Q1 2024 Summary
Published Jan 31, 2025, 2:54 AM UTC- Sleep Number expects a gross margin rate improvement of about 100 basis points in 2024, primarily in the back half, driven by operational efficiencies and new product introductions like the c1 Smart Bed priced at $999 .
- The company is implementing sustainable changes in its operating model, including cost reductions in sourcing, manufacturing, and delivery, which are expected to result in gross margin leverage going forward, returning to normalized levels seen in the past.
- Early indications show that sales transfers from store closures are tracking at or above expectations, allowing the company to reduce costs without significant loss of sales.
- The company expects continued pressure in the mattress industry, projecting mid-single-digit demand declines for the year, which may negatively impact revenue growth. Additionally, the demand environment remains choppy, with mid-single-digit declines in March and April, and reliance on promotional periods to drive sales. ,
- Average revenue per mattress unit (ARU) dipped year-over-year in the first quarter and is expected to be flat or slightly down in the first half of the year, indicating potential pricing pressure or an unfavorable sales mix, which could pressure margins.
- The company is reducing R&D spending to improve operating leverage, which may hinder product innovation and long-term competitiveness. Management mentioned significant R&D reductions and re-prioritization for efficiency, potentially impacting future growth.
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Demand Trends and Outlook
Q: How are current demand trends and expectations for the year?
A: Demand was down mid-single digits in the first quarter, with March and April to date also down mid-single digits. February ended down low single digits. For the second quarter, they expect demand to be down low to mid-single digits. Improvement is anticipated in the third quarter and back half of the year due to easier comparisons and stronger messaging, but the industry remains pressured and the environment is choppy. -
Gross Margin Outlook and Improvements
Q: What is the outlook for gross margins, and how will pricing changes affect it?
A: They expect about 100 basis points of gross margin rate improvement for the year, primarily in the back half. Introducing the c1 Smart Bed at $999 and increasing the c2 price by $200 will positively impact gross margins . Sustainable changes in their operating model around sourcing, manufacturing, and delivery are expected to contribute to gross margin improvements this year and beyond. -
Promotional Strategy Impact
Q: How are changes in promotional strategy affecting sales and margins?
A: Adjusting promotional and financing strategies using new predictive analytics has improved efficiency and effectiveness. In Q1, promotional and financing dollars and rates were lower year-over-year, contributing to a higher gross margin profile . The effectiveness of these changes drove a higher mix and improved margins despite constrained demand. -
Store Portfolio Changes
Q: What is the impact of store closures on sales?
A: They plan to end the year with about 30 net store closures, mostly in the first half. Early indications show that sales transfers from closed stores are tracking at or above expectations. These store actions add about 1 point of additional pressure on demand. -
Average Revenue per Unit (ARU) Trends
Q: Why did ARU dip year-over-year, and what is the outlook?
A: ARU was down slightly year-over-year due to prior factors like pent-up demand for certain products. From Q4 to Q1, ARU increased by about $200 driven by a higher mix within the Smart Bed line. They anticipate ARU and units to be flattish for the year on a demand basis. -
R&D Spending and Margin Strategy
Q: How is the company balancing R&D spending with margin goals?
A: They are driving significant R&D reductions this year by reprioritizing for efficiency while still focusing on innovations like the c1 and other pipeline items approaching 2025. They measure key areas—cost of acquisition, cost of goods, cost to serve customers, and G&A and R&D leverage—to maintain ongoing discipline. -
Introduction of c1 Smart Bed
Q: How does the c1 Smart Bed fit into the product lineup and pricing strategy?
A: The c1 Smart Bed is a new addition priced at $999, offering adjustable firmness and all Smart Bed features. Simultaneously, the c2 price is increasing by $200, creating a step-up story in the product lineup. This strategy is expected to positively contribute to gross margin improvement in the back half. -
Potential Return to Wholesale
Q: Has the company considered returning to wholesale distribution?
A: While they continue to explore a wide range of opportunities to increase shareholder value, no commitment was made about returning to wholesale; they remain focused on competing aggressively.