with Sleep Number smart bed, for an individualized sleep experience that is proven to deliver more restful sleep per night. Industry-leading smart bases offer endless adjustability by raising the head and feet for the ultimate relaxation. Additional meaningful features include Partner Snore™ technology, which allows a sleeping partner to temporarily relieve mild snoring by raising the companion’s head at the touch of a button, Foot Warming which is designed to help an individual fall asleep faster and underbed lighting.
The exclusive Sleep Number bedding collection and upholstered furniture feature a full line of sleep products designed to improve sleep comfort and quality, including pillows designed to fit each individual’s sleeping position. Expected in the first-half of 2023, the new Sleep Number Lifestyle Collection furniture is designed to enhance the sleep environment and support the health and wellness benefits of the Sleep Number smart bed and FlexFit smart adjustable bases. The Lifestyle Collection provides an integrated sleep experience with accessories for aging and recovery, providing comfort, aiding in mobility and helping maintain independence at home.
Research and Development
Sleep Number’s global research and development (R&D) team is comprised of onshore teams in Minneapolis, MN and San Jose, CA and offshore teams in Europe and Asia. Together, these teams are the driving force of the entire smart bed ecosystem including all smart beds, adjustable base designs and bedding solutions, and are comprised of experts in mechanical engineering, comfort, adjustability, temperature, anthropometrics and test systems. The Company’s research and development expenses were $62 million in 2022, $59 million in 2021 and $41 million in 2020.
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Sleep Number is redefining the standards for monitoring sleep for research and health, and its smart bed ecosystem offers a non-invasive, real-world and accurate method to conduct sleep research. Sleep Number’s wellness technology platform is informed by sleep research, data science and partnerships, and is an AI-enabled, advanced Internet of Things (IOT) ecosystem which enables real-time intervention capabilities. The Company’s wellness technology platform generates longitudinal sleep and biosignal data through a research-grade, multi-sensor ecosystem including ballistocardiography and AI/ML algorithms. This platform leverages high-resolution, full-body, continuous sensor recordings, as well as utilizing signal processing and machine-learning methods. Cloud infrastructure enables scale for one-to-many security and data sharing capabilities. Cloud intelligence and edge intelligence engines deliver advanced AI and analytics to generate a physical and digital immersive, adaptive and effortless sleep experience for each sleeper.
Sleep Number’s wellness technology platform automatically collects and analyzes billions of data points collected from millions of Smart Sleepers, conducting one of the largest sample sizes of sleep studies every night. This enables Smart Sleepers to benefit from the detection of health care issues related to sleep. To date, the sleep measurement technology inside Sleep Number smart beds has produced billions of hours of longitudinal sleep and biometric data. By analyzing that data, Sleep Number expects to one day help identify chronic sleep issues. With more than 80% Smart Sleeper engagement, this community is actively using the physical and digital features of the platform, resulting in improved sleep performance.
To date, the Company has leveraged and learned from more than 18 billion hours of sleep data gathered from over 2.3 billion real-world sleep sessions, generating comprehensive longitudinal and ecologically-valid data to improve sleep quality. More than 330,000 individuals in its Smart SleeperSM community — and counting — have opted in to participate in ongoing sleep research and advance the science of sleep and health. This participation has led to rapid enrollment in Institutional Review Board (IRB)-approved studies, which combine the power of Sleep Number’s broad sleep database with subjective understanding of sleeper behaviors to understand real-world outcomes. The Sleep Number smart beds are the first and only smart beds with integrated and validated data collection and feedback that requires no action by the user to deliver proven quality sleep. The smart bed ecosystem is helping to advance the linkage of quality sleep to health, bringing significant benefits to real-world sleepers.
Sleep Number is pairing data and innovations with meaningful collaborations with world-leading partners in sleep, leveraging the potential of the Company’s research and technology to advance sleep science and to develop new products, services and synergistic interactions.
Partnerships, Collaborations and Smart Sleepers
Partnerships
Through partnerships with world-leading health and wellness institutions, Sleep Number is advancing sleep science with its highly accurate, longitudinal sleep data. This data, which comes from millions of Smart Sleepers, serves as the foundation for groundbreaking research on various health-related issues.
Sleep Number believes current partnerships and collaborations with physicians, researchers, and institutions — including the Mayo Clinic, American Cancer Society, Northwestern University, University of Pittsburgh and Sleep Number’s own Scientific Advisory Board — will further advance sleep science and research and deliver meaningful health solutions. These partnerships will provide society with a comprehensive, accurate picture of how sleep affects health.
In 2020, Sleep Number announced a collaboration with Mayo Clinic. Sleep Number is advancing the science of sleep by funding several Mayo Clinic research projects, including:
•Research to investigate the prevalence of disordered sleep (sleep apnea, insomnia and short sleep) in patients with Somali heritage and the implications for cardiovascular risk;
•Research to explore the relationship between disrupted sleep and markers of aging (telomeres, senescence, chronological EKG based on AI); and
•Research to explore excessive daytime sleepiness (EDS) and its cardiovascular implications.
In 2022, Sleep Number formed a partnership with the American Cancer Society to study the connection between cancer and sleep quality, with the goal of developing the first-ever sleep strategies and guidance for cancer patients and
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survivors. With contributions from Sleep Number’s proprietary sleep data, American Cancer Society will conduct research over six years, which may lead to improved sleep outcomes for cancer patients and survivors.
Sleep Number is also collaborating with researchers at the University of Pittsburgh to develop protocols to assess sleep health against objective sleep data. This research is anticipated to begin in 2023.
Sleep Number Scientific Advisory Board
The Sleep Number Scientific Advisory Board is an interdisciplinary group of renowned physicians, clinicians and researchers with expertise in sleep science, research and health:
•Daniel Buysse, MD: Professor of Sleep Medicine and Psychiatry and Clinical and Translational Science at University of Pittsburgh School of Medicine
•Eve Van Cauter, PhD: Frederick H. Rawson Professor and Director of the Sleep, Metabolism and Health Center at the University of Chicago
•Judith Owens, MD, MPH: Professor of Neurology at Harvard Medical School and Director of the Center for Pediatric Sleep Disorders at Boston Children’s Hospital
•Virend Somers, MD, PhD: Professor of Medicine at Mayo Clinic College of Medicine and Science, Director of the Cardiovascular Facility and the Sleep Facility Center for Clinical and Translational Science at Mayo Clinic
Smart Sleepers
Sleep Number focuses on lifelong relationships with its customers. The Company’s wellness technology platform enables synergistic relationships with its customers. They interact with the Company’s brand on a consistent basis because its platform provides a highly individualized experience for each sleeper through physical product and digital insights. When an individual buys a Sleep Number smart bed, they become a “Smart Sleeper,” and receive both the physical bed as well as the digitally-enabled benefits that come with it. By interacting with Sleep Number’s digital application – and through AI and ML — their smart bed learns and effortlessly adjusts to their needs, and provides valuable sleep insights. Smart Sleepers turn to the digital interface repeatedly for sleep health information as their life stages and needs change. As a result, the Company’s Smart Sleeper community— now 2.5 million — has more than 80% monthly average user engagement, a best-in-class metric for digital products.
This world-class engagement of Smart Sleepers’ ongoing interface with Sleep Number’s brand supports sustained business growth through customer advocacy and loyalty. The Company measures its repeat and referral business, which accounts for over 45% of the Company’s business.
Sleep Number continues to invest in its demand drivers for near- and long-term performance, delivering a simpler and even more engaging experience for its Smart Sleeper community. Sleep Number’s newly launched enterprise customer identity platform, which connects its customer loyalty program, InnerCircleSM Rewards (ICR), inside the Sleep Number smart bed app, creates a seamless connection for deeper customer engagement. This enables efficient customer acquisition, increased revenue and empowers its customers to engage more deeply in the brand.
Sales and Marketing
Brand Communications
As the Company has transitioned from mattress retailer to wellness technology, it has evolved its relevant and engaging brand communications to help consumers understand the benefits they gain from a Sleep Number smart bed. The Company is repositioning its brand as a sleep performance leader — a brand that delivers exceptional benefits for sleep as well as health and total wellbeing.
Sleep Number focuses on driving brand love and consumer confidence in its award-winning wellness technology platform. Brand health metrics indicate that despite significant headwinds in 2022 — including low levels of consumer sentiment — Sleep Number continues to be thought of as a sleep innovation, sleep health, and sleep science leader.
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The Company’s individualized messaging and brand marketing strategies are designed to emotionally connect with consumers about the benefits of life-changing sleep and the value of Sleep Number smart beds. In 2022, Sleep Number demonstrated that its smart beds can provide 28 minutes more restful sleep each night*. Consumers recognize their own needs and find answers in Sleep Number’s sleep innovations. Sleep Number is delivering the improved sleep performance they’ve been seeking.
The success of the Climate360 smart bed also reinforces the value and relevancy of Sleep Number’s innovations to help solve consumers’ most pressing sleep challenges. According to an omnibus survey, 80% of couples report one or both partners sleep too hot or too cold. Sleep Number introduced a simple solution to this broad temperature sleep problem.
The InnerCircle Rewards loyalty program - drives significant brand engagement. After the launch of the InnerCircle Rewards program, the Company welcomed over one million members who participated in over 13 million engagements with over 1,100 activities on its digital platform. The Company’s most dedicated Smart Sleepers, ICR members regularly interact with branded content — including video, web, email and blog content — which educates them about Sleep Number’s products and sleep expertise, adding value to their investment. They actively write product reviews and post on social media, further activating the marketing flywheel contributing to the Company’s purpose to improve the health and wellbeing of society through higher quality sleep. In 2022, they donated $212,000 worth of rewards certificates to our charitable partners.
Sleep Number amplifies its brand through highly-visible strategic partnerships, engaging consumers seamlessly across multiple touchpoints with an emphasis on digital, and creating lifelong customer relationships and brand advocacy by delivering an unparalleled sleep experience. Together, these actions result in strong brand health, increased brand interest, heightened consumer consideration, customer engagement and authentic advocacy for Sleep Number’s brand, innovations and services.
Strategic partnerships amplify the effectiveness, impact and scale of Sleep Number’s brand and marketing efforts:
•Sleep Number announced a partnership with the American Cancer Society (ACS) to create the first ever sleep guidelines for cancer treatment and survivorship. The Company included ACS in its brand communications to Smart Sleepers, in its work with the National Football League (NFL), across its social media and more. Sleep Number customers were incredibly engaged in this work; through Inner Circle Rewards, they donated tens of thousands of dollars in the last four months of 2022 to benefit ACS.
•At Super Bowl LVII, Sleep Number announced a five-year renewal of its partnership with the National Football League. As the Official Sleep and Wellness Partner of the NFL since 2017, the partnership broadens Sleep Number’s brand reach, deepens its brand relevance and magnifies the benefits of its proprietary innovations. The partnership has led to unparalleled product adoption: 80% of NFL players have a Sleep Number smart bed. With the extension of the partnership, Sleep Number expects to continue to support players and team personnel through sleep assessments, new innovations and more. Additionally, the Company will leverage the NFL to further support ACS, being recognized as “an Official Partner of Crucial Catch” and a presenting sponsor of the Defender, a digital cancer risk assessment tool developed by ACS. Additional partnerships with four clubs — Super Bowl LVII Champion Kansas City Chiefs, Super Bowl LVI Champion Los Angeles Rams, the Dallas Cowboys and Minnesota Vikings— add to its national and community-activation efforts.
•Sleep Number’s multi-year partnerships with content and media companies including Discovery Media, NFL Media, NFL Teams, Fox Sports, YouTube and more, and influencer and NFL athlete relationships also provide opportunities to drive ongoing awareness and consideration for consumers about the benefits of improved sleep performance.
The Company leverages a sophisticated media mix to drive its performance marketing and advertising, with emphasis on digital and aligned with consumer consumption, contributing to improved media return on investment. High-profile video, including television and online streaming, is its most efficient media, followed by digital and social platforms. Sleep Number’s in-house digital capabilities, content marketing, online user experience and data-driven tools give it the flexibility to pivot quickly and optimize media investment, messages and audience by platform in real-time. The Company’s promotional strategy focuses on simplicity and relevance, driving consumers to the brand at the time when they are seeking a sleep solution. In 2022, media expense represented 14.6% of net sales.
*Based on average SleepIQ® data from sleepers who engaged with their Sleep Number® setting, SleepIQ data and FlexFitTM adjustable base versus sleepers who had those same features but did not similarly engage with them.
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Exclusive Direct-to-Consumer Distribution
Sleep Number’s exclusive, direct-to-consumer distribution model supports lifelong relationships with its customers. Across its customer touchpoints, which include Stores, Online, Phone and Chat, it delivers a value-added retail experience that seamlessly integrates Sleep Number’s digital and physical experiences to meet customer needs. The Company offers an engaging and dynamic online experience to educate consumers and advance their purchase path, driving highly-qualified traffic to all its retail touchpoints. Sleep Number’s mission-driven, highly-trained sleep experts use digital technology and its best-in-class relationship-based selling process, which is continually tested and refined, to find the right sleep solutions for its customers – wherever and whenever they want to shop. This “sell-from-anywhere” model supports customers’ shopping preferences and results in new customer acquisition, sustained repeat and referral, high conversion and strong revenue per smart bed unit — all of which drive continued sales and profitable growth.
As the exclusive distributor of Sleep Number® products, the Company has a nationwide portfolio of retail stores. It targets 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, the Company has invested to reposition a large percentage of its mall stores to stronger, optimally-sized, non-mall locations, adding stores in both existing and new markets. As of December 31, 2022, the Company operated 670 Sleep Number® stores, with locations in all 50 states. More than 40% of its stores (including remodels) are less than five years old and more than 56% are less than seven years old.
The Company’s Stores accounted for 86% of net sales in 2022. Average annual net sales per store in 2022, based on Total Retail (which includes Stores, Online, Phone and Chat), was $3.3 million. In 2021, 76% of Stores open for a full year generated net sales of greater than $2 million, and 36% of Stores open for a full year generated more than $3 million in net sales. In 2022, Online, Phone, Chat and Other sales accounted for 14% of net sales.
Operations
Integrated Sourcing and Logistics
By the end of 2022, the Company completed a multi-year evolution of its supply chain network. Now, 100% of its smart beds are pre-assembled in its assembly distribution centers prior to delivery versus being assembled in customers’ homes by Sleep Number delivery technicians. Additionally in 2022, the Company moved its bedding fulfillment center from Minnesota to Ohio for improved fulfillment logistics. Sleep Number is advancing its outbound logistics network by adding full truckload carriers and dedicated cross docks to reduce product handling, hand-offs, damage and costs while in transit to customers’ homes. This new network design enables scale and provides a superior and reliable experience for customers.
In addition to a network of global suppliers, Sleep Number currently operates two component manufacturing plants (Irmo, SC and Salt Lake City, UT), each of which is combined with an assembly distribution center and six additional assembly distribution centers (Ontario, CA; Baltimore, MD; Tampa, FL; Dallas, TX; Cincinnati, OH; and Minneapolis, MN). Primary operations at the manufacturing sites include cutting and sewing of the fabric covers for its beds. In the Utah plant, the Company also assembles its Firmness Control™ systems. Teams at the assembly distribution centers fulfill customer orders that are made-to-order daily and assemble final mattress and order kitting with bases and accessories for shipment. The Company also operates a bedding fulfillment center at the same location as its Cincinnati, OH assembly distribution center.
The Company sources the raw materials and components used in its products from third parties. Throughout 2022, the Company encountered disruptions in its supply of various materials such as semiconductor chips and components due to shortages and constraints in the global supply chain. The Company has taken, and continues to take, various measures to mitigate the potential impact of supply disruptions, including strengthening relationships with primary suppliers, identifying new alternate suppliers, redesigning products, exploring alternative components and maintaining safety stocks. The Company expects supply constraints to ease in 2023 but the general supply environment to remain volatile. Sleep Number is leveraging the flexibility, visibility and resilience of its vertically-integrated model to respond nimbly as conditions change and to communicate clearly with customers regarding their delivery experience.
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Home Delivery Service
Sleep Number’s home delivery teams are another direct touchpoint with its customers. Since 2018, 100% of its Sleep Number smart beds sold have been delivered and installed by Sleep Number delivery technicians or by trained third-party service providers.
Customer Service
Through its U.S.-based, in-house customer service team, Sleep Number provides direct post-purchase support that improves Smart Sleepers’ experience and supports its business. Through ongoing interactions with customers via phone, email, chat and social media, customer service team members also provide a unique opportunity to benefit from insights that help the Company continuously improve its products and strengthen its service quality and innovation. This integration enables operational synergies and organizational efficiencies.
Seasonality
The Company’s 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 demand in the second quarter of the calendar year and increased sales demand during selected holiday or promotional periods.
Working Capital
The Company is able to operate with minimal working capital requirements because it sells directly to customers, utilizes both “make-to-order” and “make-to-stock” production processes and operates retail stores that serve mainly as showrooms. Sleep Number has historically generated sufficient cash flows to self-fund operations through an accelerated cash-conversion cycle. The Company’s Credit Agreement provides a revolving credit facility for general corporate purposes with net aggregate availability of $825 million. The Credit Agreement contains an accordion feature that allows the Company to increase the amount of the credit facility from $825 million up to $1.2 billion in total availability, subject to Lenders’ approval. The Credit Agreement matures in December 2026.
Qualified customers are offered revolving credit to finance purchases through a private-label consumer credit facility provided by Synchrony Bank. Approximately 53% of net sales in 2022 were financed by Synchrony Bank. The Company’s current agreement with Synchrony Bank expires December 31, 2028, subject to earlier termination upon certain events. The Company pays Synchrony Bank a fee for extended credit promotional financing offers. Under the terms of the 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 the Company. Sleep Number is not liable to Synchrony Bank for its customers’ credit defaults. In connection with all purchases financed under these arrangements, Synchrony Bank pays the Company an amount equal to the total amount of such purchases, net of promotional related discounts, upon delivery to the customer.
Information Systems
The Company uses information technology systems to operate, analyze and manage its business, to reduce operating costs and to enhance its customers’ experience. The Company’s major systems include an order entry system, a customer relationship management system, a payment processing system, inbound and outbound telecommunications systems for direct marketing, delivery scheduling and customer service systems, e-commerce systems, a data warehouse system and an enterprise resource planning system. These systems are primarily comprised of packaged applications licensed from various software vendors plus a limited number of internally developed programs and digital solutions.
Intellectual Property
As a result of the Company’s R&D and strategic efforts, Sleep Number has continued to grow its patent portfolio, with a particular focus on smart features that improve sleep quality and thermal solutions to solve temperature disruptions to sleep. The Company holds various U.S. and foreign patents and patent applications regarding certain elements of the design and function of Sleep Number products, including air control systems, remote control systems, air chamber features, mattress construction, foundation systems, sensing systems, automated adjustments, in-bed temperature
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control, as well as other technology. Sleep Number has numerous U.S. patents, expiring at various dates between March 2023 and December 2040, and numerous U.S. patent applications pending. The Company also has numerous foreign patents, expiring at various dates between September 2023 and June 2045 and foreign patent applications pending. Notwithstanding these patents and patent applications, the Company 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, Sleep Number products.
Sleep Number has 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®, Comfort.Individualized®, Does Your Bed Do That?®, the DualTemp logo, the DualAir Technology Inside logo, FlexTop®, HealthIQ®, 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™, HeartIQ™, Individualized Sleep Experiences™, RespiratoryIQ™, Retail Flow™, Sleep Number Labs logo, Sleep Number Labs Sleep For The Future logo, Smart SleeperSM 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. The Company also has a number of common law trademarks, including ActiveComfort™, Clima-Temp™, Comfortable. Adjustable. Affordable.™, ComfortFit™ CoolFit™, DualAir™, DualTemp™, Firmness Control™, FlexFit™, In Balance™, Partner Snore™, The Bed Reborn™, The Bed That Moves You™, The Best Bed For Couples™, True Temp™, Winter Soft™ and the Company’s bed model names.
Several of the Company’s trademarks have been registered, or are the subject of pending applications for registration, in various foreign countries. Sleep Number also has other intellectual property rights related to its products, processes and technologies, including trade secrets, trade dress and copyrights. The Company protects and enforces its intellectual property rights, including through litigation, as necessary.
Industry and Competition
Up to 50% of the developed world’s population experiences sleep deficiencies. In the United States, sleep disorders have been declared a public health epidemic by the U.S. Center for Disease Control. Sleep Number is focused on innovations that will 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 modifications and therapeutic treatments. As the sleep-health economy continues to evolve, Sleep Number intends to play a role in the digital health market as consumers look for products and reliable data sources to address their overall wellbeing. The digital health market is $77 billion in the U.S. alone; $211 billion globally with markets expecting to expand by 4x by 2030.
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 5% annually over the last 20 years, including 5% annually, on average, over the past five years. According to ISPA* and the Company’s estimates, industry wholesale shipments of mattresses and foundations (including imported products and adjustable bases) were approximately $13 billion in 2021 (approximately $25 billion at retail).
The retail bedding industry is commoditized and highly competitive. Sleep Number competes against regional and local specialty bedding retailers, bedding manufacturers, home furnishing stores, mass merchants, national discount stores and online marketers. Furniture Today, a furniture industry trade publication, has ranked Sleep Number as the third largest U.S. bedding retailer and etailer for 2021, with an estimated 9% market share of industry retail revenue. Sleep Number’s consumer innovation strategy with proprietary sleep innovations and exclusive direct-to-consumer distribution is highly differentiated, resulting in lifelong customer relationships and contributing to the Company’s continued profitable growth.
*2022 ISPA industry information had not been published at the time of this report.
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Manufacturers in the bedding industry mostly compete through national and regional retail partners, regional manufacturing verticals, and online direct-to-consumer. Price, quality, brand name recognition, product availability and product performance are the primary ways manufacturers differentiate themselves. There is a high degree of concentration among manufacturers who produce innerspring, memory foam and hybrid beds under nationally recognized brand names, including Tempur-Pedic, Sealy, Stearns & Foster, Serta, and Simmons. National manufacturers still dominate the bedding industry. Newer brands like Purple, Casper, and Nectar, which started online have now moved into traditional retail channels for growth.
Governmental Regulation and Compliance
As a vertically integrated manufacturer and retailer, the Company is subject to extensive federal, state and local laws and regulations affecting all aspects of its business.
As a manufacturer, Sleep Number is committed to product quality and safety, including adherence to all applicable laws and regulations affecting the Company’s 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 the Company’s products and may adversely impact the speed and cost of product development efforts. Further, the Company’s 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.
As a retailer, the Company is subject to additional laws and regulations that apply to retailers generally and govern the marketing and sale of the Company’s products and the operation of both Sleep Number retail stores and e-commerce activities. Many of the statutory and regulatory requirements that impact the Company’s retail and e-commerce operations are consumer-focused and pertain to activities such as the Company’s 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.
The Company’s 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. The Company is also subject to existing and emerging federal and state laws relating to data security, privacy, cybersecurity disclosures and climate disclosure.
It is Sleep Number’s policy and practice to comply with all legal and regulatory requirements. The Company’s procedures and internal controls are designed to promote such compliance.
Human Capital
Grounded in Sleep Number’s shared values of passion, integrity, innovation, courage and teamwork, and guided by its purpose to improve society’s health and wellbeing through higher quality sleep, the Company’s team members are highly engaged and make a difference in the world every day. With sleep at the center, Sleep Number’s culture supports the wellbeing of its team members across the pillars of physical, emotional, financial, career and community, and connects their work to the Sleep Number mission and goals. Founded on the premise that “one size doesn’t fit all,” Sleep Number celebrates individuality in its team members’ and customers’ lives. Sleep Number embraces every individual’s unique talents, perspectives and experiences, and strives to create an environment where we can each be our best self. Valuing diversity, equity and inclusion makes Sleep Number stronger and smarter, and fuels its innovation and teamwork.
At December 31, 2022, Sleep Number employed a total of 5,115 team members, of which 92 were classified as part-time and 75 were employed on a temporary basis. The breakdown of team members by area was as follows: 2,343 in retail sales and support, 911 in field services, 396 in customer service, 575 in manufacturing and logistics, and 890 in technology, corporate, management and administrative positions.
Sleep Number’s holistic approach to talent management, designed to attract, motivate, develop, reward and retain the right talent, is critical to the execution of the Company’s consumer innovation strategy. The Company sustains its
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inclusive culture built on individuality and wellbeing by providing an exceptional team member experience, offering ample opportunities for professional learning and advancement. Sleep Number leaders are deeply committed to the success of its talent management approach and the Company holds itself accountable by routinely measuring its progress on a variety of elements and metrics including:
•Retention: To advance brand awareness, increase overall candidate traffic and diverse hiring, and improve retention strategies, Sleep Number tracks numerous talent recruitment, retention and turnover metrics, including new hires on a monthly, quarterly and rolling 12-month basis;
•Diversity, Equity and Inclusion (DEI): Sleep Number’s approach to DEI is designed to embrace different perspectives, cultivate an inclusive environment and empower its team members. The Company maintains a dashboard that tracks race/ethnicity and gender by job grade, tenure and generation to provide increased visibility to leaders across the Company on progress toward key goals. The Company also measures and reports a team member inclusion and belonging index, and conducts a self-identification survey to learn how team members identify and how they want to be appreciated as individuals;
•Engagement: Sleep Number has a continuous listening strategy to ensure it stays connected to the voice of its 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, enabling leaders to monitor team member sentiment and course-correct in real time as appropriate;
•Performance Management: Sleep Number utilizes a human capital management (HCM) system to track and follow team member performance evaluations, competency assessments and development plans. The Company uses its HCM system to monitor the completion of learning courses for its team members. Sleep Number’s enterprise learning management system provides all team members access to an equitable learning and training curriculum that is dynamic and mobile-accessible;
•Safety: Sleep Number has a commitment to maintain a safety-first mindset. The Company has policies and practices that create clear expectations for how each team member contributes to a safe and healthy workplace. The Company collects and monitors workplace injury and accident information across all its locations and takes appropriate steps to reduce incident rates, number of workers’ compensation claims and lost workdays. The Company actively evolves its health and safety policies during the year to ensure the safety of its team members and customers; and
•Total Rewards: Sleep Number benchmarks and reviews, at least annually, all aspects of its total rewards program for team members. Sleep Number’s rewards offering is unique because all team members participate in some type of variable pay program (e.g., bonus, commissions) in addition to base pay. The Company’s overall Total Rewards offering reflects recent enhancements and its continued commitment to maintaining reward programs that are valued, equitable and competitive.
Social Impact Commitment
Sleep Number is committed to leveraging the power of sleep, and sleep science, to improve lives and create a healthier, kinder, more inclusive world. To further support this commitment and amplify its positive community impact, Sleep Number is honored to partner with several national organizations to fulfill its purpose of improving the health and wellbeing of society through higher quality sleep. The strength of the Company’s purpose meets the needs of military personnel, children and adults facing health challenges and families in transition, through these partnerships:
•BLUE STAR FAMILIES is a nonprofit devoted to strengthening military families by connecting them with supportive individuals and organizations within their communities. Sleep Number has partnered with Blue Star Families for eight years, providing monetary support for the organization and the gift of improved sleep performance to the families of those who serve and sacrifice for our country.
•GENYOUth is an organization whose programming reaches 38 million students annually in 73,000 U.S. schools, is devoted to helping students live healthfully and raise their academic achievement. In 2022, Shelly Ibach and Sleep Number were awarded the Vanguard Award, a prestigious recognition given to partners for their long-term and exemplary service to children.
•My Very Own Bed is a Minnesota-based nonprofit that provides new beds and bedding to children of families who have recently transitioned into more stable housing, helping their new house feel more like a home and supporting their health and wellbeing through improved sleep. In partnership with the Minnesota Vikings and US Bank, the Company provided smart beds, bedding and other products for 50 children in 2022.
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•Dream Foundation is a national organization serving terminally-ill adults and their families by providing end-of-life dreams that offer inspiration, comfort and closure. The Company provided smart beds and once-in-a-lifetime NFL experiences to terminal patients.
Sleep Number’s social impact extends beyond philanthropic partnerships. At the beginning of 2022, Sleep Number began a multiyear partnership with the American Cancer Society (ACS) to meaningfully support the fight against cancer. Over the next six years, ACS will conduct research with data and expertise from Sleep Number’s proprietary smart beds to identify the impact of quality sleep on cancer prevention and recovery. Leveraging Sleep Number's 18 billion hours of highly accurate sleep data in conjunction with historical and ongoing cancer prevention studies, ACS will study the effects of cancer on patients’ and survivors’ nighttime sleep and biometric patterns. Informed by this research, the goal is to develop the first-ever sleep guidelines for cancer prevention and treatment and improve sleep outcomes for cancer patients and survivors. Sleep Number was recently honored with the American Cancer Society’s 2022 Corporate Partner of the Year award in recognition of its support in the fight against cancer and its meaningful impact to ACS’s mission.
Sleep Number’s partnership with ACS will materially advance not only the fundamental understanding of the science of sleep, but also the application of that knowledge to deliver meaningful outcomes. With learning and insights from its investment in sleep science and research, Sleep Number will produce innovations that deliver increased utility and value to consumers and advance society's understanding of how sleep affects individual health.
Additionally, Sleep Number demonstrated the breadth of its commitment to ACS — and to improving the wellbeing of society through high quality sleep — through two other actions in 2022:
•To benefit cancer patients and their caregivers, Sleep Number furnished ACS’s Hope Lodges with life-changing smart beds, Sleep Number® bedding, and other sleep solutions to provide comfort and care for individuals undergoing cancer treatment away from home. Hope Lodges offer these patients and their caregivers a free place to live when their best option for effective care is in a city other than their home location. Lodges located in Rochester and Minneapolis, MN, near Sleep Number headquarters, were the first to receive Sleep Number’s support in early 2022. In subsequent months, Hope Lodge locations in Kansas City, MO, and Dallas, TX, also received Sleep Number furnishings. The Dallas Hope Lodge received a surprise visit from Dallas Cowboys' Micah Parsons and 150 PlushComfort™ pillows and autographed Cowboys gear.
•In celebration and recognition of Juneteenth and the Company’s support for greater health equity, Sleep Number was proud to contribute to ACS's Health Equity Fund for the second year. The Company’s donation to NorthPoint Health & Wellness in Minneapolis, MN, supports efforts to increase access to colorectal cancer screenings for underserved communities.
Through Sleep Number’s collaboration with Mayo Clinic, the Company continues to advance sleep science research and enhance its understanding of sleep's impact on cardiovascular health. In 2022, the Company provided funding for Mayo Clinic to conduct several multi-year studies, two of which particularly demonstrated Sleep Number’s societal impact:
•A study that will investigate the prevalence of obstructive sleep apnea and determine the presence of comorbid cardiovascular diseases in U.S. patients of Somali descent, a large and growing population in Minnesota, which is also home to both Sleep Number and Mayo Clinic headquarters; and
•A study that will explore the relationship between disrupted sleep and markers of aging to test the hypotheses that disrupted or inadequate sleep and sleepiness are indicative of older biological age and may contribute to the acceleration of the aging process.
As part of Sleep Number’s commitment to team member wellbeing and community health, the Company also encourages team members to become involved in their local communities by volunteering their time and talents in support of causes or organizations that inspire them. In 2022, the Company’s leaders who participated on the board of directors of a qualified nonprofit organization were eligible to apply for a grant of up to $1,500 per calendar year that benefits the organization.
Through strategic partnerships, team member involvement and support for sleep science research, combined with the continued advancement of Sleep Number proprietary innovations, the Company is fulfilling its purpose to improve the health and wellbeing of society through higher quality sleep.
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Sleep Number’s Corporate Sustainability Report, posted within the Investor Relations section of the Company’s website, provides additional information about its commitment to talent management and human rights at Sleep Number, including strategy details, performance metrics and its engagement. The report highlights the Company’s priorities and progress related to environmental, social and governance (ESG) initiatives and its integration with consumer innovation strategy and pursuit of profitable growth. 2022 milestones include:
•Environmental: To lower the Company’s non-renewable energy use and related Scope 1 and Scope 2 greenhouse gas (GHG) emissions, Sleep Number cut fuel consumption by decreasing home delivery truck idling and outbound miles driven, and launched solar installation projects at company facilities in Minnesota, Texas, and California. The Company also conducted an initial assessment of its Scope 3 GHG emissions that will help the Company prioritize future actions, and continued to focus on landfill diversion, with expanded re-use and recycling programs.
•Social: In support of the Company’s purpose, Sleep Number advanced sleep innovation with the introduction of its Climate360 smart bed and Sleep Number’s new wellness technology platform, and through its partnership with the American Cancer Society, collaboration with the Mayo Clinic, and work with other renowned scientists, researchers and physicians, the Company made strides in the fundamental understanding of sleep science and the application of that knowledge to deliver meaningful health outcomes. Sleep Number also continued to make thoughtful investments in its team members’ total wellbeing which drove high engagement, exceeding benchmarks for “Commitment,” “Effort” and “Inspiration.” And the Company ensured its direct materials suppliers were aware of its human rights and environmental policies and worked with them to align on priorities that promote safe working conditions and conversion to a low-carbon economy.
•Governance: Sleep Number completed its first materiality assessment to identify ESG issues of importance to its stakeholders; submitted its inaugural report of environmental performance to CDP, a not-for-profit considered the gold standard for environmental reporting; and communicated more frequently with team members and consumers about the Company’s ESG priorities and progress. The Company also established and activated cross-functional teams to increase its preparedness for potential new Securities Exchange Commission (SEC) disclosure requirements related to climate and cybersecurity.
This report may be accessed at www.sleepnumber.com: select the “Investors” link, the “ESG” link and then “Sustainability Reports.” The information contained on the Company’s website or connected to its website is not incorporated by reference into this Form 10-K and should not be considered part of this report.
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Information about the Company’s Executive Officers
SHELLY R. IBACH, 63
Chair, President and Chief Executive Officer (Joined the Company in April 2007, was promoted to President and CEO in June 2012 and became Chair of the Board of Directors in May 2022)
Shelly R. Ibach, Sleep Number® setting 40, serves as the Chair, 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 and 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.
CHRISTOPHER D. KRUSMARK, 43
Executive Vice President and Interim Chief Financial Officer and Chief Human Resources Officer (Joined the Company in 2005, was promoted to Chief Human Resources Officer in July 2020 and assumed the role of Interim Chief Financial Officer in January 2023)
Chris Krusmark, Sleep Number® setting 55, serves as the Executive Vice President and Interim Chief Financial Officer and Chief Human Resources Officer, where he leads all finance functions and all human resources, training and learning functions. Prior to being promoted to his Chief Human Resources Officer role in July 2020, Mr. Krusmark served as Sleep Number’s Vice President of Sales Operations, Field Services and Training where he led retail and home delivery operations 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.
MELISSA BARRA, 51
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. Ms. Barra leads the Company’s customer-focused strategy and its sales, real estate, filed services and customer relationship teams. 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. 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, 53
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 the Company’s sleep innovation strategy, including research and development of its physical and digital smart bed ecosystem, digital engagement with its Smart Sleeper community, and strategic 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 general management, sourcing, buying, development and planning at Macy’s and The Department Stores for Target Corporation.
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KEVIN K. BROWN, 54
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. Mr. Brown leads all brand marketing and communications strategies for the Company, including brand storytelling; strategic brand partnerships; paid, earned and social media; and loyalty and advocacy with the Company’s millions of Smart Sleepers. He joined the Company in 2014 as Senior Vice President and Chief Marketing Officer. 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, 44
Executive Vice President and Chief Legal and Risk Officer and Secretary (Joined the Company in 2013 and was promoted to current role in March 2022)
Samuel R. Hellfeld, Sleep Number® setting 65, serves as the Executive Vice President and Chief Legal and Risk Officer and Secretary and leads legal, internal audit, corporate security and asset protection. From September 2018 to March 2022, Mr. Hellfeld served as Senior Vice President and Chief Legal and Risk Officer. 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.
J. HUNTER SAKLAD, 53
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 and leads the Company’s sourcing, procuring, inventory planning and manufacturing capabilities. 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 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.
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Available Information
Sleep Number is subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires the Company to file reports, proxy statements and other information with the Securities and Exchange Commission (SEC).
Sleep Number’s corporate website is www.sleepnumber.com. Through a link to a third-party content provider, the corporate website provides free access to its 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 the Company electronically files such material with, or furnishes it to, the SEC. These documents are posted on the corporate website at www.sleepnumber.com: select the “Investors” link, the “Financials” link, and then the “SEC Filings” link. The information contained on the Company’s website or connected to its website is not incorporated by reference into this Form 10-K and should not be considered part of this report.
The Company also makes available, free of charge on its website, the charters of the Audit Committee, Management Development and Compensation Committee and Corporate Governance and Nominating Committee, as well as its Code of Business Conduct (including any amendment to, or waiver from, a provision of its Code of Business Conduct) adopted by the Company’s Board. These documents are posted on the Company’s website: select the “Investors” link, the “Governance” link and then the “Governance Documents” link. The information contained on the Company’s website or connected to it 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
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ITEM 1A. RISK FACTORS
An investment in Sleep Number’s 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 the Company. Additional risks and uncertainties, including risks and uncertainties that impact the business environment generally, those not presently known to the Company, or those that it currently see as immaterial, may also harm its business. If any of these risks occur, the Company’s business, results of operations, cash flows and financial condition could be materially and adversely affected.
Economic Conditions, Consumer Sentiment and the Availability of Credit
Adverse changes in general economic conditions have reduced, and could continue to reduce discretionary consumer spending and, as a result, have adversely affected and could continue to adversely affect the Company’s sales, profitability, cash flows and financial condition.
The Company’s success depends significantly upon discretionary consumer spending, which is influenced by a number of general economic factors, including without limitation economic growth, consumer confidence and sentiment, the housing market, employment, income and debt levels, interest rates, inflation, taxation, consumer shopping trends and the level of customer traffic in malls and shopping centers, political conditions, civil unrest and disturbances, terrorist activities, war and fears of war, including the war in Ukraine, as well as health epidemics or pandemics, such as the COVID-19 pandemic. Adverse trends in these general economic factors have and may continue to adversely affect the Company’s sales, profitability, cash flows and financial condition.
Inflation, which increased significantly during 2021 and remained at historically high rates throughout 2022 due to supply chain disruptions, increased demand or other economic factors, has adversely affected the Company’s business operations and financial results by increasing the costs of fuel, shipping, raw materials, labor, commodity, and other costs. While the Company has historically been able to pass along some cost increases to its customers, it has not and may not be able to fully offset such higher costs through price increases in a persistent inflationary environment, and its margins have and could continue to decrease.
In order to combat recent high rates of inflation, the Federal Reserve significantly increased the federal funds rate beginning in 2022 and has indicated that further rate increases may be announced to combat rising inflation in the United States. Such rate increases have and may continue to negatively affect customer purchasing behavior, which has and may continue to adversely affect the Company’s sales.
Additionally, on January 19, 2023, the U.S. reached its debt ceiling, requiring the U.S. Treasury to take extraordinary measures to avoid default. However, the U.S. Treasury expects to exhaust these measures by early June 2023, and if U.S. lawmakers do not pass legislation to raise the federal debt ceiling by such time, it is possible that the U.S. could default on its debt obligations. Whether or not a U.S. sovereign default occurs, growing uncertainty due to the unprecedented nature of such a default may trigger recessionary conditions, further reduce consumer confidence and increase levels of unemployment, all of which may reduce demand for the Company’s products, causing harm to it sales, profitability, cash flows and financial condition.
Increases in interest rates has increased and may continue to increase the cost of servicing the Company’s indebtedness and have an adverse effect on its results of operations, cash flows and stock price.
The Company’s credit facility currently bears interest at a variable rate based on its leverage ratio. Sleep Number bears the risk that the rates charged by the Company’s lenders will increase faster than the earnings and cash flow of its business, which has reduced profitability and is expected to continue to reduce profitability, adversely affect its ability to service its debt, or cause the Company to breach covenants contained in its Credit Agreement, which could materially adversely affect the Company’s business, financial condition and results of operations.
In 2022, the average interest rate with respect to the Company’s credit facility significantly increased year-over-year, adversely affecting the Company’s profitability, operations and reported earnings-per-share.
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A reduction in the availability of, or increase in the cost of, credit to consumers generally or under the Company’s existing consumer credit programs has negatively impacted, and could continue to negatively impact, the Company’s sales, profitability, cash flows and financial condition.
A significant percentage of the Company’s sales are made under consumer credit programs through third parties. The amount and cost of credit available to consumers may be adversely impacted by macroeconomic factors, including general economic conditions, consumer disposable income, fuel prices, recession and fears of recession, unemployment, war and fears of war, inclement weather, consumer debt levels, conditions in the housing market, increased interest rates, sales tax rates and rate increases, inflation, civil disturbances and terrorist activities, consumer confidence in future economic and political conditions, natural disasters, and consumer perceptions of personal wellbeing and security, health epidemics or pandemics, such as the COVID-19 pandemic, which could cause suppliers of credit to adjust their lending criteria and costs. These macroeconomic factors have, and may continue to, adversely impact the cost of credit which, in turn, has and may continue to negatively impact the Company’s sales, profitability, cash flows and financial condition.
Synchrony Bank provides credit to the Company’s customers through a private label credit card agreement that is currently scheduled to expire on December 31, 2028, subject to earlier termination upon certain events. Synchrony Bank has discretion to control the content of financing offers to the Company’s customers and to set minimum credit standards under which credit is extended to customers.
Reduction of credit availability due to changing economic conditions, including rising inflation, increased interest rates, changes in credit standards under the Company’s private label credit card program or changes in regulatory requirements, or the termination of its agreement with Synchrony Bank, could harm the Company’s sales, profitability, cash flows and financial condition.
The COVID-19 pandemic has had, and may continue to have, an adverse effect on the Company’s business and the Company’s financial results.
The COVID-19 pandemic has created significant volatility, uncertainty and economic, consumer, supply chain and workforce disruption. Beginning in 2020, the pandemic resulted in government restrictions, such as quarantines, travel advisories and the implementation of social distancing measures, leading to the closure of businesses and causing weakened economic conditions. In 2022, the Company’s financial performance continued to be adversely impacted by: (i) the disruptive flow of semiconductor chips which affected its ability to deliver products to its customers; (ii) incremental costs from labor and material inflation, and expediting costs resulting from current-period global supply chain shortages; (iii) record low consumer sentiment, and (iv) other negative effects of the COVID-19 pandemic and variants including Omicron. The Company recognizes that the long term macro-economic effects, such as the effect on the economy and the lingering effects of the COVID-19 pandemic on the supply chain, could again in the future have an adverse effect on the Company’s business and financial results.
The extent to which COVID-19 will impact the Company’s business and financial results during 2023 will depend on future developments, including the duration and continued spread of COVID-19, the effectiveness of vaccines against COVID-19 and new variants that may arise, and the possibility that resurgences may result in government restrictions being reimposed. Although most state and local governments have eased or lifted restrictions, it is possible that a resurgence in COVID-19 cases, particularly due to variants of COVID-19, could prompt a return to tighter restrictions in certain areas. For example, some of Sleep Number’s manufacturing partners’ facilities in China have been temporarily closed from time to time due to strict COVID-related lockdown requirements. If lockdowns or other pandemic-related restrictions in China are imposed, this could materially negatively impact the Company’s ability to source raw materials and product and transport goods in its supply chain. Such occurrences may have an adverse effect on the Company’s business and financial results.
Risks Related to the Company’s Reliance on Third Parties and Reliance on a Global Supply Chain
Sleep Number has been, and could continue to be, vulnerable to shortages in supply of components necessary to manufacture its products due to its manufacturing processes which operate with minimal levels of inventory or due to global shortages of supply of electronic componentry or other materials, which, in turn, has and may
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continue to harm its ability to satisfy consumer demand and adversely impact the Company’s sales and profitability.
A significant percentage of the Company’s products are assembled after it receives 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 its products are provided on a sole source basis. The Company has experienced lengthened lead times throughout its supply chain as a result of supply chain constraints and material shortages that occurred in 2021, continued in 2022, and may continue in 2023. The Company’s efforts to mitigate supply chain weaknesses may not be successful or may have unfavorable effects. For example, efforts to purchase raw materials in advance for product manufacturing has resulted in, and may continue to result in, increased storage costs or excess supply. In addition, with the increasing prevalence of and consumer demand for electronic products, along with COVID-19’s impact on the global supply chain over the past three years, the global supply of electronic componentry has been strained, which has led to shortages in supply and increased prices, and has adversely affected, and may continue to adversely affect, its operations, costs, production capacity, delivery timeframe, product development, sales, profitability, and financial results. Shortage of materials caused by disruptions or unavailability of supply or an increase in the demand for its products, has harmed and could continue to harm the Company’s ability to satisfy customer demand, delay deliveries of its products to customers, lead to customer cancellations and returns, delay the development and launch of new products, and increase its costs. Any such impacts or delays could adversely affect the Company’s sales, customer satisfaction, profitability, cash flows and financial condition.
The Company relies upon several key suppliers and third parties that are, in some instances, the only source of supply or services currently used by the Company for particular materials, components, products or services. A disruption in the supply or substantial increase in cost of any of these products or services has, and could continue to, harm the Company’s sales, profitability, cash flows and financial condition.
Sleep Number currently obtains all the materials and components used to produce its smart beds from outside sources including some that are located outside the United States. In several cases, including its air chambers, integrated non-adjustable foundations, adjustable foundations, various components for its Firmness Control and Smart Control systems, certain electronic componentry, certain foam formulations, as well as its fabrics and zippers, the Company obtains these materials, components and products from suppliers who serve as the only source of supply, or who supply the vast majority of the Company’s needs of the particular material, component or product. While the Company believes that some of these materials, components and products, or suitable replacements, could be obtained from other sources in the event of a disruption or loss of supply, it has not been able to, and in the future may not be able to, find alternative sources of supply or alternative sources of supply on comparable terms, quantities and timelines. If the Company’s relationship with the primary supplier of its air chambers, adjustable foundations, or electronic components is terminated or significantly disrupted, the Company 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 its suppliers to timely meet commitments, including in an environment of increased demand for consumer products and labor challenges, has, and may continue to, adversely impact the Company’s ability to meet its product demand, result in additional costs, or otherwise adversely impact the Company’s business, operations and financial results.
Similarly, the Company relies on third parties to deliver some of its products to its facilities and customers on a timely and cost-effective basis. These third-party providers could be vulnerable to labor challenges, liquidity concerns, the impacts of global health conditions, or other factors that may result in delays in deliveries or increased costs of deliveries. Any significant delay in deliveries to its customers could lead to increased cancellations or returns and cause the Company to lose sales or incur increased costs. Delays in deliveries and increases in freight charges or other costs of deliveries has and could continue to harm the Company’s sales, profitability, cash flows and financial condition.
Fluctuations in commodity prices or availability or third-party logistics costs has resulted, and could continue to result, in an increase in component costs and/or delivery costs.
The Company’s 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 have resulted, and may continue to result, in significant cost increases for the Company’s raw materials and product components, as well as increases in the cost of delivering its products to
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customers. The Company has been, and may continue to be, unable to offset any such increased costs through value engineering and similar initiatives, or through price increases, and, as a result, the Company’s profitability, cash flows and financial condition have been, and may continue to be adversely impacted. Price increases to offset the increased costs, have, and may continue to, adversely impact the Company’s sales volumes.
The Company’s business is subject to risks inherent in global sourcing activities.
Sleep Number’s air chambers, certain electronic components, and some of its 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, unrest, geo-political turmoil, acts of terrorism, global conflicts or war (such as the war in Ukraine), outbreaks of pandemics or contagious diseases, shipping delays, foreign or domestic strikes, customs inspections, or other factors resulting in disruption in supply, transportation, trade, labor, or the availability of global contractors utilized in the Company’s business operations;
•Foreign currency fluctuations; and
•Economic uncertainties, including inflation.
The Company cannot predict whether the countries in which some of its components are manufactured, or may be manufactured in the future, or where the Company contracts for labor 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 implemented certain trade policies, including imposing tariffs on certain goods imported from China and other countries and imposing sanctions against Russia as a result of the war in Ukraine, and may take further actions with respect to these policies in the future. Additionally, although the Company does not have operations in Russia, Belarus, or Ukraine, have not had a material amount of sales into these countries, and have not been directly impacted by the war in Ukraine, some of the Company’s third-party suppliers have disclosed that they may source, directly or indirectly, a portion of their supply chain requirements of gold, tantalum, tin, tungsten, and birch plywood from Russia. These factors have, and could continue to, increase the costs of doing business with foreign suppliers, lead to inadequate inventory levels or delays in shipping products to customers, which could harm the Company’s sales, customer satisfaction, profitability, cash flows and financial condition.
The Company’s operations and those of its suppliers are located in various regions of the U.S. and across the globe, which subjects the Company to regional risks, such as adverse weather conditions and other natural or man-made disasters.
The locations where Sleep Number and its suppliers and global contractors 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 significant adverse effect on the Company, its ability to source necessary materials, components and products, and its ability to develop, launch, sell and deliver its products to customers. Climate change may increase the frequency and severity of adverse weather conditions and other natural disasters. All regions of the U.S. and warmer climates globally may be particularly impacted by extreme weather, such as hurricanes, natural disasters, droughts, wildfires and rising sea levels. These events have disrupted, and may continue to, disrupt the Company’s operations and ability to source components and products.
Risks Related to the Company’s Marketing Strategy and Execution of Total Retail Distribution Strategy
The Company’s future growth and profitability depend upon the effectiveness and efficiency of its marketing programs.
The Company is highly dependent on the effectiveness of its marketing messages and the efficiency of its advertising expenditures in generating consumer awareness, consideration and conversation leading to sales of its products. Sleep Number continues to evolve its marketing strategies, adjust its messages, and review the amount it spends on advertising and where it is spent. The Company may not always be successful in developing effective messages, as the consumer and competition change, or in achieving efficiency in its advertising expenditures.
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The Company relies in part upon third parties, such as social media influencers and athletes, to market its brand, and are unable to fully control their efforts. Influencers and athletes with whom the Company maintains a relationship could engage in behavior or use their platforms to communicate directly with Sleep Number’s customers in a manner that reflects poorly on its brand, and these communications may be attributed to the Company or otherwise adversely affect the Company. It is not possible to prevent such behavior, and the precautions the Company takes to prevent or detect this activity may not be effective.
Consumers are increasingly having digital experiences and interactions as a part of their shopping experience. As a result, the Company’s future growth and profitability will depend in part on (i) the effectiveness and efficiency of the Company’s online experience, including without limitation advertising and search marketing and optimization programs, in generating consumer awareness and sales of its products; (ii) the Company’s ability to prevent confusion among consumers that can result from search engines that allow competitors to use its trademarks to direct consumers to competitors’ websites through confusing or misleading advertisements; (iii) its ability to prevent Internet publication of false or misleading information regarding its products or the Company’s competitors’ products; (iv) reviews of Sleep Number’s products; (v) the nature and tone of consumer sentiment, including those published online or elsewhere; and (vi) the stability of the Company’s website. Competitor spending on digital marketing programs has and may continue to increase, including without limitation from a number of direct-to-consumer, digital and omnichannel retailers, which, in turn, has and may continue to increase the cost of the Company’s digital marketing programs and online search terms.
If the Company’s marketing messages are ineffective or its advertising expenditures and other marketing programs, including digital programs, are inefficient in creating awareness and consideration of its products and brand name, and in driving consumer traffic to the Company’s website, call centers, or stores, the Company’s sales, profitability, cash flows and financial condition may be adversely impacted. In addition, if the Company is not effective in preventing the publication of confusing, false or misleading information regarding its brand or its products, or if there is publication online or elsewhere of significant negative consumer sentiment regarding the Company, brand or products, sales, profitability, cash flows and financial condition may be adversely impacted.
The Company’s future growth and profitability depend on its ability to execute its Total Retail distribution strategy.
The vast majority of the Company’s sales occur through Total Retail, including its retail stores and website. Total Retail represents the Company’s largest opportunity for growth in sales and improvement in profitability. The Company’s retail stores carry significant fixed costs. Sleep Number also makes significant capital expenditures as it open new stores and remodel or reposition existing stores. The Company is highly dependent on its ability to maintain and increase sales per store to cover these fixed expenses, provide a return on its capital investments and improve the Company operating margins.
Some of the Company’s stores are mall-based. The Company depends on the continued popularity of malls as shopping destinations and the ability of mall anchor tenants and other attractions to generate customer traffic for its mall-based retail stores. Any decrease in mall traffic, including due to increased online shopping, could adversely affect the Company’s sales, profitability, cash flows and financial condition.
The Company’s Total Retail distribution strategy results in relatively few points of distribution, including 670 retail stores in 50 U.S. states as of the end of 2022, Online, Phone and Chat. Several of the mattress manufacturers and retailers with which the Company competes have significantly more brick-and-mortar points of distribution than it does, which makes the Company highly dependent on its ability to drive consumers to its points of distribution to gain market share.
The Company’s longer-term Total Retail distribution strategy is also dependent on its ability to renew existing store leases and to secure suitable locations for new store openings, in each case on a cost-effective basis. The Company may encounter higher than anticipated rents and other costs in connection with managing its retail store base. The Company may also be unable to find or obtain suitable new locations or renew existing locations.
Failure to achieve and maintain a high level of product quality could negatively impact the Company’s sales, profitability, cash flows and financial condition.
The Company’s 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, its
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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 its products or result in negative media and Internet reports or owner dissatisfaction that could negatively impact the Company’s 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 the Company’s warranty reserves. An unexpected increase in return rates or warranty claims could harm the Company’s sales, profitability, cash flows and financial condition.
As a consumer innovation Company with differentiated products, the Company faces an inherent risk of exposure to product liability claims or regulatory actions if the use of its products is alleged to have resulted in personal injury or property damage. If any of the Company’s products proves to be defective or non-compliant with applicable regulations such as the federal Consumer Product Safety Commission flammability standards, the Company may be required to recall or redesign such products. The Company has 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 it products to develop mold. The Company may experience additional adverse impacts on sales and additional litigation if any similar media reports were to occur in the future. The Company maintains 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 the Company outside of, or in excess of, available insurance coverage, or any claim or product recall that results in significant adverse publicity about the Company, may have a material adverse effect on the Company’s sales, profitability, cash flows and financial condition.
The Company’s future growth and profitability depend in part on its ability to continue to improve and expand its 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 the Company’s ability to compete effectively and to profitably grow its market share depend in part on its ability to continue to improve and expand the Company’s product line of adjustable firmness air beds, SleepIQ technology and related accessory products. The Company incurs significant research and development and other expenditures in the pursuit of improvements and additions to its product line. If these efforts do not result in meaningful product improvements or new product introductions, if the Company is not able to gain widespread consumer acceptance of product improvements or new product introductions, or there are delays or production limitations with respect to its product improvements or new product introductions, the Company’s sales, profitability, cash flows and financial condition may be adversely affected. If the Company offers products or services in other countries, the Company’s business may be exposed to additional risks, such as additional and varied legal/regulatory requirements, complexity and cost to maintain operations in multiple countries, adapting and localizing products for enhanced market acceptance, ability to enforce intellectual property rights, tariffs and non-tariff barriers, fluctuation in and barriers to currency exchange, and political or social unrest, and economic instability. In addition, if any significant product improvements or new product introductions are not successful, delayed, or constrained the Company’s reputation and brand image may be adversely affected.
The Company’s intellectual property rights may not prevent others from using its technology or trademarks in connection with the sale of competitive products. The Company is from time to time subject to claims that its products, processes or trademarks infringe intellectual property rights of others.
The Company owns various U.S. and foreign patents and patent applications related to certain elements of the design and function of the Company’s beds, biosignal monitoring and related products. The Company owns numerous registered and unregistered trademarks and trademark applications, including in particular the Sleep Number, Sleep Number 360, 360, Climate360 and SleepIQ trademarks, as well as other intellectual property rights, including trade secrets, trade dress and copyrights, which it believes has significant value and is important to the development, function, and marketing of its 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 Sleep Number beds, biosignal monitoring or other products, and may be costly and time-consuming to protect and enforce. The Company’s patents are also subject to varying expiration dates. In addition, the laws of some foreign countries may not protect its intellectual property rights and confidential information to the same extent as the laws of the United States. If the Company is unable to protect and enforce its intellectual property, the Company may be unable to prevent other companies from using the Company’s technology or trademarks in connection with competitive products, which could adversely affect the Company’s sales, profitability, cash flows and financial condition.
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The Company is from time to time subject to claims that its products, processes, advertising, or trademarks infringe the intellectual property rights of others. The defense of these claims, even if ultimately successful, may result in costly litigation, and if the Company is not successful in its defense, it could be subject to injunctions and liability for damages or royalty obligations, and the Company’s sales, profitability, cash flows and financial condition could be adversely affected.
Risks Related to the Company’s Vertically Integrated Business
Significant competition could adversely affect the Company’s business.
Because of the vertical integration of the Company’s business model, its products and distribution face significant competition from both manufacturers of different types of mattresses and a variety of retailers. The Company’s 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. A variety of sleep tracking and monitoring products that compete with the Company’s SleepIQ technology have been introduced by various manufacturers and retailers, both within and outside of the traditional mattress industry. This competition has and may continue to increase the costs of search terms and digital advertising and otherwise adversely affect the Company’s business.
Some of the Company’s competitors have substantially greater financial, marketing and manufacturing resources and greater brand name recognition than the Company does and sell products through broader and more established distribution touchpoints. The Company’s national, exclusive distribution competes with other retailers who generally provide a wider selection of mattress alternatives than the Company offers. A number of these retailers also have more points of distribution, greater marketing resources, and greater brand name recognition than the Company does.
These manufacturing and retailing competitors, or a combination of these 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. The Company has limited ability to anticipate the timing and scale of new product introductions, advertising campaigns or new pricing strategies by its competitors, which could inhibit its ability to retain or increase market share, or to maintain the Company’s profit margins.
If the Company is unable to effectively compete with other manufacturers and retailers of mattress and sleep tracking and monitoring products, the Company’s sales, profitability, cash flows and financial condition may be adversely impacted.
Disruption to the Company’s manufacturing, distribution, logistics, home delivery, product development, and customer service operations could increase its costs of doing business or harm the Company’s ability to satisfy customer demand, develop and launch new products, and service its products and customers.
Sleep Number has manufacturing plants located in Irmo, South Carolina and Salt Lake City, Utah, each of which is combined with an assembly distribution center (ADC). The Company has six additional ADCs across the country. The eight ADCs leverage component inventory to pre-assemble 100% of our smart mattresses to order rather than stocking finished goods. The Company has home delivery operations and contractors that deliver its products to customers across the country as well as a bedding fulfillment center that ships bedding products to consumers via third-party services. The product development and testing operations primarily occur in the Company’s corporate headquarters in Minneapolis, Minnesota and Sleep Number Labs facility in San Jose, California. Sleep Number’s customer service operations are located in New Orleans, Louisiana and Minneapolis, Minnesota and the Company has retail stores across the country. While we can shift demand among our eight ADCs, disruption to any of the ADCs or other operations, facilities, workforce, or the Company’s nationwide logistics network could harm or delay its ability to satisfy customer demand, develop, test and launch new products, service its products and customers, and increase its costs. Such impacts and delays could adversely affect the Company’s sales, customer satisfaction, profitability, cash flows and financial results.
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Risks Related to Legal Compliance and Legal Proceedings
The Company’s 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 the Company’s operations or increase its compliance costs. Failure to comply with such laws and regulations could have further adverse impacts on the Company’s operations.
The Company is subject to a wide variety of laws and regulations relating to the bedding industry or to various aspects of its business. Laws and regulations at the federal, state and local levels frequently change and the Company 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 the Company to change the way it does business and could have a material adverse impact on the Company’s sales, profitability, cash flows and financial condition. New or different laws or regulations could increase direct compliance costs for the Company or may cause its vendors to raise the prices they charge the Company 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 the Company is currently subject, particularly where the layers are in conflict, could require alteration of its manufacturing processes or operational parameters which may adversely impact the Company’s business.
Legislative or regulatory changes that impact the Company’s relationship with its workforce, such as minimum wage requirements or health insurance or other employee benefits mandates, could increase the Company’s expenses and adversely affect its operations. While it is Sleep Number’s policy and practice to comply with legal and regulatory requirements and its procedures and internal controls are designed to promote such compliance, the Company cannot assure that all of its operations will comply with all such legal and regulatory requirements. Further, laws and regulations change over time and the Company may be required to incur significant expenses and/or to modify its operations in order to ensure compliance. This could harm the Company’s profitability or financial condition. If Sleep Number is found to be in violation of any laws or regulations, it could become subject to fines, penalties, damages or other sanctions as well as potential adverse publicity or litigation exposure. This could adversely impact the Company’s business, reputation, sales, profitability, cash flows or financial condition.
The Company’s ability to commercialize new products and innovations may be delayed or prevented by regulatory requirements.
As the Company works to develop innovations with enhanced health capabilities, including possible capabilities of providing advanced monitoring and health risk evaluations, depending on the features that ultimately become commercially available, some features may require regulatory requirements or approvals beyond those that apply to Sleep Number’s current products or features. These additional regulatory requirements or approvals may be prohibitively expensive or otherwise delay or prevent certain features, innovations, or product from being commercialized.
Pending or unforeseen litigation and the potential for adverse publicity associated with litigation could adversely impact the Company’s business, reputation, financial results or financial condition.
The Company is involved from time to time in various legal proceedings arising in the ordinary course of its business, including primarily commercial, product liability, employment and intellectual property claims. The Company currently does not expect the outcome of any pending matters to have a material effect on the Company’s 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 the Company, or claims that may be asserted in the future that the Company is currently not aware of, or adverse publicity resulting from any such litigation, could adversely impact the Company’s business, reputation, sales, profitability, cash flows and financial condition.
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Risks Related to the Company’s Information Systems and Cybersecurity
Information systems that contain confidential Company data, consumers’ personal information, and team members’ personal information 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 the Company’s business and could result in a breach of the data.
The Company’s information systems and information systems of third-party vendors it uses to assist in the storage and management of information, including on-premise and cloud-based systems, contains personal information related to its customers and team members collected and maintained in the ordinary course of its business, such as credit card and demographic information of its customers, SleepIQ® data, including biosignal data (e.g., sleep, physiological) from Sleep Number’s customer base and social security numbers, demographic information, and employment-related information of its team members. These information systems also contain confidential Company data regarding its business and innovations. The Company’s use and dependence on its information systems has increased with amplified remote working since the onset of the COVID-19 pandemic and additional data storage in cloud-based systems. While the Company maintains, and requires the Company’s 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 its data and systems, malfeasance or otherwise, could compromise the security of the Company’s data and customers’ and team members’ personal information. Like many other businesses, Sleep Number has and will likely continue to experience cyber-based attacks and incidents from time to time. As the techniques used to breach security measures change frequently and may not be recognized until launched against a target, the Company may be unable to anticipate these techniques or to implement adequate preventive measures. Any failure of the Company’s systems and processes or its third-party vendors’ systems and processes to adequately protect its data or customer or team member personal information from exposure, theft or loss could adversely impact the Company’s business, reputation, sales, profitability, cash flows and financial condition.
Any maintenance, improvements or upgrades to information systems that may be required to meet the evolving needs of the Company’s business and cybersecurity needs as well as existing and emerging regulatory requirements may be costly to implement, may take longer or require greater resources than anticipated and may result in disruptions to its systems or business.
The Company depends on its information systems for many aspects of its business. Sleep Number has and may continue to have disruptions or outages to its information systems that negatively impact its business and systems. If the Company’s information systems are disrupted in any material way, or maintenance, improvements or upgrades are required to meet the evolving needs of its business, cybersecurity needs, and existing and emerging regulatory requirements, the Company may be required to incur significant capital expenditures in the pursuit of improvements or upgrades to its 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 the Company’s existing systems and business. Any of these outcomes could impair the Company’s ability to achieve critical strategic initiatives and could adversely impact the Company’s sales, profitability, cash flows and financial condition.
Additionally, on February 9, 2022, the SEC proposed new rules related to cyber security risk management, which may increase the Company’s regulatory burden and cost of compliance related to cyber security threats. The Company is currently assessing the impact of the new rules, if adopted as proposed, but at this time, it cannot predict the costs of implementation or any potential adverse impacts resulting from the new rules.
Risks Related to Workforce
The Company’s future growth and profitability depends upon its ability to attract, retain and motivate qualified personnel.
As a vertically integrated manufacturer and retailer, the Company’s future growth and profitability will depend upon its ability to attract, retain and motivate qualified personnel in a wide variety of areas to execute its growth strategy, including qualified management and executive personnel, retail sales professionals and managers, and manufacturing, home delivery and technical personnel. The current labor challenges, the world-wide trends of corporate resignations, or other economic factors may prevent the Company, and its suppliers and vendors, from successfully hiring and retaining
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qualified personnel. The failure to attract, retain and motivate qualified personnel may hinder the Company’s ability to execute its business strategy and growth initiatives and may adversely impact the Company’s sales, profitability, cash flows and financial condition.
Risks Related to the Company’s Stock
A substantial amount of the Company’s stock is held by a small number of large investors and significant sales of its common stock by one or more of these holders could cause the Company’s stock price to fall, which could cause investors to lose all or a portion of their investment in its stock.
As of December 31, 2022, the Company’s ten largest holders of common stock were institutional investors who held approximately 62% of the outstanding shares of common stock in the aggregate, with BlackRock Fund Advisors being the largest shareholder with approximately 16% of the Company’s 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 the Company’s common stock, which could cause investors to lose all or a portion of their investment in its stock. In addition, any such sales of the Company’s common stock by these entities could also impair its ability to raise capital through the sale of additional equity securities.
The Company’s stock price 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 the Company or third parties may provide to the public or the Company’s failure to meet these projections; actual or anticipated changes in its growth rate relative to that of its competitors; failure of securities analysts to maintain coverage of the Company, changes in financial estimates by securities analysts who follow the Company or its failure to meet these estimates or the expectations of investors; and sales of share of the Company’s common stock by Sleep Number or its shareholders particularly sales by its directors, executive officers and significant shareholders or the perception that these sales could occur.
Risks Related to Environmental, Social and Governance Matters
The Company’s priorities and progress with respect to Environmental, Social and Governance (ESG) matters may expose it to numerous risks, including risks to its reputation and stock price, and may impose additional costs on the Company.
There has been an increased focus on the Company’s ESG practices within the general markets. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, climate change, health and safety, supply chain management, diversity, equity and inclusion, labor conditions and human rights, both in its own operations and in the Company’s supply chain. Sleep Number has established and plans to further establish priorities related to ESG matters. These priorities reflect the Company’s plans and aspirations and are not guarantees that it will be able to achieve them. The Company’s efforts to accomplish and accurately report its progress present numerous operational, reputational, financial, legal, and other risks, any of which could have a material adverse impact, including on the Company’s reputation, stock price, and results of operation. Sleep Number could also incur additional costs and require additional resources to implement various ESG practices to make progress against its priorities and to monitor and track its performance with respect to such priorities.
The standards for tracking and reporting on ESG matters are relatively new, have not been formalized and continue to evolve. Collecting, measuring, and reporting ESG information and metrics can be difficult and time consuming. While Sleep Number has taken steps to evolve its ESG priorities and related disclosures, including through implementing enhanced data collection methods and reporting certain data under recognized ESG reporting frameworks, the Company’s ESG practices may not meet the standards of all its stakeholders and advocacy groups may campaign for further changes. Additionally, the Company’s selected disclosure framework or standards may need to be changed from time to time, which may result in a lack of consistent or meaningful comparative data from period to period. In addition, the Company’s interpretation of reporting frameworks or standards may differ from those of others and such frameworks or standards may change over time, any of which could result in significant revisions to the Company’s ESG priorities or reported progress.
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The Company’s ability to achieve any ESG-related objective is subject to numerous risks, many of which are outside of its control, including: the availability and cost of low-or non-carbon-based energy sources and technologies, evolving regulatory requirements affecting ESG standards or disclosures, the availability of vendors and suppliers that can meet its sustainability, diversity and other standards, and the availability of raw materials that meet and further the Company’s sustainability objectives. If its ESG practices do not meet evolving standards or the Company’s priorities, then the Company’s reputation, its ability to attract or retain employees and its competitiveness, including as an investment and business partner, could be negatively impacted. Furthermore, if Sleep Number’s competitors’ ESG performance is perceived to be better than the Company’s, potential or current customers and investors may elect to do business with its competitors instead, and the Company’s ability to attract or retain employees could be negatively impacted. The Company’s failure, or perceived failure, to pursue or fulfill its priorities and objectives or to satisfy various reporting standards within the timelines the Company announces, or at all, could also expose the Company to government enforcement actions and private litigation.
Climate change and legal or regulatory responses may adversely affect the Company’s business, operations and financial condition.
Climate change presents various near and long-term risks that may adversely impact the Company’s business. The enactment of new laws and regulations to address or limit the effects of climate change, or changes to existing laws and regulations, could mandate more restrictive standards or require such changes on a more accelerated time frame. The consequences of climate change and the ensuing governmental regulations could disrupt the Company’s operations or harm its ability to source necessary materials and components and manufacture its products, which may adversely affect the Company’s financial condition. If public perception of Sleep Number’s compliance with laws and regulations related to climate change is negative, it could adversely affect the Company’s business, reputation and shareholder perception. Adverse publicity or climate-related litigation that impacts the Company could also have a negative impact on its business.
Extreme weather, natural disasters, power outages, or other unexpected events could result in physical damage to and complete or partial closure of one or more of the Company’s manufacturing, distribution centers or other facilities or those of its suppliers, temporary or long-term disruption in its supply chain or logistics, disruption of or harm to the Company’s workforce and/or disruption of its ability to deliver products to customers. Current or future insurance arrangements may not provide protection for costs that may arise from such events, particularly if such events are catastrophic in nature or if multiple such events occur. Climate change may also subject the Company’s business 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, plywood, steel and chemical ingredients used to produce foam, as well as third-party logistic costs. Further, the long-term effects of climate change on general economic conditions and the Company’s industry in particular are unclear, and changes in the supply, demand, or available sources of energy and the regulatory and other costs associated with energy production and delivery may affect the availability or cost of goods and services, including natural resources, necessary to run its business. Any long-term disruption in the Company’s ability to service its customers from one or more manufacturing, distribution centers or other facilities could have an adverse effect on the Company’s operations.
New climate disclosure rules, if adopted by the SEC, may increase the Company’s costs and litigation risks, which would materially and adversely affect its future results of operations and financial condition.
During fiscal 2022, the SEC proposed new climate disclosure rules, which if adopted, would require new climate-related disclosures in SEC filings, including certain climate-related metrics and greenhouse gas emissions data, information about climate-related targets and goals, transition plans, if any, and extensive attestation requirements. In addition to requiring filers to quantify and disclose direct emissions data, the new rules also would require disclosure of climate impact arising from the operations and uses by the filer’s business partners and contractors and end-users of the filer’s products and/or services. The Company is currently assessing the impact of the new rules, if adopted as proposed, but at this time, it cannot predict the costs of implementation or any potential adverse impacts resulting from the new rules. However, Sleep Number may incur increased costs relating to the assessment and disclosure of climate-related risks and increased litigation risks related to disclosures made pursuant to the new rules, either of which could materially and adversely affect the Company’s future results of operations and financial condition.
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General Risks
The timing and amount of the Company’s share repurchases is subject to a number of uncertainties.
The Company’s Board has authorized management to repurchase up to $600 million worth of shares, and as of December 31, 2022, the remaining authorization under that program was $348 million. The Inflation Reduction Act of 2022 (the Act) imposes a non-deductible 1% excise tax on net repurchases of shares, with some exceptions. The excise tax will be imposed on transactions that occur after December 31, 2022. The imposition of the excise tax will increase the cost to the Company of making repurchases and may cause it to reduce the number of shares repurchased.
Other factors that may influence the Company’s decision to utilize, limit, suspend or delay future share repurchases include market conditions, the trading price of its common stock, the nature and magnitude of other investment opportunities available to the Company from time to time, and the amount of available cash.