10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 1, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-25121

_______________________________________________________________________

SLEEP NUMBER CORPORATION

(Exact name of registrant as specified in its charter)

Minnesota	41-1597886
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1001 Third Avenue South
Minneapolis,	Minnesota	55404
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (763) 551-7000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	SNBR	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐ No ☒

As of April 1, 2023, 22,184,000 shares of the registrant’s Common Stock were outstanding.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

INDEX

		Page
PART I: FINANCIAL INFORMATION		1
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Shareholders' Deficit	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
PART II: OTHER INFORMATION		24
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	25
Item 6.	Exhibits	26
SIGNATURES		27

i | 2Q 2022 FORM 10-Q SLEEP NUMBER CORPORATION

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited - in thousands, except per share amounts)

	April 1, 2023		December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	1,459	$	1,792
Accounts receivable, net of allowances of $1,474 and $1,267, respectively	23,288		26,005
Inventories	116,781		114,034
Prepaid expenses	26,986		16,006
Other current assets	39,902		39,921
Total current assets	208,416		197,758
Non-current assets:
Property and equipment, net	194,802		200,605
Operating lease right-of-use assets	398,339		397,755
Goodwill and intangible assets, net	67,565		68,065
Deferred income taxes	11,210		7,958
Other non-current assets	82,477		81,795
Total assets	$	962,809	$	953,936
Liabilities and Shareholders’ Deficit
Current liabilities:
Borrowings under revolving credit facility	$	470,600	$	459,600
Accounts payable	160,304		176,207
Customer prepayments	68,542		73,181
Accrued sales returns	24,071		25,594
Compensation and benefits	30,706		31,291
Taxes and withholding	31,647		23,622
Operating lease liabilities	81,383		79,533
Other current liabilities	58,441		60,785
Total current liabilities	925,694		929,813
Non-current liabilities:
Operating lease liabilities	355,556		356,879
Other non-current liabilities	106,606		105,421
Total liabilities	1,387,856		1,392,113
Shareholders’ deficit:
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding	—		—
Common stock, $0.01 par value; 142,500 shares authorized, 22,184 and 22,014 shares issued and outstanding, respectively	222		220
Additional paid-in capital	6,845		5,182
Accumulated deficit	(432,114)		(443,579)
Total shareholders’ deficit	(425,047)		(438,177)
Total liabilities and shareholders’ deficit	$	962,809	$	953,936

See accompanying notes to condensed consolidated financial statements.

1 | 1Q 2023 FORM 10-Q SLEEP NUMBER CORPORATION

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited - in thousands, except per share amounts)

	Three Months Ended
	April 1, 2023		April 2, 2022
Net sales	$	526,527	$	527,130
Cost of sales	216,262		224,832
Gross profit	310,265		302,298
Operating expenses:
Sales and marketing	230,488		240,259
General and administrative	39,401		41,319
Research and development	14,443		16,305
Total operating expenses	284,332		297,883
Operating income	25,933		4,415
Interest expense, net	9,102		2,127
Income before income taxes	16,831		2,288
Income tax expense	5,366		214
Net income	$	11,465	$	2,074
Basic net income per share:
Net income per share – basic	$	0.51	$	0.09
Weighted-average shares – basic	22,296		22,760
Diluted net income per share:
Net income per share – diluted	$	0.51	$	0.09
Weighted-average shares – diluted	22,583		23,591

See accompanying notes to condensed consolidated financial statements.

2 | 1Q 2023 FORM 10-Q SLEEP NUMBER CORPORATION

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Deficit

(unaudited - in thousands)

	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total
	Shares	Amount
Balance at December 31, 2022	22,014	$	220	$	5,182	$	(443,579)	$	(438,177)
Net income	—	—		—		11,465		11,465
Exercise of common stock options	17	—		389		—		389
Stock-based compensation	271	3		4,636		—		4,639
Repurchases of common stock	(118)	(1)		(3,362)		—		(3,363)
Balance at April 1, 2023	22,184	$	222	$	6,845	$	(432,114)	$	(425,047)

	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total
	Shares	Amount
Balance at January 1, 2022	22,683	$	227	$	3,971	$	(429,151)	$	(424,953)
Net income	—	—		—		2,074		2,074
Exercise of common stock options	21	—		531		—		531
Stock-based compensation	341	3		4,130		—		4,133
Repurchases of common stock	(813)	(8)		(8,632)		(42,358)		(50,998)
Balance at April 2, 2022	22,232	$	222	$	—	$	(469,435)	$	(469,213)

See accompanying notes to condensed consolidated financial statements.

3 | 1Q 2023 FORM 10-Q SLEEP NUMBER CORPORATION

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited - in thousands)

	Three Months Ended
	April 1, 2023		April 2, 2022
Cash flows from operating activities:
Net income	$	11,465	$	2,074
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	18,218		15,870
Stock-based compensation	4,639		4,133
Net loss on disposals and impairments of assets	12		93
Deferred income taxes	(3,252)		(376)
Changes in operating assets and liabilities:
Accounts receivable	2,717		1,216
Inventories	(2,747)		2,432
Income taxes	8,736		1,102
Prepaid expenses and other assets	(11,056)		10,877
Accounts payable	(574)		2,073
Customer prepayments	(4,639)		12,506
Accrued compensation and benefits	(593)		(25,348)
Other taxes and withholding	(711)		3,104
Other accruals and liabilities	(3,634)		(5,198)
Net cash provided by operating activities	18,581		24,558
Cash flows from investing activities:
Purchases of property and equipment	(15,556)		(19,604)
Proceeds from sales of property and equipment	—		10
Net cash used in investing activities	(15,556)		(19,594)
Cash flows from financing activities:
Repurchases of common stock	(3,363)		(50,998)
Net (decrease) increase in short-term borrowings	(384)		44,712
Proceeds from issuance of common stock	389		531
Debt issuance costs	—		(42)
Net cash used in financing activities	(3,358)		(5,797)
Net decrease in cash and cash equivalents	(333)		(833)
Cash and cash equivalents, at beginning of period	1,792		2,389
Cash and cash equivalents, at end of period	$	1,459	$	1,556

See accompanying notes to condensed consolidated financial statements.

4 | 1Q 2023 FORM 10-Q SLEEP NUMBER CORPORATION

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Business and Summary of Significant Accounting Policies

Business & Basis of Presentation

The Company prepared the condensed consolidated financial statements as of and for the three months ended April 1, 2023 of Sleep Number Corporation and its 100%-owned subsidiaries (Sleep Number or the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and they reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly its financial position as of April 1, 2023 and December 31, 2022, and the consolidated results of operations and cash flows for the periods presented. The historical and quarterly consolidated results of operations may not be indicative of the results that may be achieved for the full year or any future period.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the most recent audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and other recent filings with the SEC.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of sales, expenses and income taxes during the reporting period. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates will be reflected in the consolidated financial statements in future periods and could be material. The Company’s critical accounting policies consist of stock-based compensation, warranty liabilities and revenue recognition.

The condensed consolidated financial statements include the accounts of Sleep Number Corporation and its 100%-owned subsidiaries. All significant intra-entity balances and transactions have been eliminated in consolidation.

2. Fair Value Measurements

At April 1, 2023 and December 31, 2022, the Company had $18 million and $17 million, respectively, of debt and equity securities that fund the deferred compensation plan and are classified in other non-current assets. The Company also had corresponding deferred compensation plan liabilities of $18 million and $17 million at April 1, 2023 and December 31, 2022, respectively, which are included in other non-current liabilities. The majority of the debt and equity securities are Level 1 as they trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis. Unrealized gains/(losses) on the debt and equity securities offset those associated with the corresponding deferred compensation plan liabilities.

5 | 1Q 2023 FORM 10-Q SLEEP NUMBER CORPORATION

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

3. Inventories

Inventories consisted of the following (in thousands):

	April 1, 2023		December 31, 2022
Raw materials	$	9,042	$	7,785
Work in progress	102		102
Finished goods	107,637		106,147
	$	116,781	$	114,034

4. Goodwill and Intangible Assets, Net

Goodwill and Indefinite-lived Intangible Assets

Goodwill was $64 million at April 1, 2023 and December 31, 2022. Indefinite-lived trade name/trademarks totaled $1.4 million at April 1, 2023 and December 31, 2022.

Definite-lived Intangible Assets

	April 1, 2023				December 31, 2022
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Developed technologies	$	18,851	$	18,085	$	18,851	$	17,641
Patents	1,972		615		1,972		559
	$	20,823	$	18,700	$	20,823	$	18,200

Developed technologies - amortization expense for the three months ended April 1, 2023 and April 2, 2022, was $0.4 million and $0.5 million, respectively.

Patents - amortization expense for both the three months ended April 1, 2023 and April 2, 2022, was $55 thousand.

Annual amortization for definite-lived intangible assets for subsequent years are as follows (in thousands):

2023 (excluding the three months ended April 1, 2023)	$	931
2024	222
2025	226
2026	222
2027	222
2028	156
Thereafter	144
Total future amortization for definite-lived intangible assets	$	2,123

5. Credit Agreement

As of April 1, 2023, the Company’s credit facility had a total commitment amount of $825 million. The credit facility is for general corporate purposes, to meet seasonal working capital requirements and to repurchase its stock. The Credit Agreement includes an accordion feature which allows the Company to increase the amount of the credit facility from $825 million to $1.2 billion, subject to lenders’ approval. The Credit Agreement provides the lenders with a collateral

6 | 1Q 2023 FORM 10-Q SLEEP NUMBER CORPORATION

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

security interest in substantially all of the Company’s assets and those of its subsidiaries and requires the Company to comply with, among other things, a maximum net leverage ratio (5.0x) and a minimum interest coverage ratio (3.0x).

The Company amended the Credit Agreement on October 26, 2022. The amendment, among other things, (a) provides relief from the requirement that the net leverage ratio not exceed 3.75x for certain corporate actions including Permitted Capital Distributions for Performance or Taxes (as defined in the Credit Agreement) and certain acquisition activity; (b) increases the permissible net leverage ratio to 5.0x for the three consecutive quarterly reporting periods ending July 1, 2023; (c) increases the commitment fee rate to 50 basis points and the margin applicable to interest rates for all borrowings by an additional 50 basis points, in each case if the net leverage ratio is greater than or equal to 4.5x; and (d) replaces the option to borrow at an interest rate based on London Interbank Offered Rate (LIBOR) to one based on a Term SOFR Rate. The Term SOFR Rate equals the sum of (x) the Term SOFR Screen Rate (as defined in the Credit Agreement) for the applicable interest period (but in no event less than zero), plus (y) 0.10%, plus (z) the margin based on Sleep Number’s net leverage ratio. For the quarterly reporting period ending September 30, 2023, and subsequent quarterly reporting periods, the maximum leverage ratio will be 4.5x.

Under the terms of the Credit Agreement, the Company pays a variable rate of interest and a commitment fee based on its leverage ratio. The Credit Agreement matures in December 2026. The Company was in compliance with all financial covenants as of April 1, 2023.

The following table summarizes the Company’s borrowings under the credit facility ($ in thousands):

	April 1, 2023			December 31, 2022
Outstanding borrowings	$	470,600		$	459,600
Outstanding letters of credit	$	7,147		$	5,947
Additional borrowing capacity	$	347,253		$	359,453
Weighted-average interest rate	7.1		%	6.7		%

6. Leases

The Company leases its retail, office and manufacturing space under operating leases which, in addition to the minimum lease payments, may require payment of a proportionate share of the real estate taxes and certain building operating expenses. While the Company’s local market development approach generally results in long-term participation in given markets, the retail store leases generally provide for an initial lease term of five to 10 years. The Company’s office and manufacturing leases provide for an initial lease term of up to 15 years. In addition, the Company’s mall-based retail store leases may require payment of variable rent based on net sales in excess of certain thresholds. Certain leases may contain options to extend the term of the original lease. The exercise of lease renewal options is at the Company’s sole discretion. Lease options are included in the lease term only if exercise is reasonably certain at lease commencement. The Company’s lease agreements do not contain any material residual value guarantees. The Company also leases vehicles and certain equipment under operating leases with an initial lease term of three to six years.

The Company’s operating lease costs include facility, vehicle and equipment lease costs, but exclude variable lease costs. Operating lease costs are recognized on a straight-line basis over the lease term, after consideration of rent escalations and rent holidays. The lease term for purposes of the calculation begins on the earlier of the lease commencement date or the date the Company takes possession of the property. During lease renewal negotiations that extend beyond the original lease term, the Company estimates straight-line rent expense based on current market conditions. Variable lease costs are recorded when it is probable the cost has been incurred and the amount can be reasonably estimated.

At April 1, 2023, the Company’s finance right-of-use assets and lease liabilities were not significant.

7 | 1Q 2023 FORM 10-Q SLEEP NUMBER CORPORATION

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

Lease costs were as follows (in thousands):

	Three Months Ended
	April 1, 2023		April 2, 2022
Operating lease costs(1)	$	28,289	$	27,078
Variable lease costs	$	56	$	330

___________________________

(1)Includes short-term lease costs which are not significant.

The maturities of operating lease liabilities as of April 1, 2023, were as follows(1) (in thousands):

2023 (excluding the three months ended April 1, 2023)	$	80,072
2024	97,674
2025	86,081
2026	73,814
2027	58,468
2028	46,420
Thereafter	80,899
Total operating lease payments(2)	523,428
Less: Interest	86,489
Present value of operating lease liabilities	$	436,939

___________________________

(1)Future payments for real estate taxes and certain building operating expenses for which the Company is obligated are not included in the operating lease liabilities. Total operating lease payments exclude $70 million of legally binding minimum lease payments for leases signed but not yet commenced.

(2)Includes the current portion of $81 million for operating lease liabilities.

Other information related to operating leases was as follows:

	April 1, 2023		December 31, 2022
Weighted-average remaining lease term (in years)	6.1		6.2
Weighted-average discount rate	6.3	%	6.2	%

	Three Months Ended
(in thousands)	April 1, 2023		April 2, 2022
Cash paid for amounts included in present value of operating lease liabilities	$	26,538	$	24,209
Right-of-use assets obtained in exchange for operating lease liabilities	$	14,717	$	17,564

8 | 1Q 2023 FORM 10-Q SLEEP NUMBER CORPORATION

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

7. Repurchases of Common Stock

Repurchases of the Company’s common stock were as follows (in thousands):

	Three Months Ended
	April 1, 2023		April 2, 2022
Amount repurchased under Board-approved share repurchase program	$	—	$	42,308
Amount repurchased in connection with the vesting of employee restricted stock grants	3,363		8,690
Total amount repurchased (based on trade dates)	$	3,363	$	50,998

As of April 1, 2023, the remaining authorization under the Board-approved $600 million share repurchase program was $348 million.

8. Revenue Recognition

Deferred contract assets and deferred contract liabilities are included in the condensed consolidated balance sheets as follows (in thousands):

	April 1, 2023		December 31, 2022
Deferred contract assets included in:
Other current assets	$	28,313	$	28,121
Other non-current assets	56,264		55,564
	$	84,577	$	83,685

	April 1, 2023		December 31, 2022
Deferred contract liabilities included in:
Other current liabilities	$	36,509	$	36,335
Other non-current liabilities	71,847		70,999
	$	108,356	$	107,334

Deferred revenue and costs related to SleepIQ® technology are currently recognized on a straight-line basis over the product's estimated life of 4.5 to 5.0 years because the Company’s inputs are generally expended evenly throughout the performance period. During the three months ended April 1, 2023 and April 2, 2022, the Company recognized revenue of $10 million and $9 million, respectively, that was included in the deferred contract liability balances at the beginning of the respective periods.

Revenue from goods and services transferred to customers at a point in time accounted for approximately 98% of revenues for both the three months ended April 1, 2023 and April 2, 2022.

Net sales were as follows (in thousands):

	Three Months Ended
	April 1, 2023		April 2, 2022
Retail stores	$	458,663	$	444,336
Online, phone, chat and other	67,864		82,794
Total Company	$	526,527	$	527,130

9 | 1Q 2023 FORM 10-Q SLEEP NUMBER CORPORATION

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

Obligation for Sales Returns

The activity in the sales returns liability account was as follows (in thousands):

	Three Months Ended
	April 1, 2023		April 2, 2022
Balance at beginning of year	$	25,594	$	22,368
Additions that reduce net sales	29,843		26,667
Deductions from reserves	(31,366)		(28,758)
Balance at end of period	$	24,071	$	20,277

9. Stock-based Compensation Expense

Total stock-based compensation expense (benefit) was as follows (in thousands):

	Three Months Ended
	April 1, 2023		April 2, 2022
Stock awards (1)	$	3,855	$	3,274
Stock options	784		859
Total stock-based compensation expense (1)	4,639		4,133
Income tax benefit	1,253		1,033
Total stock-based compensation expense, net of tax	$	3,386	$	3,100

___________________________

(1) Changes in stock-based compensation expense include the cumulative impact of the change in the expected achievements of certain performance targets.

10. Profit Sharing and 401(k) Plan

Under the Company’s profit sharing and 401(k) plan, eligible employees may defer up to 50% of their compensation on a pre-tax basis, subject to Internal Revenue Service limitations. Each pay period, the Company may make a discretionary contribution equal to a percentage of the employee’s contribution. During the three months ended April 1, 2023 and April 2, 2022, the Company’s contributions, net of forfeitures, were $2.4 million and $2.8 million, respectively.

10 | 1Q 2023 FORM 10-Q SLEEP NUMBER CORPORATION

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

11. Net Income per Common Share

The components of basic and diluted net income per share were as follows (in thousands, except per share amounts):

	Three Months Ended
	April 1, 2023		April 2, 2022
Net income	$	11,465	$	2,074
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	22,296		22,760
Dilutive effect of stock-based awards	287		831
Diluted weighted-average shares outstanding	22,583		23,591
Net income per share – basic	$	0.51	$	0.09
Net income per share – diluted	$	0.51	$	0.09

Additional potential dilutive stock-based awards totaling 1.1 million and 0.4 million for the three months ended April 1, 2023 and April 2, 2022, respectively, have been excluded from the diluted net income per share calculations because these stock-based awards were anti-dilutive.

12. Commitments and Contingencies

Warranty Liabilities

The activity in the accrued warranty liabilities account was as follows (in thousands):

	Three Months Ended
	April 1, 2023		April 2, 2022
Balance at beginning of year	$	8,997	$	10,069
Additions charged to costs and expenses for current-year sales	4,371		4,447
Deductions from reserves	(4,325)		(4,750)
Changes in liability for pre-existing warranties during the current year, including expirations	(88)		(31)
Balance at end of period	$	8,955	$	9,735

Legal Proceedings

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. In accordance with U.S. generally accepted accounting principles, the Company records a liability in its consolidated financial statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. If a material loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. With respect to currently pending legal proceedings, the Company has not established an estimated range of reasonably possible material losses either because it believes that is has valid defenses to claims asserted against it, the proceeding has not advanced to a stage of discovery that would enable it to establish an estimate, or the potential loss is not material. The Company currently does not expect the outcome of pending legal proceedings to have a material effect on its 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 claims asserted against the Company could adversely impact its consolidated results of operations, financial position or cash flows. The Company expenses legal costs as incurred.

11 | 1Q 2023 FORM 10-Q SLEEP NUMBER CORPORATION

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

Shareholder Class Action Complaints

On December 14, 2021, purported Sleep Number shareholder, Steamfitters Local 449 Pension & Retirement Security Funds (Steamfitters), filed a putative class action complaint in the United States District Court for the District of Minnesota (the District of Minnesota) on behalf of all purchasers of Sleep Number common stock between February 18, 2021 and July 20, 2021, inclusive, against Sleep Number, Shelly Ibach and David Callen, the Company’s former Executive Vice President and Chief Financial Officer. Steamfitters alleges material misstatements and omissions in certain of Sleep Number’s public disclosures during the purported class period, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act). The complaint seeks, among other things, unspecified monetary damages, reasonable costs and expenses and equitable/injunctive or other relief as deemed appropriate by the District of Minnesota.

On February 14, 2022, a second purported Sleep Number shareholder, Ricardo Dario Schammas, moved for appointment as lead plaintiff in the action. On March 24, 2022, the District of Minnesota heard argument on Schammas’s motion, and subsequently appointed Steamfitters and Schammas as Co-Lead Plaintiffs (together, Co-Lead Plaintiffs). On July 19, 2022, Co-Lead Plaintiffs filed a consolidated amended complaint, which, like the predecessor complaint, asserts claims against Sleep Number, Shelly Ibach, and David Callen under Sections 10(b) and 20(a) of the Exchange Act. Co- Lead Plaintiffs purport to assert these claims on behalf of all purchasers of Sleep Number common stock between February 18, 2021 and July 20, 2021. Defendants moved to dismiss the consolidated complaint on September 19, 2022, which motion was heard by the Court on January 17, 2023, and remains pending.

Shareholder Derivative Complaint

On May 12, 2022, Gwendolyn Calla Moore, as the appointed representative of purported Sleep Number shareholder Matthew Gelb, filed a derivative action (the Derivative Action) in the District of Minnesota against Jean-Michel Valette, Shelly Ibach, Barbara Matas, Brenda Lauderback, Daniel Alegre, Deborah Kilpatrick, Julie Howard, Kathleen Nedorostek, Michael Harrison, Stephen Gulis, Jr., David Callen, and Kevin Brown. Moore purports to assert claims on behalf of Sleep Number for breaches of fiduciary duty, waste, and contribution under Sections 10(b) and 21(d) of the Exchange Act. Moore’s allegations generally mirror those asserted in the securities complaint described above. The Moore complaint seeks damages in an unspecified amount, disgorgement, interest, and costs and expenses, including attorneys’ and experts’ fees.

On September 13, 2022, the District of Minnesota entered a joint stipulation staying all proceedings in the Derivative Action pending the outcome of any motion to dismiss the Steamfitters consolidated amended complaint.

Stockholder Demand

On March 25, 2022, Sleep Number received a shareholder litigation demand (the “Demand”), requesting that the Board investigate the allegations in the securities class action complaint and pursue claims on Sleep Number’s behalf based on those allegations. On May 12, 2022, the Board established a special litigation committee to investigate the demand.

On October 5 and October 12, 2022, Sleep Number received two additional shareholder litigation demands, which adopted and incorporated the allegations and requests in the Demand. Both of these additional litigation demands were referred to the special litigation committee.

The special litigation committee has concluded that it would not be in the best interests of Sleep Number and its shareholders to take any of the actions requested in the demands at this time.

12 | 1Q 2023 FORM 10-Q SLEEP NUMBER CORPORATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of the Company’s condensed consolidated financial statements with a narrative from the perspective of management on its financial condition, results of operations, liquidity and certain other factors that may affect the Company’s future results. MD&A is presented in eight sections:

•Forward-Looking Statements and Risk Factors

•Business Overview

•Results of Operations

•Liquidity and Capital Resources

•Non-GAAP Data Reconciliations

•Off-Balance-Sheet Arrangements and Contractual Obligations

•Critical Accounting Policies

Forward-looking Statements and Risk Factors

The discussion in this Quarterly Report contains certain forward-looking statements that relate to future plans, events, financial results or performance. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “predict,” “intend,” “potential,” “continue” or the negative of these or similar terms. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company’s historical experience and its present expectations or projections. These risks and uncertainties include, among others:

•Current and future economic conditions and consumer sentiment;

•Bank failures or other events affecting financial institutions;

•Increases in interest rates, which have increased the cost of servicing the Company’s indebtedness;

•Availability of attractive and cost-effective consumer credit options;

•Operating with minimal levels of inventory, which may leave the Company vulnerable to supply shortages;

•Sleep Number’s dependence on, and ability to maintain strong working relationships with, key suppliers and third parties;

•Rising commodity costs or third-party logistics costs and other inflationary pressures;

•Risks inherent in global-sourcing activities, including tariffs, geo-political turmoil, war, strikes, labor challenges, government-mandated work closures, outbreaks of pandemics or contagious diseases, and resulting supply shortages and production and delivery delays and disruptions;

•Risks of disruption due to health epidemics or pandemics, such as the COVID-19 pandemic;

•Regional risks related to having global operations and suppliers, including climate and other disasters;

•The effectiveness of the Company’s marketing strategy and promotional efforts;

•The execution of Sleep Number’s Total Retail distribution strategy;

•Ability to achieve and maintain high levels of product quality;

•Ability to improve and expand Sleep Number’s product line and execute successful new product introductions;

•Ability to prevent third parties from using the Company’s technology or trademarks, and the adequacy of its intellectual property rights to protect its products and brand;

•Ability to compete;

•Risks of disruption in the operation of any of the Company’s main manufacturing, distribution, logistics, home delivery, product development or customer service operations;

•The Company’s ability to comply with existing and changing government regulation;

•Pending or unforeseen litigation and the potential for associated adverse publicity;

•The adequacy of the Company’s and third-party information systems and costs and disruptions related to upgrading or maintaining these systems;

13 | 1Q 2023 FORM 10-Q SLEEP NUMBER CORPORATION

•The Company’s ability to withstand cyber threats that could compromise the security of its systems, result in a data breach or business disruption;

•Sleep Number’s ability, and the ability of its suppliers and vendors, to attract, retain and motivate qualified personnel;

•The volatility of Sleep Number stock;

•Environmental, social and governance (ESG) risks, including increasing regulation and stakeholder expectations; and

•The Company’s ability to adapt to climate change and readiness for legal or regulatory responses thereto.

Additional information concerning these, and other risks and uncertainties is contained under the caption “Risk Factors” in Part I, Item 1A. in the Company’s Annual Report on Form 10-K.

The Company has no obligation to publicly update or revise any of the forward-looking statements contained in this Quarterly Report on Form 10-Q.

Business Overview

Sleep Number is a wellness technology company. Over 14.5 million people have had their lives improved by the Company’s award-winning sleep innovations and are experiencing the physical, mental and emotional benefits of life-changing sleep performance. Sleep Number’s proprietary smart beds combine the physical and digital worlds, pairing exceptional sleep with a highly advanced digital technology platform. Only Sleep Number can provide a dynamic, adjustable and adaptive sleep experience that effortlessly responds to the needs of each sleeper helping them reach their full potential. More than two million Smart Sleepers benefit from the Company’s smart beds, which change with the sleeper over time and provide individualized sleep that is unique, like they are.

Sleep Number’s differentiated business model is guided by its purpose to improve the health and wellbeing of society through higher quality sleep. The Company partners with world-leading sleep and health institutions to bring the power of 19 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. It generates revenue by marketing and selling its innovations directly to new and existing customers through exclusive, direct-to-consumer retail touch points including Stores, Online, Phone, and Chat (Total Retail). Sleep Number is committed to creating long-term superior value for all stakeholders as it focuses on the Company’s three performance drivers: (1) increasing consumer demand; (2) leveraging its vertically integrated business model; and (3) deploying capital efficiently.

Results of Operations

Quarterly and Year-to-Date Results

Quarterly and year-to-date operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in sales, timing, amount and effectiveness of advertising expenditures, changes in sales return rates or warranty experience, timing of investments in growth initiatives and infrastructure, timing of store openings/closings and related expenses, changes in net sales resulting from changes in the Company’s store base, timing of new product introductions and related expenses, timing of promotional offerings, competitive factors, changes in commodity costs, disruptions in global supplies or third-party service providers, seasonality of retail and bedding industry sales, consumer sentiment and general economic conditions. The extent to which these external factors will impact the Company’s business and its consolidated financial results will depend on future developments, which are highly uncertain and cannot be predicted. Therefore, the historical results of operations may not be indicative of the results that may be achieved for any future period.

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Highlights

Financial highlights for the three months ended April 1, 2023 were as follows:

•Net sales for the three months ended April 1, 2023 were consistent at $527 million with the prior-year period. Demand was impacted by historically low consumer sentiment.

•The net sales change consisted of a 2% comparable sales decrease in Total Retail offset by additional sales from 18 net new stores opened in the past 12 months that added 2 percentage points (ppt.) of growth. For additional details, see the components of total net sales change on page 16.

•Sales per store (sales for stores open at least one year, Total Retail, including online, phone and chat) on a trailing twelve-month basis for the period ended April 1, 2023 totaled $3.2 million, compared with $3.5 million for the same period last year.

•Operating income for the three months ended April 1, 2023 was $26 million, compared with $4 million in the prior-year period. The $22 million increase in operating income was driven by a 1.6 ppt. increase in the gross profit rate and a $14 million reduction in the operating expenses.

•The 1.6 ppt. gross profit rate increase was primarily due to pricing actions take over the past twelve months. See the Gross profit discussion on page 18 for additional details.

•The $14 million reduction in the Company’s operating expenses was mainly due to lower marketing expenses.

•Net income for the three months ended April 1, 2023 increased to $11 million, compared with $2 million for the same period one year ago. Net income per diluted share was $0.51, compared with $0.09 last year.

•The Company achieved an adjusted return on invested capital (Adjusted ROIC) of 20.4% on a trailing twelve-month basis for the period ended April 1, 2023, compared with 32.0% for the comparable period one year ago.

•The Company generated $19 million in cash from operating activities for the three months ended April 1, 2023, compared with $25 million for the same period one year ago.

•As of April 1, 2023, the Company had $471 million of borrowings under its revolving credit facility and available net liquidity of $347 million.

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The following table sets forth the Company’s results of operations expressed as dollars and percentages of net sales. Figures are in millions, except percentages and per share amounts. Amounts may not add due to rounding differences.

	Three Months Ended
	April 1, 2023				April 2, 2022
Net sales	$	526.5	100.0	%	$	527.1	100.0	%
Cost of sales	216.3		41.1	%	224.8		42.7	%
Gross profit	310.3		58.9	%	302.3		57.3	%
Operating expenses:
Sales and marketing	230.5		43.8	%	240.3		45.6	%
General and administrative	39.4		7.5	%	41.3		7.8	%
Research and development	14.4		2.7	%	16.3		3.1	%
Total operating expenses	284.3		54.0	%	297.9		56.5	%
Operating income	25.9		4.9	%	4.4		0.8	%
Interest expense, net	9.1		1.7	%	2.1		0.4	%
Income before income taxes	16.8		3.2	%	2.3		0.4	%
Income tax expense	5.4		1.0	%	0.2		0.0	%
Net income	$	11.5	2.2	%	$	2.1	0.4	%
Net income per share:
Basic	$	0.51			$	0.09
Diluted	$	0.51			$	0.09
Weighted-average number of common shares:
Basic	22.3				22.8
Diluted	22.6				23.6

The percentage of total net sales, by dollar volume, was as follows:

	Three Months Ended
	April 1, 2023		April 2, 2022
Retail stores	87.1	%	84.3	%
Online, phone, chat and other	12.9	%	15.7	%
Total Company	100.0	%	100.0	%

The components of total net sales change, including comparable net sales changes, were as follows:

	Three Months Ended
	April 1, 2023		April 2, 2022
Sales change rates:
Retail comparable-store sales (1)	1	%	(14	%)
Online, phone and chat	(18	%)	5	%
Total Retail comparable sales change (1)	(2	%)	(11	%)
Net opened/closed stores and other	2	%	4	%
Total Company	0	%	(7	%)

___________________________

(1)Stores are included in the comparable-store calculations in the 13th full month of operations. Stores that have been remodeled or repositioned within the same shopping center remain in the comparable-store base.

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Other sales metrics were as follows:

	Three Months Ended
	April 1, 2023			April 2, 2022
Average sales per store (1) (in thousands)	$	3,239		$	3,487
Average sales per square foot (1)	$	1,060		$	1,167
Stores > $2 million in net sales (2)	75		%	82		%
Stores > $3 million in net sales (2)	36		%	46		%
Average revenue per smart bed unit (3)	$	5,848		$	4,905

___________________________

(1)Trailing-twelve months Total Retail comparable sales per store open at least one year.

(2)Trailing-twelve months for stores open at least one year (excludes online, phone and chat sales).

(3)Represents Total Retail net sales divided by Total Retail smart bed units.

The number of retail stores operating was as follows:

	Three Months Ended
	April 1, 2023	April 2, 2022
Beginning of period	670	648
Opened	12	13
Closed	(11)	(8)
End of period	671	653

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Comparison of Three Months Ended April 1, 2023 with Three Months Ended April 2, 2022

Net sales

Net sales for the three months ended April 1, 2023 of $527 million were consistent with the same period one year ago. Demand was impacted by historically low consumer sentiment.

The net sales change consisted primarily of a 2% comparable sales decrease in Total Retail offset by additional sales from 18 net new stores opened in the past 12 months that added 2 percentage points (ppt.) of growth.

The $0.6 million net sales decrease compared with the same period one year ago was comprised of the following: (i) a $10.6 million decrease in Total Retail comparable net sales; offset by (ii) a $10.0 million increase from net store openings. Total Retail smart bed unit sales decreased 16% compared with the prior year. Total Retail average revenue per smart bed unit increased by 19% to $5,848, compared with $4,905 in the prior-year period. Prior year average revenue per smart bed unit was impacted by a less favorable sales mix due to supply constraints impacting adjustable bases and smart bed deliveries at the higher end of the Company’s product line.

Gross profit

Gross profit of $310 million for the three months ended April 1, 2023 increased by $8 million, or 3%, compared with $302 million for the same period one year ago. The gross profit rate increased to 58.9% of net sales for the three months ended April 1, 2023, compared with 57.3% for the prior-year comparable period.

The current-year gross profit rate increase of 1.6 ppt. was mainly due to: (i) pricing actions taken over the past twelve months (1.8 ppt.); (ii) improvement in commodity prices and operating efficiencies (0.6 ppt.); and (iii) favorable product mix changes (0.6 ppt.); partially offset by (iv) incremental logistics and delivery costs including labor inflation and investments in our distribution network (0.5 ppt.); (v) 16% lower delivered smart bed volume (0.3 ppt.); and (vi) higher performance-based incentive compensation (0.2 ppt.). In addition, the gross profit rate will fluctuate from quarter to quarter due to a variety of other factors, including warranty expenses, and return and exchange costs.

Sales and marketing expenses

Sales and marketing expenses for the three months ended April 1, 2023 were $230 million, or 43.8% of net sales, compared with $240 million, or 45.6% of net sales, for the same period one year ago. The current-year sales and marketing expenses rate decrease of 1.8 ppt. was primarily due to lower media expense with a decrease in spend of 11% year-over-year.

General and administrative expenses

General and administrative (G&A) expenses totaled $39 million, or 7.5% of net sales, for the three months ended April 1, 2023, compared with $41 million, or 7.8% of net sales, in the prior-year period. The $1.9 million decrease in G&A expenses consisted mainly of: (i) $2.4 million reduction in employee compensation on lower headcount; (ii) a $0.8 million reduction in professional and consulting fees; (iii) a $0.5 million decrease in travel and training expenses; and (iv) a $1.9 million net decrease in other miscellaneous expenses; partially offset by (v) a $3.7 million increase in company-wide performance-based incentive compensation. The G&A expenses rate decreased by 0.3 ppt. in the current-year period, compared with the same period one year ago due to the items discussed above.

Research and development expenses

Research and development (R&D) expenses decreased to $14 million for the three months ended April 1, 2023, compared with $16 million with the same period last year on lower headcount. The Company continues to maintain a flexible mindset, to capitalize on profitable opportunities as the environment improves, and deliver tangible life-long health benefits for Smart Sleepers.

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Interest expense

Interest expense, net increased to $9 million for the three months ended April 1, 2023, compared with $2 million for the same period one year ago. The $7 million increase was mainly driven by a higher weighted-average interest rate compared with the same period one year ago.

Income tax expense

Income tax expense totaled $5 million for the three months ended April 1, 2023, compared with $0.2 million last year. The effective income tax rate for the three months ended April 1, 2023 was 31.9%, compared with 9.4% for the comparable period last year. Discrete tax expenses, primarily stock-based compensation excess tax expense, were $0.8 million for the three months ended April 1, 2023, compared with discrete tax benefits of $0.4 million in last year’s first quarter.

Liquidity and Capital Resources

Managing liquidity and capital resources is an important part of the Company’s commitment to deliver superior shareholder value over time. The Company’s primary sources of liquidity are cash flows provided by operating activities and cash available under its $825 million revolving credit facility. As of April 1, 2023, the Company does not have any off-balance sheet financing other than its $7 million in outstanding letters of credit. The cash generated from ongoing operations and cash available under the revolving credit facility are expected to be adequate to maintain operations, and fund anticipated expansion, strategic initiatives and contractual obligations such as lease payments and capital commitments for new retail stores for the foreseeable future.

Changes in cash and cash equivalents during the three months ended April 1, 2023 primarily consisted of $19 million of cash provided by operating activities offset by $16 million of cash used to purchase property and equipment, and $3 million of cash used to repurchase its common stock (based on settlement, in connection with the vesting of employee restricted stock grants).

The following table summarizes cash flows (in millions). Amounts may not add due to rounding differences:

	Three Months Ended
	April 1, 2023		April 2, 2022
Total cash provided by (used in):
Operating activities	$	18.6	$	24.6
Investing activities	(15.6)		(19.6)
Financing activities	(3.4)		(5.8)
Net decrease in cash and cash equivalents	$	(0.3)	$	(0.8)

Cash provided by operating activities for the three months ended April 1, 2023 was $19 million, compared with $25 million for the three months ended April 2, 2022. Significant components of the year-over-year change in cash provided by operating activities included: (i) a $9 million increase in net income for the three months ended April 1, 2023, compared with the same period one year ago; (ii) a $25 million fluctuation in accrued compensation and benefits primarily related to year-over-year changes in company-wide performance-based compensation that was earned in 2021 and paid in the first quarter of 2022, compared with no company-wide performance-based compensation earned in 2022 and paid in the first quarter of 2023; (iii) a $17 million fluctuation in customer prepayments due to timing of deliveries; and (iv) a $22 million fluctuation in prepaid expenses and other assets primarily due to the amount and timing of rebate payments.

Net cash used in investing activities to purchase property and equipment was $16 million for the three months ended April 1, 2023, compared with $20 million for the same period one year ago. The year-over-year decrease was primarily due to the timing of cash flows associated with investments in information technology.

Net cash used in financing activities was $3 million for the three months ended April 1, 2023, compared with $6 million for the same period last year. During the three months ended April 1, 2023, the Company repurchased $3 million of its stock (based on settlement dates, in connection with the vesting of employee restricted stock awards), compared with $51 million (based on settlement dates, $42 million under the Board-approved share repurchase program and $9 million

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in connection with the vesting of employee restricted stock awards) during the same period one year ago. Short-term borrowings decreased by $0.4 million during the current-year period due to an $11.0 million increase in borrowings under the revolving credit facility to $471 million offset by an $11.4 million decrease in book overdrafts which are included in the net change in short-term borrowings. Short-term borrowings increased by $45 million during the prior-year period due to a $31 million increase in borrowings under the credit facility to $413 million and a $14 million increase in book overdrafts.

With the incremental macroeconomic pressures, in the second quarter of fiscal 2022, the Company suspended share repurchases under its Board-approved share repurchase program. At April 1, 2023, there was $348 million remaining authorization under the Board-approved $600 million share repurchase program. There is no expiration date governing the period over which the Company can repurchase shares.

The Company has a credit facility (Credit Agreement) which is for general corporate purposes, to meet its seasonal working capital requirements and to repurchase its stock. The Company amended the Credit Agreement on October 26, 2022. The amendment, among other things, (a) provides relief from the requirement that the net leverage ratio not exceed 3.75x for certain corporate actions including Permitted Capital Distributions for Performance or Taxes (as defined in the Credit Agreement) and certain acquisition activity; (b) increases the permissible net leverage ratio to 5.0x for the three consecutive quarterly reporting periods ending July 1, 2023; (c) increases the commitment fee rate to 50 basis points and the margin applicable to interest rates for all borrowings by an additional 50 basis points, in each case if the net leverage ratio is greater than or equal to 4.5x; and (d) replaces the option to borrow at an interest rate based on London Interbank Offered Rate (LIBOR) to one based on a Term SOFR Rate. The Term SOFR Rate equals the sum of (x) the Term SOFR Screen Rate (as defined in the Credit Agreement) for the applicable interest period (but in no event less than zero), plus (y) 0.10%, plus (z) the margin based on Sleep Number’s net leverage ratio. Under the terms of the Credit agreement, the Company pays a variable rate of interest and a commitment fee based on its leverage ratio.

At April 1, 2023, the Company had $471 million of borrowings under its revolving credit facility, $7 million in outstanding letters of credit and net liquidity available under the credit facility of $347 million. At April 1, 2023, the Company’s leverage ratio as defined in the credit agreement was 4.0x, the weighted-average interest rate on borrowings under the credit facility was 7.1% and the Company was in compliance with all financial covenants.

Sleep Number has an agreement with Synchrony Bank to offer qualified customers revolving credit arrangements to finance their purchases from the Company (Synchrony Agreement). The Synchrony Agreement contains financial covenants consistent with the credit facility, including a maximum net leverage ratio and a minimum interest coverage ratio. As of April 1, 2023, the Company was in compliance with all financial covenants.

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Non-GAAP Data Reconciliations

Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)

The Company defines earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation and asset impairments. Management believes Adjusted EBITDA is a useful indicator of its financial performance and its ability to generate cash from operating activities. The Company’s definition of Adjusted EBITDA may not be comparable to similarly titled definitions used by other companies. The table below reconciles Adjusted EBITDA, which is a non-GAAP financial measure, to the comparable GAAP financial measure.

Adjusted EBITDA calculations are as follows (in thousands):

	Three Months Ended				Trailing-Twelve Months Ended
	April 1, 2023		April 2, 2022		April 1, 2023		April 2, 2022
Net income	$	11,465	$	2,074	$	46,001	$	89,186
Income tax expense	5,366		214		17,437		24,947
Interest expense	9,102		2,127		25,960		7,394
Depreciation and amortization	17,991		15,683		68,934		60,943
Stock-based compensation	4,639		4,133		13,729		20,930
Asset impairments	12		103		204		186
Adjusted EBITDA	$	48,575	$	24,334	$	172,265	$	203,586

Free Cash Flow

The Company’s “free cash flow” data is considered a non-GAAP financial measure and is not in accordance with, or preferable to, “net cash provided by operating activities,” or GAAP financial data. However, the Company is providing this information as it believes it facilitates analysis for investors and financial analysts.

The following table summarizes free cash flow calculations (in thousands):

	Three Months Ended				Trailing-Twelve Months Ended
	April 1, 2023		April 2, 2022		April 1, 2023		April 2, 2022
Net cash provided by operating activities	$	18,581	$	24,558	$	30,161	$	212,970
Subtract: Purchases of property and equipment	15,556		19,604		65,406		74,958
Free cash flow	$	3,025	$	4,954	$	(35,245)	$	138,012

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Non-GAAP Data Reconciliations (continued)

Return on Invested Capital (Adjusted ROIC)

(dollars in thousands)

Adjusted ROIC is a financial measure the Company uses to determine how efficiently it deploys its capital. It quantifies the return the Company earns on its adjusted invested capital. Management believes Adjusted ROIC is also a useful metric for investors and financial analysts. The Company computes Adjusted ROIC as outlined below. Its definition and calculation of Adjusted ROIC may not be comparable to similarly titled definitions and calculations used by other companies.

The tables below reconcile adjusted net operating profit after taxes (Adjusted NOPAT) and total adjusted invested capital, which are non-GAAP financial measures, to the comparable GAAP financial measures (in thousands):

	Trailing-Twelve Months Ended
	April 1, 2023			April 2, 2022
Adjusted net operating profit after taxes (Adjusted NOPAT)
Operating income	$	89,398		$	121,527
Add: Operating lease expense (1)	26,487			24,907
Less: Income taxes (2)	(29,674)			(34,753)
Adjusted NOPAT	$	86,211		$	111,681
Average adjusted invested capital
Total deficit	$	(425,047)		$	(469,213)
Add: Long-term debt (3)	470,991			413,709
Add: Operating lease obligations (4)	436,939			412,574
Total adjusted invested capital at end of period	$	482,883		$	357,070
Average adjusted invested capital (5)	$	423,287		$	348,804
Adjusted return on invested capital (Adjusted ROIC) (6)	20.4		%	32.0		%

___________________________

(1) Represents the interest expense component of lease expense included in the Company’s financial statements under ASC 842, Leases.

(2) Reflects annual effective income tax rates, before discrete adjustments, of 25.6% and 23.7% for April 1, 2023 and April 2, 2022, respectively.

(3) Long-term debt includes existing finance lease liabilities.

(4) Reflects operating lease liabilities included in the Company’s financial statements under ASC 842.

(5) Average adjusted invested capital represents the average of the last five fiscal quarters’ ending adjusted invested capital balances.

(6) Adjusted ROIC equals Adjusted NOPAT divided by average adjusted invested capital.

Note - the Company’s ROIC calculation and data are considered non-GAAP financial measures and are not in accordance with, or preferable to, GAAP financial data. However, the Company is providing this information as it believe it facilitates analysis of the Company's financial performance by investors and financial analysts. The Company updated its Adjusted ROIC calculation effective beginning with the reporting period ended December 31, 2022, to reflect adjustments consistent with ASC 842. The prior period has been updated to reflect this calculation.

GAAP - generally accepted accounting principles in the U.S.

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Off-Balance-Sheet Arrangements

As of April 1, 2023, the Company was not involved in any unconsolidated special purpose entity transactions. Other than it’s $7 million in outstanding letters of credit, the Company does not have any off-balance-sheet financing.

There have been no material changes in the Company’s contractual obligations since the end of fiscal 2022. See Note 5, Credit Agreement, of the Notes to the Condensed Consolidated Financial Statements for information regarding the Company’s credit agreement. See the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for additional information regarding its other contractual obligations.

Critical Accounting Policies

The Company discusses its critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. There were no significant changes in the Company’s critical accounting policies since the end of fiscal 2022.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to changes in market-based short-term interest rates that will impact net interest expense. If overall interest rates were one percentage point higher than current rates, annual net income would decrease by $3.4 million based on the $471 million of borrowings under the credit facility at April 1, 2023. The Company does not manage the interest-rate volatility risk of borrowings under the credit facility through the use of derivative instruments.

ITEM 4. CONTROLS AND PROCEDURES

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, with the participation of its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, its principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in Internal Control

There were no changes in the Company’s internal control over financial reporting during the fiscal quarter ended April 1, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

23 | 1Q 2023 FORM 10-Q SLEEP NUMBER CORPORATION

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company’s legal proceedings are discussed in Note 12, Commitments and Contingencies, Legal Proceedings, in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

ITEM 1A. RISK FACTORS

In addition to the risks discussed below and other information set forth in this Quarterly Report on Form 10-Q, the Company’s business, financial condition and operating results are subject to a number of risks and uncertainties, including both those that are specific to the Company’s business and others that affect all businesses operating in a global environment. Investors should carefully consider the information in this report under the heading, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and also the information under the heading, Risk Factors, in the Company’s most recent Annual Report on Form 10-K. The risk factors discussed in the Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q do not identify all risks that the Company faces because its business operations could also be affected by additional risk factors that are not presently known to the Company or that it currently considers to be immaterial to its operations.

Bank failures or other events affecting financial institutions could adversely affect our liquidity and financial performance.

The recent and potential future disruptions in access to bank deposits or lending commitments due to bank failures and banking industry instability could materially and adversely affect the Company’s liquidity, access to cash and credit, and the Company’s business, financial condition and results of operations, as well those of the Company’s third-party suppliers or vendors. The recent closures of Silicon Valley Bank (SVB) and Signature Bank and their placement into receivership with the Federal Deposit Insurance Company (FDIC) along with the FDIC’s seizure and sale of First Republic Bank created market disruption and uncertainty with respect to the financial condition of a number of other banking institutions in the United States. While the Company does not have any direct exposure to SVB, Signature Bank, or First Republic Bank, the Company does maintain its cash at financial institutions, occasionally in balances that exceed the current FDIC insurance limits.

If other banks and financial institutions enter receivership or become insolvent in the future due to financial conditions affecting the banking system and financial markets, the Company’s ability to access its cash and cash equivalents, including transferring funds, making payments or receiving funds, and the Company’s access to credit, as well as those of its third-party suppliers or vendors, may be threatened and could have a material adverse effect on the Company’s business and financial condition.

24 | 1Q 2023 FORM 10-Q SLEEP NUMBER CORPORATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) – (b) Not applicable.

(c) Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased(1)(2)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(3)
January 1, 2023 through January 28, 2023	131	$	34.13	—	$	348,071,000
January 29, 2023 through February 25, 2023	445	$	35.53	—	$	348,071,000
February 26, 2023 through April 1, 2023	117,662	$	28.42	—	$	348,071,000
Total	118,238	$	28.45	—	$	348,071,000

___________________________

(1)The Company did not purchase any shares under its Board-approved $600 million share repurchase program (effective April 4, 2021), during the three months ended April 1, 2023.

(2)In connection with the vesting of employee restricted stock grants, the Company repurchased 118,238 shares of its common stock at a cost of $3.4 million during the three months ended April 1, 2023.

(3)There is no expiration date governing the period over which the Company can repurchase shares under it’s Board-approved share repurchase program. Any repurchased shares are constructively retired and returned to an unissued status.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

25 | 1Q 2023 FORM 10-Q SLEEP NUMBER CORPORATION

ITEM 6. EXHIBITS

Exhibit Number	Description
10.1*†	Form of Performance Adjusted Restricted Stock Unit Award Agreement under the Sleep Number Corporation 2020 Equity Incentive Plan
10.2*†	Form of Performance Adjusted Restricted Stock Unit Award Agreement (CEO and Executive Team) under the Sleep Number Corporation 2020 Equity Incentive Plan
10.3*†	Sleep Number Annual Incentive Plan (AIP) Effective January 2, 2023(1)
10.4*	Sixth Amendment to Retailer Program Agreement, dated November 28, 2022, by and between Synchrony Bank, Sleep Number Corporation and Select Comfort Retail Corporation
31.1*	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
32.2*	Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
101.INS*	Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH*	Inline XBRL Taxonomy Extension Schema Document
101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

* Filed Herein.

† Management contract or compensatory plan or arrangement.

(1)     Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10).

26 | 1Q 2023 FORM 10-Q SLEEP NUMBER CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		SLEEP NUMBER CORPORATION
		(Registrant)
Dated:	May 9, 2023	By:	/s/ Shelly R. Ibach
			Shelly R. Ibach
			Chief Executive Officer
			(principal executive officer)
		By:	/s/ Joel J. Laing
			Joel J. Laing
			Chief Accounting Officer
			(principal accounting officer)

27 | 1Q 2023 FORM 10-Q SLEEP NUMBER CORPORATION

EX-10.1

EX10.1

FORM OF PERFORMANCE ADJUSTED

RESTRICTED STOCK UNIT AWARD AGREEMENT

THIS AGREEMENT is entered into and effective as of         , 20__ (the “Date of Grant”), by and between Sleep Number Corporation (the “Company”) and          (the “Grantee”).

Unless defined in this Agreement, capitalized terms used in this Agreement shall have the meanings established in the Sleep Number Corporation 2020 Equity Incentive Plan (the “Plan”).

The Company has adopted the Plan, which authorizes the grant of Restricted Stock Unit Awards to Employees, Non-Employee Directors, and Consultants. The Company desires to give the Grantee a proprietary interest in the Company and its Subsidiaries in recognition of the Grantee’s contributions and as an added incentive to advance the interests of the Company and its Subsidiaries by granting to the Grantee a Restricted Stock Unit Award pursuant to the Plan.

Accordingly, the parties agree as follows:

1.    Grant of Award Units and Performance Adjustments.

1.1    Grant of Award Units. The Company hereby grants to the Grantee a Restricted Stock Unit Award (the “Award”) consisting of units (the “Award Units”) that will be settled in shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), subject to the terms, conditions, and restrictions set forth below and in the Plan. Reference in this Agreement to the Award Units or the Adjusted Award Units (as defined in Section 1.2 of this Agreement) will be deemed to include the Dividend Proceeds (as defined in Section 3.3 of this Agreement) with respect to such Award Units or Adjusted Award Units as provided in Section 3.3 of this Agreement.

1.2    Performance Adjustments. The number of Award Units granted hereunder is subject to adjustment based on the Company’s level of achievement versus annual Net Sales goals and annual NOP goals for the 20__, 20__, and 20__ fiscal years (the “Performance Period”). (For purposes of this Agreement, “NOP” will be defined as Net Operating Income). The Net Sales growth goals and NOP growth goals will be equally weighted.

The annual Net Sales and NOP goals and the corresponding performance adjustment multiples are as follows:

	Payout Multiple	Net Sales		NOP
		Percent of AOP * achieved for 20__	Annual growth achieved for 20__ and 20__	Percent of AOP * achieved for 20__	Annual growth achieved for 20__ and 20__
Threshold	0.5X
Target	1.0X
Maximum	2.0X

* The Company’s Annual Operating Plan (AOP) as approved by the Board of Directors for 20__.

The calculation of the “Adjusted Award Units” based on performance versus these annual goals will be determined as follows:

(a)    The Company’s actual percent achievement of AOP for 20__ or achievement of annual growth for 20__ and 20__ will be measured for each of the two (2) performance measures and for each of the three (3) fiscal years of the Performance Period;

(b)    A payout multiple will be determined for each performance goal and for each fiscal year, based on interpolation between the performance goals in the foregoing table (performance relative to a performance goal that is below the threshold for a fiscal year will result in a payout multiple of zero (0) for that performance goal for that fiscal year); and

(c)    The mean, or average, of the resulting six (6) payout multiples will be applied to the number of Award Units to determine the number of “Adjusted Award Units.”

For example, if the annual Net Sales growth rate achieved for 20__ is 5%, the multiple for that performance goal for that year will be 1.0X; and if the annual NOP growth rate in 20__ is 12%, the multiple for that performance goal for that year will be 2.0X. Similar multiples will be determined for each performance goal and for each of the following fiscal years. The resulting six (6) payout multiples will then be averaged to determine the final payout multiple. This final payout multiple times the number of Award Units originally granted results in the number of Adjusted Award Units that would vest, subject to all of the other proration and vesting provisions set forth in this Agreement.

The Company’s actual performance relative to the performance goals set forth above and the calculation of the Adjusted Award Units shall be determined by the Management Development and Compensation Committee (the “Committee”) of the Board of Directors following the conclusion of the Performance Period. The Committee’s determination shall be final and conclusive for all purposes under this Agreement. The number of Award Units resulting after adjustment as described above will be referred to herein as the “Adjusted Award Units.”

1.3    Restrictive Covenant Agreement. In consideration for the grant of this Award, the Grantee agrees to execute and be bound by the terms of the Employee Inventions, Confidentiality, Non-Compete and Mutual Arbitration Agreement (the “Non-Compete Agreement”) attached hereto, and the Grantee acknowledges that the Grantee’s failure to execute the Non-Compete Agreement will cause this Award to automatically terminate and be forfeited without any further action.

2.    Grant Restriction.

2.1    Restriction and Forfeiture. The Grantee’s right to the Award Units or the Adjusted Award Units and the shares of Common Stock issuable under the Award Units or Adjusted Award Units will be subject to the Grantee remaining in continuous employment or service with the Company or any Subsidiary for a period of three (3) years (the “Vesting Period”) following the Date of Grant; provided, however, that such employment or service period restrictions (the “Restrictions”) will lapse and terminate prior to end of the Vesting Period as set forth in Section 2.2 below (or as otherwise set forth in the Plan for any circumstance not contemplated by the terms of Section 2.2).

2.2    Death, Disability, or other Termination of Employment or Service.

(a)    Death. In the event that the Grantee’s employment or service is terminated prior to the end of the Vesting Period due to the Grantee’s death, the Restrictions applicable to the Award Units or Adjusted Award Units will immediately lapse and terminate, and the shares of Common Stock to be issued in settlement of the Award Units will be issued within 90 days of the Grantee’s death, with the performance adjustment determination related to any incomplete fiscal year(s) within the Performance Period deemed to be satisfied at the target level.

(b)    Disability. In the event that the Grantee’s employment or service is terminated prior to the end of the Vesting Period due to the Grantee’s Disability, the Grantee will become fully vested in the Award Units pending completion of the Performance Period and final determination of the Adjusted Award Units. The shares of Common Stock to be issued in settlement of the Adjusted Award Units will be retained and held by the Company pending the final determination of the Adjusted Award Units and will be issued within 90 days of the end of the Vesting Period.

(c)    Termination Due to Retirement.

(i)    In the event that the Grantee’s employment or other service is terminated prior to the end of the Vesting Period by reason of the Grantee’s retirement at or beyond age fifty-five (55) and the Grantee has five (5) or more years of service with the Company prior to such retirement, the Grantee will become vested in a pro rata portion of Award Units based on the number of calendar days elapsed in the Vesting Period as of the date of retirement (e.g., If the Grantee was granted 1,200 Award Units, and if retirement occurs 730 calendar days into the 1,095 calendar days vesting period, then the Grantee will become vested with respect to an aggregate of 800 Award Units and the remaining 400 Award Units will immediately terminate and be forfeited without notice of any kind) pending completion of the Performance Period and final determination of the Adjusted Award Units.

(ii)    In the event that the Grantee’s employment or other service with the Company and all Subsidiaries is terminated prior to the end of the Vesting Period by reason of the Grantee’s retirement prior to age fifty-five (55) or the Grantee has fewer than five (5) years of service with the Company prior to retirement, all rights of the Grantee under the Plan and this Agreement relating to all Award Units with respect to which the Restrictions have not lapsed will immediately terminate and be forfeited without notice of any kind.

(iii)    In the event that the Grantee’s employment or other service with the Company and all Subsidiaries is terminated prior to the end of the Vesting Period by reason of the Grantee’s retirement at or beyond age sixty (60) and the Grantee has five (5) or more years of service with the Company prior to retirement, the Grantee will become fully vested in the Award Units pending

completion of the Performance Period and final determination of the Adjusted Award Units if the following criteria are met: a) Grantee provides written notice of Grantee’s intention to retire one year before Grantee’s actual retirement date, and b) Grantee’s actual retirement date is at least one year after the Date of Grant.

(iv)    The shares of Common Stock to be issued in settlement of the Adjusted Award Units pursuant to paragraphs (i) or (iii) above will be retained and held by the Company pending the final determination of the Adjusted Award Units and will be issued within 90 days of the end of the Vesting Period.

(d)    Termination for Reasons other than Death, Disability, or Retirement. In the event the Grantee’s employment or other service with the Company and all Subsidiaries is terminated prior to the end of the Vesting Period for any reason other than death, Disability, or retirement as provided above, or if the Grantee is in the employ or service of a Subsidiary and the Subsidiary ceases to be a Subsidiary of the Company (unless the Grantee continues in the employ or service of the Company or another Subsidiary), all rights of the Grantee under this Agreement relating to Award Units with respect to which the Restrictions have not lapsed will immediately terminate and be forfeited without notice of any kind.

3.    Issuance of Shares.

3.1    Timing. Vested Award Units or Adjusted Award Units shall be converted to shares of Common Stock on a one-for-one basis, and such shares shall be issued as soon as reasonably possible, but not more than 90 days, after the end of the Vesting Period, subject to the provisions set forth above applicable to vesting events that occur prior to the end of the Vesting Period.

3.2    Limitations on Transfer. Award Units or Adjusted Award Units will not be assignable or transferable by the Grantee, either voluntarily or involuntarily, and may not be subjected to any lien, directly or indirectly, by operation of law or otherwise. Any attempt to transfer, assign, or encumber the Award Units or Adjusted Award Units, other than in accordance with this Agreement and the Plan, will be null and void and will void the Award, and all Award Units or Adjusted Award Units for which the Restrictions have not lapsed will be forfeited and immediately returned to the Company.

3.3    Dividends and Other Distributions. The Award Units are being granted with an equal number of dividend equivalents. Accordingly, the Grantee is entitled to receive an additional award unit with a value equal to any dividends or distributions (including, without limitation, any cash dividends, stock dividends or dividends in kind, the proceeds of any stock split, or the proceeds resulting from any changes or exchanges described in Section 6 of this Agreement, all of which are referred to herein collectively as the “Dividend Proceeds”) that are paid or payable with respect to one share of Common Stock for each Award Unit, which will be subject to the same rights, restrictions, and performance adjustments under this Agreement as the Award Units to which such dividends or distributions relate. The number of additional award units to be received as dividend equivalents for each Award Unit shall be determined by dividing the cash dividend per share by the Fair Market Value of one share of Common Stock on the dividend or distribution payment date. All such additional award units received as dividend equivalents will be subject to the same restrictions and performance adjustments as the Award Units to which such Dividend Proceeds relate.

3.4    Fractional Shares. The Grantee acknowledges that the Company will not issue or deliver fractional shares of Common Stock under this Agreement. All fractional shares will be rounded up to the nearest whole share.

4.    Rights of Grantee.

4.1    Employment or Service. Nothing in this Agreement will interfere with or limit in any way the right of the Company or any Subsidiary to terminate the employment or service of the Grantee at any time, nor confer upon the Grantee any right to continue in the employment or service with the Company or any Subsidiary at any particular position or rate of pay or for any particular period of time.

4.2    Rights as a Shareholder. The Grantee will have no rights as a shareholder until the Grantee becomes the holder of record of shares of Common Stock issued in settlement of the Adjusted Award Units. As soon as reasonably possible after the satisfaction of any conditions to the effective issuance of shares of Common Stock in settlement of the Adjusted Award Units, the shares will be issued by the Company.

5.    Withholding Taxes. The Company is entitled to (i) withhold and deduct from future wages of the Grantee (or from other amounts that may be due and owing to the Grantee from the Company), or to withhold from the shares of Common Stock that would otherwise be determined to be paid to the Company out of Dividend Proceeds, or make other arrangements for the collection of all amounts the Company determines are legally required to satisfy any federal, state, or local withholding and employment-related tax requirements attributable to the receipt of the Award, the receipt of dividends or distributions on Award Units or Adjusted Award Units, or the lapse or termination of the Restrictions applicable to Award Units or Adjusted Award Units, or (ii) require the Grantee promptly to remit the amount of such withholding to the Company. In the event that the Company is unable to withhold such amounts, for whatever reason, the Grantee agrees to pay to the Company an amount equal to the amount the Company would otherwise be required to withhold under federal, state, or local law.

6.    Adjustments. In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, or divestiture (including a spin-off), or any other change in the corporate structure or shares of the Company, the Committee (or, if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation), in order to prevent dilution or enlargement of the rights of the Grantee, will make appropriate adjustment (which determination will be conclusive) as to the number and kind of securities or other property (including cash) subject to this Award.

7.    Subject to Plan. The Award and the Award Units granted pursuant to this Agreement have been granted under the Plan and, except as otherwise expressly provided in this Agreement, are subject to all of the terms and conditions of the Plan. In addition, the Grantee, by execution hereof, acknowledges having received a copy of the Plan and acknowledges that the Company, or a third party vendor designated by the Company, may deliver to the Grantee any documents related to the Grantee’s participation in the Plan by electronic means, including through email, the Company’s website, and through the website of the third party vendor designated by the Company.  The provisions of this Agreement will be interpreted as to be consistent with the Plan, and any ambiguities in this Agreement will be interpreted by reference to the Plan. In the event that any provision of this Agreement is not authorized under the Plan, the terms of the Plan will prevail.

8.    Forfeiture, Clawback or Recoupment. This Award is subject to the forfeiture and clawback provisions pursuant to the Plan. Additionally, the Grantee may be subject to the Company’s policy regarding clawback and forfeiture of certain compensation, as in effect at such time. In addition to the other rights of the Committee under the Plan, if Grantee is determined by the Committee, acting in its sole discretion, to have taken any action that would constitute Adverse Action or Cause or that is subject to any other or additional “clawback,” forfeiture, or recoupment policy adopted by the Company, either prior to or after the date of this Agreement, or to have violated the Non-Compete Agreement, as defined in Section 1.3, (i) all of Grantee’s rights under the Plan and any agreements evidencing an award granted under the Plan, including this Agreement evidencing this Award, then held by Grantee shall terminate and be forfeited upon the effectiveness of such Committee action, and without notice of any kind, and (ii) the

Committee, in its sole discretion, may require Grantee to surrender and return, transfer, or assign to the Company all or any portion of the shares of Common Stock received, or to disgorge all or any profits or any other economic value (however defined by the Committee) made or realized by Grantee or Grantee’s affiliate, during the period beginning one (1) year prior to your termination of employment or service with the Company, in connection with any awards granted under the Plan, including this Award, or any shares of Common Stock issued upon the exercise or vesting of any awards, including this Award. This Section 8 shall not apply and shall automatically become void ab initio following a Change of Control.

9.    Miscellaneous.

9.1    Binding Effect. This Agreement will be binding upon the heirs, executors, administrators, and successors of the parties to this Agreement.

9.2    Governing Law. This Agreement and all rights and obligations under this Agreement will be construed in accordance with the Plan and governed by the laws of the State of Minnesota, without regard to conflicts of laws provisions. Any legal proceeding related to this Agreement will be brought in an appropriate Minnesota court, and the parties to this Agreement consent to the exclusive jurisdiction of the court for this purpose.

9.3    Entire Agreement. This Agreement and the Plan set forth the entire agreement and understanding of the parties to this Agreement with respect to the grant and vesting of this Award and the administration of the Plan and supersede all prior agreements, arrangements, plans, and understandings relating to the grant and vesting of this Award and the administration of the Plan.

9.4    Amendment and Waiver. Other than as provided in the Plan, this Agreement may be amended, waived, modified, or canceled only by a written instrument executed by the parties to this Agreement or, in the case of a waiver, by the party waiving compliance.

9.5    Code Section 409A. Payments of amounts under this Agreement are intended to comply with the requirements of Code section 409A, and this Agreement shall in all respects be administered and construed to give effect to such intent. The Committee, in its sole discretion, may accelerate or delay distribution of any shares in payment of amounts due under this Agreement if and to the extent allowed under Code section 409A.

The parties hereto have executed this Agreement effective the day and year first above written.

SLEEP NUMBER CORPORATION

    
    Shelly Ibach
    President and CEO

By execution of this Agreement,     GRANTEE
the Grantee acknowledges having
received a copy of the Plan.    
    (Signature)

(Name and Address)

EX-10.2

EX10.2

FORM OF PERFORMANCE ADJUSTED
RESTRICTED STOCK UNIT AWARD AGREEMENT

(CEO and Executive Team)

THIS AGREEMENT is entered into and effective as of __________, 20__ (the “Date of Grant”), by and between Sleep Number Corporation (the “Company”) and (the “Grantee”).

Unless defined in this Agreement, capitalized terms used in this Agreement shall have the meanings established in the Sleep Number Corporation 2020 Equity Incentive Plan (the “Plan”).

The Company has adopted the Plan, which authorizes the grant of Restricted Stock Unit Awards to Employees, Non-Employee Directors, and Consultants. The Company desires to give the Grantee a proprietary interest in the Company and its Subsidiaries in recognition of the Grantee’s contributions and as an added incentive to advance the interests of the Company and its Subsidiaries by granting to the Grantee a Restricted Stock Unit Award pursuant to the Plan.

Accordingly, the parties agree as follows:

1.    Grant of Award Units and Performance Adjustments.

1.1    Grant of Award Units. The Company hereby grants to the Grantee a Restricted Stock Unit Award (the “Award”) consisting of __________ units (the “Award Units”) that will be settled in shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), subject to the terms, conditions, and restrictions set forth below and in the Plan. Reference in this Agreement to the Award Units or the Adjusted Award Units (as defined in Section 1.2 of this Agreement) will be deemed to include the Dividend Proceeds (as defined in Section 3.3 of this Agreement) with respect to such Award Units or Adjusted Award Units as provided in Section 3.3 of this Agreement.

1.2    Performance Adjustments. The number of Award Units granted hereunder is subject to adjustment based on the Company’s level of achievement versus annual Net Sales goals and annual NOP goals for the 20__, 20__, and 20__ fiscal years (the “Performance Period”). (For purposes of this Agreement, “NOP” will be defined as Net Operating Income). The Net Sales growth goals and NOP growth goals will be equally weighted.

The annual Net Sales and NOP goals and the corresponding performance adjustment multiples are as follows:

	Payout Multiple	Net Sales		NOP
		Percent of AOP* achieved for 20__	Annual growth achieved for 20__ and 20__	Percent of AOP* achieved for 20__	Annual growth achieved for 20__ and 20__
Threshold	0.5X
Target	1.0X
Maximum	2.0X

* The Company’s Annual Operating Plan (AOP) as approved by the Board of Directors for 2023.

The calculation of the “Adjusted Award Units” based on performance versus these annual goals will be determined as follows:

(a)    The Company’s actual percent achievement of AOP for 20__ or achievement of annual growth for 20__ and 20__ will be measured for each of the two (2) performance measures and for each of the three (3) fiscal years of the Performance Period;

(b)    A payout multiple will be determined for each performance goal and for each fiscal year, based on interpolation between the performance goals in the foregoing table (performance relative to a performance goal that is below the threshold for a fiscal year will result in a payout multiple of zero (0) for that performance goal for that fiscal year); and

(c)    The mean, or average, of the resulting six (6) payout multiples will be applied to the number of Award Units to determine the number of “Adjusted Award Units.”

For example, if the annual Net Sales growth rate achieved for 20__ is __5%, the multiple for that performance goal for that year will be 1.0X; and if the annual NOP growth rate achieved for 20__ is 12%, the multiple for that performance goal for that year will be 2.0X. Similar multiples will be determined for each performance goal and for each of the following fiscal years. The resulting six (6) payout multiples will then be averaged to determine the final payout multiple. This final payout multiple times the number of Award Units originally granted results in the number of Adjusted Award Units that would vest, subject to all of the other proration and vesting provisions set forth in this Agreement.

The “Adjusted Award Units” will be subject to reduction for failure to generate Return on Invested Capital (“ROIC”) that exceeds Weighted Average Cost of Capital by at least 300 basis points (“bps”), as outlined in the table below. The measurement will be based on an average of the basis points difference between annual ROIC and WACC for the three fiscal years 20__, 20__, and 20__.

ROIC Basis Points difference versus WACC (e.g., ROIC of 12% vs. WACC of 10% = +200 bps)	Reduction to Final Payout
__ bps or lower (i.e., ROIC at or below WACC)	-20% of target award
__ to __ bps	-15% of target award
__ to __ bps	-10% of target award
__ to __ bps	-5% of target award
___ bps or greater	No reduction

For the purpose of this calculation, ROIC shall be defined as detailed in the annual 10-K disclosure.

For the purpose of this calculation, WACC shall be defined as detailed in Attachment A.

The Company’s actual performance relative to the performance goals set forth above and the calculation of the Adjusted Award Units shall be determined by the Management Development and Compensation Committee (the “Committee”) of the Board of Directors following the conclusion of the Performance Period. The Committee’s determination shall be final and conclusive for all purposes under this Agreement. The number of Award Units resulting after adjustment as described above will be referred to herein as the “Adjusted Award Units.”

1.3    Restrictive Covenant Agreement. In consideration for the grant of this Award, the Grantee agrees to execute and be bound by the terms of the Employee Inventions, Confidentiality, Non-Compete and Mutual Arbitration Agreement (the “Non-Compete Agreement”) attached hereto, and the Grantee acknowledges that the Grantee’s failure to execute the Non-Compete Agreement will cause this Award to automatically terminate and be forfeited without any further action.

2.    Grant Restriction.

2.1    Restriction and Forfeiture. The Grantee’s right to the Award Units or the Adjusted Award Units and the shares of Common Stock issuable under the Award Units or Adjusted Award Units will be subject to the Grantee remaining in continuous employment or service with the Company or any Subsidiary for a period of three (3) years (the “Vesting Period”) following the Date of Grant; provided, however, that such employment or service period restrictions (the “Restrictions”) will lapse and terminate prior to end of the Vesting Period as set forth in Section 2.2 below (or as otherwise set forth in the Plan for any circumstance not contemplated by the terms of Section 2.2).

2.2    Death, Disability, or other Termination of Employment or Service.

(a)    Death. In the event that the Grantee’s employment or service is terminated prior to the end of the Vesting Period due to the Grantee’s death, the Restrictions applicable to the Award Units or Adjusted Award Units will immediately lapse and terminate, and the shares of Common Stock to be issued in settlement of the Award Units will be issued within 90 days of the Grantee’s death, with the performance adjustment determination related to any incomplete fiscal year(s) within the Performance Period deemed to be satisfied at the target level, with no reduction based on ROIC performance.

(b)    Disability. In the event that the Grantee’s employment or service is terminated prior to the end of the Vesting Period due to the Grantee’s Disability, the Grantee will become fully vested in the Award Units pending completion of the Performance Period and final determination of the Adjusted Award Units. The shares of Common Stock to be issued in settlement of the Adjusted Award Units will be retained and held by the Company pending the final determination of the Adjusted Award Units and will be issued within 90 days of the end of the Vesting Period.

(c)    Termination Due to Retirement.

(i)    In the event that the Grantee’s employment or other service is terminated prior to the end of the Vesting Period by reason of the Grantee’s retirement at or beyond age fifty-five (55) and the Grantee has five (5) or more years of service with the Company prior to such retirement, the Grantee will

become vested in a pro rata portion of Award Units based on the number of calendar days elapsed in the Vesting Period as of the date of retirement (e.g., If the Grantee was granted 1,200 Award Units, and if retirement occurs 730 calendar days into the 1,095 calendar days vesting period, then the Grantee will become vested with respect to an aggregate of 800 Award Units and the remaining 400 Award Units will immediately terminate and be forfeited without notice of any kind) pending completion of the Performance Period and final determination of the Adjusted Award Units.

(ii)    In the event that the Grantee’s employment or other service with the Company and all Subsidiaries is terminated prior to the end of the Vesting Period by reason of the Grantee’s retirement prior to age fifty-five (55) or the Grantee has fewer than five (5) years of service with the Company prior to retirement, all rights of the Grantee under the Plan and this Agreement relating to all Award Units with respect to which the Restrictions have not lapsed will immediately terminate and be forfeited without notice of any kind.

(iii)    In the event that the Grantee’s employment or other service with the Company and all Subsidiaries is terminated prior to the end of the Vesting Period by reason of the Grantee’s retirement at or beyond age sixty (60) and the Grantee has five (5) or more years of service with the Company prior to retirement, the Grantee will become fully vested in the Award Units pending completion of the Performance Period and final determination of the Adjusted Award Units if the following criteria are met: a) Grantee provides written notice of Grantee’s intention to retire one year before Grantee’s actual retirement date, and b) Grantee’s actual retirement date is at least one year after the Date of Grant.

(iv)    The shares of Common Stock to be issued in settlement of the Adjusted Award Units pursuant to paragraphs (i) or (iii) above will be retained and held by the Company pending the final determination of the Adjusted Award Units and will be issued within 90 days of the end of the Vesting Period.

(d)    Termination for Reasons other than Death, Disability, or Retirement. In the event the Grantee’s employment or other service with the Company and all Subsidiaries is terminated prior to the end of the Vesting Period for any reason other than death, Disability, or retirement as provided above, or if the Grantee is in the employ or service of a Subsidiary and the Subsidiary ceases to be a Subsidiary of the Company (unless the Grantee continues in the employ or service of the Company or another Subsidiary), all rights of the Grantee under this Agreement relating to Award Units with respect to which the Restrictions have not lapsed will immediately terminate and be forfeited without notice of any kind.

3.    Issuance of Shares.

3.1    Timing. Vested Award Units or Adjusted Award Units shall be converted to shares of Common Stock on a one-for-one basis, and such shares shall be issued as soon as reasonably possible, but not more than 90 days, after the end of the Vesting Period, subject to the provisions set forth above applicable to vesting events that occur prior to the end of the Vesting Period.

3.2    Limitations on Transfer. Award Units or Adjusted Award Units will not be assignable or transferable by the Grantee, either voluntarily or involuntarily, and may not be subjected to any lien, directly or indirectly, by operation of law or otherwise. Any attempt to transfer, assign, or encumber the Award Units or Adjusted Award Units, other than in accordance with this Agreement and the Plan, will be null and void and will void the Award, and

all Award Units or Adjusted Award Units for which the Restrictions have not lapsed will be forfeited and immediately returned to the Company.

3.3    Dividends and Other Distributions. The Award Units are being granted with an equal number of dividend equivalents. Accordingly, the Grantee is entitled to receive an additional award unit with a value equal to any dividends or distributions (including, without limitation, any cash dividends, stock dividends or dividends in kind, the proceeds of any stock split, or the proceeds resulting from any changes or exchanges described in Section 6 of this Agreement, all of which are referred to herein collectively as the “Dividend Proceeds”) that are paid or payable with respect to one share of Common Stock for each Award Unit, which will be subject to the same rights, restrictions, and performance adjustments under this Agreement as the Award Units to which such dividends or distributions relate. The number of additional award units to be received as dividend equivalents for each Award Unit shall be determined by dividing the cash dividend per share by the Fair Market Value of one share of Common Stock on the dividend or distribution payment date. All such additional award units received as dividend equivalents will be subject to the same restrictions and performance adjustments as the Award Units to which such Dividend Proceeds relate.

3.4    Fractional Shares. The Grantee acknowledges that the Company will not issue or deliver fractional shares of Common Stock under this Agreement. All fractional shares will be rounded up to the nearest whole share.

4.    Rights of Grantee.

4.1    Employment or Service. Nothing in this Agreement will interfere with or limit in any way the right of the Company or any Subsidiary to terminate the employment or service of the Grantee at any time, nor confer upon the Grantee any right to continue in the employment or service with the Company or any Subsidiary at any particular position or rate of pay or for any particular period of time.

4.2    Rights as a Shareholder. The Grantee will have no rights as a shareholder until the Grantee becomes the holder of record of shares of Common Stock issued in settlement of the Adjusted Award Units. As soon as reasonably possible after the satisfaction of any conditions to the effective issuance of shares of Common Stock in settlement of the Adjusted Award Units, the shares will be issued by the Company.

5.    Withholding Taxes. The Company is entitled to (i) withhold and deduct from future wages of the Grantee (or from other amounts that may be due and owing to the Grantee from the Company), or to withhold from the shares of Common Stock that would otherwise be determined to be paid to the Company out of Dividend Proceeds, or make other arrangements for the collection of all amounts the Company determines are legally required to satisfy any federal, state, or local withholding and employment-related tax requirements attributable to the receipt of the Award, the receipt of dividends or distributions on Award Units or Adjusted Award Units, or the lapse or termination of the Restrictions applicable to Award Units or Adjusted Award Units, or (ii) require the Grantee promptly to remit the amount of such withholding to the Company. In the event that the Company is unable to withhold such amounts, for whatever reason, the Grantee agrees to pay to the Company an amount equal to the amount the Company would otherwise be required to withhold under federal, state, or local law.

6.    Adjustments. In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, or divestiture (including a spin-off), or any other change in the corporate structure or shares of the Company, the Committee (or, if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation), in order to prevent dilution or enlargement of the rights of the Grantee, will make appropriate adjustment (which determination

will be conclusive) as to the number and kind of securities or other property (including cash) subject to this Award.

7.    Subject to Plan. The Award and the Award Units granted pursuant to this Agreement have been granted under the Plan and, except as otherwise expressly provided in this Agreement, are subject to all of the terms and conditions of the Plan. In addition, the Grantee, by execution hereof, acknowledges having received a copy of the Plan and acknowledges that the Company, or a third party vendor designated by the Company, may deliver to the Grantee any documents related to the Grantee’s participation in the Plan by electronic means, including through email, the Company’s website, and through the website of the third party vendor designated by the Company.  The provisions of this Agreement will be interpreted as to be consistent with the Plan, and any ambiguities in this Agreement will be interpreted by reference to the Plan. In the event that any provision of this Agreement is not authorized under the Plan, the terms of the Plan will prevail.

8.    Forfeiture, Clawback or Recoupment. This Award is subject to the forfeiture and clawback provisions pursuant to the Plan. Additionally, the Grantee may be subject to the Company’s policy regarding clawback and forfeiture of certain compensation, as in effect at such time. In addition to the other rights of the Committee under the Plan, if Grantee is determined by the Committee, acting in its sole discretion, to have taken any action that would constitute Adverse Action or Cause or that is subject to any other or additional “clawback,” forfeiture, or recoupment policy adopted by the Company, either prior to or after the date of this Agreement, or to have violated the Non-Compete Agreement, as defined in Section 1.3, (i) all of Grantee’s rights under the Plan and any agreements evidencing an award granted under the Plan, including this Agreement evidencing this Award, then held by Grantee shall terminate and be forfeited upon the effectiveness of such Committee action, and without notice of any kind, and (ii) the Committee, in its sole discretion may require Grantee to surrender and return, transfer, or assign to the Company all or any portion of the shares of Common Stock received, or to disgorge all or any profits or any other economic value (however defined by the Committee) made or realized by Grantee or Grantee’s affiliate, during the period beginning two (2) years prior to your termination of employment or service with the Company, in connection with any awards granted under the Plan, including this Award, or any shares of Common Stock issued upon the exercise or vesting of any awards, including this Award. This Section 8 shall not apply and shall automatically become void ab initio following a Change of Control.

9.    Miscellaneous.

9.1    Binding Effect. This Agreement will be binding upon the heirs, executors, administrators, and successors of the parties to this Agreement.

9.2    Governing Law. This Agreement and all rights and obligations under this Agreement will be construed in accordance with the Plan and governed by the laws of the State of Minnesota, without regard to conflicts of laws provisions. Any legal proceeding related to this Agreement will be brought in an appropriate Minnesota court, and the parties to this Agreement consent to the exclusive jurisdiction of the court for this purpose.

9.3    Entire Agreement. This Agreement and the Plan set forth the entire agreement and understanding of the parties to this Agreement with respect to the grant and vesting of this Award and the administration of the Plan and supersede all prior agreements, arrangements, plans, and understandings relating to the grant and vesting of this Award and the administration of the Plan.

9.4    Amendment and Waiver. Other than as provided in the Plan, this Agreement may be amended, waived, modified, or canceled only by a written instrument executed by the parties to this Agreement or, in the case of a waiver, by the party waiving compliance.

9.5    Code Section 409A. Payments of amounts under this Agreement are intended to comply with the requirements of Code section 409A, and this Agreement shall in all respects be administered and construed to give effect to such intent. The Committee, in its sole discretion, may accelerate or delay distribution of any shares in payment of amounts due under this Agreement if and to the extent allowed under Code section 409A.

The parties hereto have executed this Agreement effective the day and year first above written.

SLEEP NUMBER CORPORATION

    Shelly Ibach
    President and CEO

By execution of this Agreement,    GRANTEE
the Grantee acknowledges having
received a copy of the Plan.    
    (Signature)

(Name and Address)

____________________________________

ATTACHMENT A: Definition for the Company’s Weighted Average Cost of Capital (WACC)

WACC is an approximation of the average rate of return a company expects to compensate all of its different investors. The WACC formula and key assumptions used in the Company’s WACC calculation are outlined below:

    The market value of all debt reflects the capitalization of our operating leases as debt, plus any other outstanding debt. We calculate our capitalized operating lease obligations as part of our Return on Invested Capital (ROIC) calculation. The market value of all debt (including capitalized operating lease obligations) for each fiscal year within the Performance Period will equal the amounts included in our publicly reported ROIC calculations.

    The market value of all common stock for each fiscal year within the Performance Period is calculated based on the 5-quarter average (the first day of the first quarter and the last day of each of the 4 quarters) of our common shares outstanding multiplied by the respective closing share price at the end of each quarter.

    Cost of debt is the effective interest rate a company would pay for its debt. Our research indicates our debt would receive a rating of approximately BB (high-yield corporate debt). We base our cost of debt on the JP Morgan Chase Domestic High Yield 7-10 Year Corporate Bond Index rates computed on a five-quarter average (the first day of the first quarter and the last day of each of the 4 quarters) for each fiscal year within the Performance Period.

    Cost of equity

̶    Risk-free rate is the theoretical rate of return of an investment with no risk of financial loss. In practice, a bond issued by a government with a negligible risk of default is used. We base our risk-free rate on the five quarter average (the first day of the first quarter and the last day of each of the four quarters) 10-year U.S. treasury bill rate during each fiscal year within the Performance Period

̶    Risk premium is the return in excess of the risk-free rate that an investment (as adjusted for risk) is expected to yield. We use the risk premium by industry/sector as annually reported by the Stern School of Business at New York University. For the purposes of this calculation, we use the average of the annual risk premium estimates for the Furniture/Home Furnishings, Retail (Special Lines), and Retail (Building Supply) industry sectors for the period that most closely corresponds to each fiscal year within the Performance Period

Marginal corporate tax rate is our effective tax rate before discrete adjustments for each fiscal year within the Performance Period

If any benchmark or index referenced above is unavailable at the time of the performance measurement, we will substitute with a substantially similar benchmark or index approved by the Compensation Committee.

EX-10.3

Exhibit 10.3

[Certain identified information has been omitted from this document because it is not material and would be competitively harmful if publicly disclosed; such omissions have been marked with “[***]”.]

Sleep Number Annual Incentive Plan (AIP)

Effective January 2, 2023

Introduction

The Annual Incentive Plan (the “AIP” or the “Plan”) is a variable compensation program that rewards eligible team members (“Participants”) with an incentive opportunity tied to Sleep Number Corporation (“Company” or “Sleep Number”) results. The AIP opportunity is part of Sleep Number’s overall total rewards program that is designed to be competitive, comprehensive, flexible, and performance based.

This Plan document outlines the terms and conditions for the AIP effective January 2, 2023, and as approved by the Management Development and Compensation Committee of the Sleep Number Board of Directors (the “Committee”). The Company retains the discretion to modify, amend or change the terms of the AIP at any time, and will determine and approve the incentive payouts earned by eligible team members in connection with Company performance.

Eligible Team Members

Full-time and part-time team members (excluding temporary team members and interns) who work in areas of the business the Company has designated as eligible for this Plan. Team members are eligible for this Plan if AIP is shown in Workday (under the “Compensation” heading) as their incentive plan. Team members will also be able to see current Target Incentive Opportunity (as a percent of Eligible Earnings) in Workday. Team members who do not have AIP listed as their incentive plan in Workday, are not eligible for this Plan. Please read this document for more information on Plan rules regarding eligibility for incentive payments under the Plan.

Newly hired, AIP eligible Participants, become eligible for participation in AIP on the first day of employment with the Company.

Overview of the Plan

The AIP is a variable compensation program tied to Company performance as measured by EBITDA, which is earnings before interest, taxes, depreciation, and amortization (as detailed in quarterly and annual financial filings). EBITDA is a good indicator of the Company’s financial performance and our ability to generate cash flow from operating activities, an important source of shareholder value creation. The Annual Incentive Payments under the Plan are based on the components listed below.

Your Eligible Earnings	x	Target Incentive Opportunity Percent (a percent of Eligible Earnings)	x	Percent of Target Payout (earned for EBITDA performance vs. goals)	=	Annual Incentive Earned for the Fiscal Year
Your Eligible Earnings (as defined under the Plan – see the next page) for the fiscal year.		Your Target Incentive Opportunity (percent of Eligible Earnings, as listed in your profile information in Workday).		The payout as a percent of target earned for Company EBITDA performance vs. goals (can be up to 200% of target).

[***]

The AIP includes an opportunity to receive a progress payment if the Company achieves or exceeds EBITDA goals for the first half of the fiscal year. The progress payment is equal to 50% of the AIP Target Incentive Opportunity for the first half of the year (based on Eligible Earnings received in the first half of the year). If the progress payment is earned and paid out, it is subtracted from the annual payout earned and paid out following the end of the fiscal year. By having this opportunity for a progress payment in our AIP, it reinforces the importance of starting out the year with strong first half performance.

Annual Incentive Earned	Minus	First Half Progress Payment (July)	=	Annual Incentive Payment (February)
Earned for the entire fiscal year based on your Eligible Earnings, Target Incentive, and Company performance		Equals 50% of Target Incentive Opportunity for the first half of the year Typically paid by the end of July of the fiscal year		Annual incentive earned for the fiscal year minus the first half progress payment (if any) Typically paid by the end of February following the end of the fiscal year

The following is an example of a team member who earned $60,000 and had a 5% target incentive. In this example, the First Half Progress Payment was paid out and it was subtracted from the Annual Incentive Payment earned for the year as calculated following the end of the fiscal year end (example assumes that a 110% of target payout was earned for the year).

Eligible Earnings

Generally, for purposes of this Plan, “Eligible Earnings” means the total base pay earnings (including both straight time and overtime) paid to Participants by Sleep Number during the fiscal year, while a participant in this plan, and before any payroll deductions or tax withholdings. This includes base pay earnings paid for paid time off (including vacation and sick time) and holiday pay. Other payments received from the Company or its team member benefit plans are not considered Eligible Earnings under this Plan (except as required by law) including, but not limited to, expense reimbursement payments and team member discounts.

Target Annual Incentive

The Plan’s Target Incentive Opportunity for Participants is established based on grade level. Participants can look up their Target Incentive Opportunity in Workday under the “Compensation” heading. Target Incentive Opportunity is expressed as a percent of Eligible Earnings and represents the Annual Incentive Payment if the Company achieves its annual performance goal for a 100% of target payout. If a Participant’s Target Incentive Opportunity changes during the fiscal year (e.g., due to promotion), the Target Incentive Opportunity will be a combination of old and new target incentive, prorating for the portion of the fiscal year that was actually worked at either the old or new target incentive level.

Payment Eligibility Requirements

Except for the special termination reasons described below and where prohibited by law, a Participant must be employed with the Company through the following dates to be eligible for an incentive payment under the Plan:

-    For the First Half Progress Payment, the Participant must be employed as of the end of the last day of the second fiscal quarter.

-    For the Annual Incentive Payment, the Participant must be employed as of the end of the last day of the fiscal year.

If an exempt Participant terminates employment and is rehired by the Company during the fiscal year, the Participant’s AIP will be based on Eligible Earnings paid to the Participant after the rehire date. Also, Participants who transfer during the year to a position that is AIP eligible, their Eligible Earnings for purposes of the AIP calculation will only be those earnings from the date of the transfer forward.

Payment Timing

The following is the typical timing for incentive payouts under the Plan, but this timing can vary at the Company’s discretion.

-    For the First Half Progress Payment, it is generally made following the fiscal second quarter earnings release when first half financial results for the Company have been determined and disclosed.

-    For the Annual Incentive Payment, it is generally made following the fiscal fourth quarter earnings release when the annual financial results for the Company have been determined and disclosed.

Participants have no legal, contractual, or equitable right to receive any incentive payment under the Plan prior to the payment date determined by the Committee.

Special Termination of Employment Provisions

If a Participant dies during the fiscal year and prior to the Participant’s termination of

employment with the Company, the Participant’s estate will receive a prorated Annual Incentive Payment calculated by assuming a target payout of 100% and based on the Participant’s Target Incentive Opportunity and Eligible Earnings paid to the Participant during the fiscal year as of the date of death. Payment will be made as soon as administratively practical following the Participant’s death (and no later than March 15 of the following fiscal year). The amount of any First Half Progress Payment made to the Participant will be deducted from the prorated Annual Incentive Payment made to the Participant’s estate.

If a Participant becomes permanently disabled – meaning for purposes of this Plan that the Participant is entitled to disability income benefits under the Company’s long-term disability plan – the Participant may receive a prorated Annual Incentive Payment calculated by assuming a target payout of 100% and based on the Participant’s Target Incentive Opportunity and Eligible Earnings paid to the Participant during the fiscal year up to the date Participant became disabled. Payment will be made within 90 days after the plan administrator of the Company’s long-term disability plan has determined the Participant is entitled to disability income benefits under the long-term disability plan (and no later than March 15 of the following fiscal year). The amount of the First Half Progress Payment made to the Participant (if any) will be deducted from the prorated Annual Incentive Payment.

If a Participant terminates employment during the fiscal year, is at least age fifty-five (55) and has completed at least five (5) years of continuous service with the Company prior to termination, the Participant may be eligible for a prorated Annual Incentive Payment (if one is made) based on the Participant’s Eligible Earnings paid to the Participant during the fiscal year through the date of termination, subject to the following exception. If a Participant is entitled to receive a prorated annual incentive payment under any other Sleep Number plan during the fiscal year, the Participant is not eligible to receive a prorated First Half Progress Payment or Annual Incentive Payment under the terms of this paragraph.  Participants will otherwise not be entitled to a prorated AIP, except where required by law. The prorated Annual Incentive Payment will be based on the Participant’s Target Incentive Opportunity and the actual percent of target payout earned for Company EBITDA performance vs. goals and will be paid to the Participant at the same time as other Plan Participants. If the date of termination occurs within the first half of the fiscal year, the Participant may be entitled to a prorated First Half Progress Payment, if one is made, on the same basis as all other Plan

Participants. The amount of the First Half Progress Payment made to the Participant (if any) will be deducted from the Annual Incentive Payment.

Other Terms and Conditions

This Plan is subject to the terms and conditions as summarized in this Plan and in the Sleep Number Corporation 2020 Equity Incentive Plan. Sleep Number Corporation has the authority to take such actions as it deems necessary and advisable with respect to the execution and administration of this Plan including, without limitation, the full and exclusive discretionary power and authority to: (a) construe and interpret the terms of this Plan and the rights of any Participant or anyone claiming the right to be treated as a Plan Participant, (b) determine the amounts payable to any Plan Participant including, without limitation, the full power and authority to reduce or eliminate the amount payable to any Participant, (c) modify, amend or terminate this Plan or any rights of any Participant or other individual claiming a right under the Plan at any time and (d) delegate to one or more of its members or to one or more officers of the Company such authority, duties or powers with respect to the execution and administration of this Plan; provided, the Company may not take any action or exercise any discretion after the end of the Company’s fiscal year to reduce the unpaid amount of a Participant’s Annual Incentive Payment that was unconditionally earned as of the end of the Company’s fiscal year. All decisions of the Company with respect to any aspect of the Plan including, without limitation, the administration of the Plan, the interpretation or enforcement of any term or condition of the Plan or the determination of any amount payable to any Plan Participant (or anyone else claiming a right to payment under the Plan) shall be final, conclusive, and binding for all purposes.

Only Sleep Number team members are eligible for this Plan. Accordingly, an individual who is classified as an independent contractor, leased employee, or as any other status in which the individual is not classified as a common law employee of Sleep Number or the affiliate at the time services are performed is not an eligible team member under this Plan. No judicial or administrative reclassification or reclassification by Sleep Number or the affiliate will be applied to grant retroactive eligibility to any individual under this Plan.

Nothing contained in this Plan shall be construed as a contract with or guaranty to any Participant or other team member of continued employment with Sleep Number Corporation or any of its subsidiaries for any period of time, at any grade level or at any rate of compensation. All team members are team members “at will” whose employment is subject to termination at any time with or without cause. Nothing in this Plan will interfere with or limit in any way the right of Sleep Number Corporation or any subsidiary to terminate the employment or service of any team member at any time, nor confer upon any team member any right to continue in the employment or service of Sleep Number Corporation or any subsidiary. Any incentive compensation payable pursuant to this Plan will be subject to the terms and conditions of the Sleep Number Corporation Clawback and Forfeiture Policy, unless prohibited by law.

The Company may withhold and deduct from any amount payable hereunder to any participant all amounts the Company reasonably determines are required, including any amounts necessary to satisfy any and all foreign, federal, state and local withholding and employment-related tax requirements attributable to any amount payable hereunder where permitted by law.

The Plan participant agrees that the validity, construction, interpretation, administration and effect of the Plan and any rules, regulations and actions relating to the Plan will be governed by and construed exclusively in accordance with the laws of the State of Minnesota, notwithstanding the conflicts of laws principles of any jurisdiction and the Plan participant consents to the jurisdiction and venue of the federal and state courts located in the State of Minnesota. California team members may elect to void this provision, to the extent it is construed to violate Cal. Labor Code § 925.

The Plan as described in this document is effective January 2, 2023, and only applies to fiscal years of Sleep Number Corporation commencing on or after this date. Nothing contained in this document should be construed as an indication of the Plan being in effect or applying with respect to any other period.

EX-10.4

Exhibit 10.4

SIXTH AMENDMENT TO RETAILER PROGRAM AGREEMENT

(Sleep Number)

THIS SIXTH AMENDMENT TO RETAILER PROGRAM AGREEMENT (this “Amendment”) is

entered into as of November 28, 2022, and amends that certain Retailer Program Agreement, made as of January 1, 2014 (as amended, modified and supplemented from time to time, the “Agreement”), by and between Synchrony Bank (“Bank”) Sleep Number Corporation, formerly known as Select Comfort Corporation (“Sleep Number”), and Select Comfort Retail Corporation (“SCRC” and collectively with Sleep Number, “Retailer”). Capitalized terms used herein and not otherwise defined have the meanings given them in the Agreement.

WHEREAS, Bank and Retailer desire to update the Financial Covenants, subject to the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the mutual promises and subject to the terms and conditions hereinafter set forth, the parties hereby agree as follows:

I.    AMENDMENTS TO THE AGREEMENT

1.1    Amendment to Appendix B. Section I of Appendix B is hereby deleted in its entirety and replaced with the following:

I.    FINANCIAL COVENANTS

Net Leverage Ratio. Retailer shall not permit the Net Leverage Ratio, as of the end of any quarterly reporting period, to exceed (x) 5.00 to 1.00 for the quarterly reporting periods ending December 31, 2022, April 1, 2023 and July 1, 2023, and (y) otherwise, 4.50 to 1.00.

Interest Coverage Ratio. Retailer shall not permit, as of the end of any quarterly reporting period,

the Interest Coverage Ratio to be less than 3.00 to 1.00.

II.    GENERAL

2.1    Authority for Amendment. Retailer represents and warrants to Bank that the execution, delivery and performance of this Amendment has been duly authorized by all requisite corporate action on the part of Retailer and upon execution by all parties, will constitute a legal, binding obligation of Retailer.

2.2    Effect of Amendment. Except as specifically amended hereby, the Agreement, and all terms contained therein, remains in full force and effect. The Agreement, as amended by this Amendment, constitutes the entire understanding of the parties with respect to the subject matter hereof.

2.3    Binding Effect; Severability. Each reference herein to a party hereto shall be deemed to include its successors and assigns, all of whom shall be bound by this Amendment and in whose favor the provisions of this Amendment shall inure. In case any one or more of the provisions contained in this Amendment shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.

2.4    Further Assurances. The parties hereto agree to execute such other documents and instruments and to do such other and further things as may be necessary or desirable for the execution and implementation of this Amendment and the consummation of the transactions contemplated hereby and thereby.

2.5    Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Utah, without regard to principles of conflicts of laws.

1

2.6    Counterparts. This Amendment may be executed in counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one agreement.

IN WITNESS WHEREOF, the parties have caused this Sixth Amendment to be executed by their respective duly authorized officers to be effective as provided herein. The parties expressly consent and agree that this Amendment may be electronically signed. The parties agree that electronic signatures appearing on this Amendment shall be treated, for purposes of validity, enforceability and admissibility, the same as hand-written signatures.

SLEEP NUMBER CORPORATION SELECT COMFORT RETAIL CORPORATION	SYNCHRONY BANK
Signature: /s/ David R. Callen	Signature: /s/ Anthony Foster
Printed Name: David R. Callen	Printed Name: Anthony Foster
Title: CFO	Title: SVP
Signature Date: 12/17/2022	Signature Date: 12/19/2022

2

EX-31.1

Exhibit 31.1

Certification by Chief Executive Officer

I, Shelly R. Ibach, certify that:

1.I have reviewed this Quarterly report on Form 10-Q of Sleep Number Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:    May 9, 2023
	/s/ Shelly R. Ibach
	Shelly R. Ibach
	Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification by Chief Financial Officer

I, Christopher D. Krusmark, certify that:

1.I have reviewed this Quarterly report on Form 10-Q of Sleep Number Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:    May 9, 2023
	/s/ Christopher D. Krusmark
	Christopher D. Krusmark
	Executive Vice President and Interim Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sleep Number Corporation (the “Company”) on Form 10-Q for the period ended April 1, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Shelly R. Ibach, Chief Executive Officer of the Company, solely for the purposes of 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, does hereby certify, to her knowledge, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:    May 9, 2023
	/s/ Shelly R. Ibach
	Shelly R. Ibach
	Chief Executive Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sleep Number Corporation (the “Company”) on Form 10-Q for the period ended April 1, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Christopher D. Krusmark, Executive Vice President and Interim Chief Financial Officer of the Company, solely for the purposes of 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, does hereby certify, to his knowledge, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:    May 9, 2023
	/s/ Christopher D. Krusmark
	Christopher D. Krusmark
	Executive Vice President and Interim Chief Financial Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

XML

Cover Page	3 Months Ended
	Apr. 01, 2023 shares
Cover [Abstract]
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Apr. 01, 2023
Document Transition Report	false
Entity File Number	000-25121
Entity Registrant Name	SLEEP NUMBER CORPORATION
Entity Incorporation, State or Country Code	MN
Entity Tax Identification Number	41-1597886
Entity Address, Address Line One	1001 Third Avenue South
Entity Address, City or Town	Minneapolis,
Entity Address, State or Province	MN
Entity Address, Postal Zip Code	55404
City Area Code	763
Local Phone Number	551-7000
Title of 12(b) Security	Common Stock, par value $0.01 per share
Trading Symbol	SNBR
Security Exchange Name	NASDAQ
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding	22,184,000
Entity Central Index Key	0000827187
Current Fiscal Year End Date	--12-30
Document Fiscal Year Focus	2023
Document Fiscal Period Focus	Q1
Amendment Flag	false

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Apr. 01, 2023	Dec. 31, 2022
Current assets:
Cash and cash equivalents	$ 1,459	$ 1,792
Accounts receivable, net of allowances of $1,474 and $1,267, respectively	23,288	26,005
Inventories	116,781	114,034
Prepaid expenses	26,986	16,006
Other current assets	39,902	39,921
Total current assets	208,416	197,758
Non-current assets:
Property and equipment, net	194,802	200,605
Operating lease right-of-use assets	398,339	397,755
Goodwill and intangible assets, net	67,565	68,065
Deferred income taxes	11,210	7,958
Other non-current assets	82,477	81,795
Total assets	962,809	953,936
Current liabilities:
Borrowings under revolving credit facility	470,600	459,600
Accounts payable	160,304	176,207
Customer prepayments	68,542	73,181
Accrued sales returns	24,071	25,594
Compensation and benefits	30,706	31,291
Taxes and withholding	31,647	23,622
Operating lease liabilities	81,383	79,533
Other current liabilities	58,441	60,785
Total current liabilities	925,694	929,813
Non-current liabilities:
Operating lease liabilities	355,556	356,879
Other non-current liabilities	106,606	105,421
Total liabilities	1,387,856	1,392,113
Shareholders’ deficit:
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding	0	0
Common stock, $0.01 par value; 142,500 shares authorized, 22,184 and 22,014 shares issued and outstanding, respectively	222	220
Additional paid-in capital	6,845	5,182
Accumulated deficit	(432,114)	(443,579)
Total shareholders’ deficit	(425,047)	(438,177)
Total liabilities and shareholders’ deficit	$ 962,809	$ 953,936

XML

Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Apr. 01, 2023	Dec. 31, 2022
Current assets:
Allowances	$ 1,474	$ 1,267
Shareholders’ deficit:
Undesignated preferred stock, shares authorized (in shares)	5,000,000	5,000,000
Undesignated preferred stock, shares issued (in shares)	0	0
Undesignated preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	142,500,000	142,500,000
Common stock, shares issued (in shares)	22,184,000	22,014,000
Common stock, shares outstanding (in shares)	22,184,000	22,014,000

XML

Condensed Consolidated Statements of Operations - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Apr. 01, 2023	Apr. 02, 2022
Income Statement [Abstract]
Net sales	$ 526,527	$ 527,130
Cost of sales	216,262	224,832
Gross profit	310,265	302,298
Operating expenses:
Sales and marketing	230,488	240,259
General and administrative	39,401	41,319
Research and development	14,443	16,305
Total operating expenses	284,332	297,883
Operating income	25,933	4,415
Interest expense, net	9,102	2,127
Income before income taxes	16,831	2,288
Income tax expense	5,366	214
Net income	$ 11,465	$ 2,074
Basic net income per share:
Net income per share – basic (in dollars per share)	$ 0.51	$ 0.09
Weighted-average shares – basic (in shares)	22,296	22,760
Diluted net income per share:
Net income per share – diluted (in dollars per share)	$ 0.51	$ 0.09
Weighted-average shares – diluted (in shares)	22,583	23,591

XML

Condensed Consolidated Statements of Shareholders' Deficit - USD ($) shares in Thousands, $ in Thousands	Total	Common Stock	Additional Paid-in Capital	Accumulated Deficit
Beginning balance (in shares) at Jan. 01, 2022		22,683
Beginning balance at Jan. 01, 2022	$ (424,953)	$ 227	$ 3,971	$ (429,151)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income	2,074			2,074
Exercise of common stock options (in shares)		21
Exercise of common stock options	531		531
Stock-based compensation (in shares)		341
Stock-based compensation	4,133	$ 3	4,130
Repurchases of common stock (in shares)		(813)
Repurchases of common stock	(50,998)	$ (8)	(8,632)	(42,358)
Ending balance (in shares) at Apr. 02, 2022		22,232
Ending balance at Apr. 02, 2022	$ (469,213)	$ 222	0	(469,435)
Beginning balance (in shares) at Dec. 31, 2022	22,014	22,014
Beginning balance at Dec. 31, 2022	$ (438,177)	$ 220	5,182	(443,579)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income	11,465			11,465
Exercise of common stock options (in shares)		17
Exercise of common stock options	389		389
Stock-based compensation (in shares)		271
Stock-based compensation	4,639	$ 3	4,636
Repurchases of common stock (in shares)		(118)
Repurchases of common stock	$ (3,363)	$ (1)	(3,362)
Ending balance (in shares) at Apr. 01, 2023	22,184	22,184
Ending balance at Apr. 01, 2023	$ (425,047)	$ 222	$ 6,845	$ (432,114)

XML

Condensed Consolidated Statement of Cash Flows - USD ($) $ in Thousands	3 Months Ended
	Apr. 01, 2023	Apr. 02, 2022
Cash flows from operating activities:
Net income	$ 11,465	$ 2,074
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	18,218	15,870
Stock-based compensation	4,639	4,133
Net loss on disposals and impairments of assets	12	93
Deferred income taxes	(3,252)	(376)
Changes in operating assets and liabilities:
Accounts receivable	2,717	1,216
Inventories	(2,747)	2,432
Income taxes	8,736	1,102
Prepaid expenses and other assets	(11,056)	10,877
Accounts payable	(574)	2,073
Customer prepayments	(4,639)	12,506
Accrued compensation and benefits	(593)	(25,348)
Other taxes and withholding	(711)	3,104
Other accruals and liabilities	(3,634)	(5,198)
Net cash provided by operating activities	18,581	24,558
Cash flows from investing activities:
Purchases of property and equipment	(15,556)	(19,604)
Proceeds from sales of property and equipment	0	10
Net cash used in investing activities	(15,556)	(19,594)
Cash flows from financing activities:
Repurchases of common stock	(3,363)	(50,998)
Net (decrease) increase in short-term borrowings	(384)	44,712
Proceeds from issuance of common stock	389	531
Debt issuance costs	0	(42)
Net cash used in financing activities	(3,358)	(5,797)
Net decrease in cash and cash equivalents	(333)	(833)
Cash and cash equivalents, at beginning of period	1,792	2,389
Cash and cash equivalents, at end of period	$ 1,459	$ 1,556

XML

Business and Summary of Significant Accounting Policies

3 Months Ended

Apr. 01, 2023

Accounting Policies [Abstract]

Business and Summary of Significant Accounting Policies

Business and Summary of Significant Accounting Policies

Business & Basis of Presentation

The Company prepared the condensed consolidated financial statements as of and for the three months ended April 1, 2023 of Sleep Number Corporation and its 100%-owned subsidiaries (Sleep Number or the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and they reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly its financial position as of April 1, 2023 and December 31, 2022, and the consolidated results of operations and cash flows for the periods presented. The historical and quarterly consolidated results of operations may not be indicative of the results that may be achieved for the full year or any future period.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the most recent audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and other recent filings with the SEC.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of sales, expenses and income taxes during the reporting period. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates will be reflected in the consolidated financial statements in future periods and could be material. The Company’s critical accounting policies consist of stock-based compensation, warranty liabilities and revenue recognition.

The condensed consolidated financial statements include the accounts of Sleep Number Corporation and its 100%-owned subsidiaries. All significant intra-entity balances and transactions have been eliminated in consolidation.

XML

Fair Value Measurements	3 Months Ended
	Apr. 01, 2023
Fair Value Disclosures [Abstract]
Fair Value Measurements	Fair Value MeasurementsAt April 1, 2023 and December 31, 2022, the Company had $18 million and $17 million, respectively, of debt and equity securities that fund the deferred compensation plan and are classified in other non-current assets. The Company also had corresponding deferred compensation plan liabilities of $18 million and $17 million at April 1, 2023 and December 31, 2022, respectively, which are included in other non-current liabilities. The majority of the debt and equity securities are Level 1 as they trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis. Unrealized gains/(losses) on the debt and equity securities offset those associated with the corresponding deferred compensation plan liabilities.

XML

Inventories

3 Months Ended

Apr. 01, 2023

Inventory Disclosure [Abstract]

Inventories

InventoriesInventories consisted of the following (in thousands):

	April 1, 2023		December 31, 2022
Raw materials	$	9,042	$	7,785
Work in progress	102		102
Finished goods	107,637		106,147
	$	116,781	$	114,034

XML

Goodwill and Intangible Assets, Net

3 Months Ended

Apr. 01, 2023

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Intangible Assets, Net

Goodwill and Intangible Assets, Net

Goodwill and Indefinite-lived Intangible Assets

Goodwill was $64 million at April 1, 2023 and December 31, 2022. Indefinite-lived trade name/trademarks totaled $1.4 million at April 1, 2023 and December 31, 2022.

Definite-lived Intangible Assets

	April 1, 2023				December 31, 2022
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Developed technologies	$	18,851	$	18,085	$	18,851	$	17,641
Patents	1,972		615		1,972		559
	$	20,823	$	18,700	$	20,823	$	18,200

Developed technologies - amortization expense for the three months ended April 1, 2023 and April 2, 2022, was $0.4 million and $0.5 million, respectively.

Patents - amortization expense for both the three months ended April 1, 2023 and April 2, 2022, was $55 thousand.

Annual amortization for definite-lived intangible assets for subsequent years are as follows (in thousands):

2023 (excluding the three months ended April 1, 2023)	$	931
2024	222
2025	226
2026	222
2027	222
2028	156
Thereafter	144
Total future amortization for definite-lived intangible assets	$	2,123

XML

Credit Agreement

3 Months Ended

Apr. 01, 2023

Debt Disclosure [Abstract]

Credit Agreement

Credit AgreementAs of April 1, 2023, the Company’s credit facility had a total commitment amount of $825 million. The credit facility is for general corporate purposes, to meet seasonal working capital requirements and to repurchase its stock. The Credit Agreement includes an accordion feature which allows the Company to increase the amount of the credit facility from $825 million to $1.2 billion, subject to lenders’ approval. The Credit Agreement provides the lenders with a collateral

security interest in substantially all of the Company’s assets and those of its subsidiaries and requires the Company to comply with, among other things, a maximum net leverage ratio (5.0x) and a minimum interest coverage ratio (3.0x).

The Company amended the Credit Agreement on October 26, 2022. The amendment, among other things, (a) provides relief from the requirement that the net leverage ratio not exceed 3.75x for certain corporate actions including Permitted Capital Distributions for Performance or Taxes (as defined in the Credit Agreement) and certain acquisition activity; (b) increases the permissible net leverage ratio to 5.0x for the three consecutive quarterly reporting periods ending July 1, 2023; (c) increases the commitment fee rate to 50 basis points and the margin applicable to interest rates for all borrowings by an additional 50 basis points, in each case if the net leverage ratio is greater than or equal to 4.5x; and (d) replaces the option to borrow at an interest rate based on London Interbank Offered Rate (LIBOR) to one based on a Term SOFR Rate. The Term SOFR Rate equals the sum of (x) the Term SOFR Screen Rate (as defined in the Credit Agreement) for the applicable interest period (but in no event less than zero), plus (y) 0.10%, plus (z) the margin based on Sleep Number’s net leverage ratio. For the quarterly reporting period ending September 30, 2023, and subsequent quarterly reporting periods, the maximum leverage ratio will be 4.5x.

Under the terms of the Credit Agreement, the Company pays a variable rate of interest and a commitment fee based on its leverage ratio. The Credit Agreement matures in December 2026. The Company was in compliance with all financial covenants as of April 1, 2023.

The following table summarizes the Company’s borrowings under the credit facility ($ in thousands):

	April 1, 2023			December 31, 2022
Outstanding borrowings	$	470,600		$	459,600
Outstanding letters of credit	$	7,147		$	5,947
Additional borrowing capacity	$	347,253		$	359,453
Weighted-average interest rate	7.1		%	6.7		%

XML

Leases

3 Months Ended

Apr. 01, 2023

Leases [Abstract]

Leases

Leases

The Company leases its retail, office and manufacturing space under operating leases which, in addition to the minimum lease payments, may require payment of a proportionate share of the real estate taxes and certain building operating expenses. While the Company’s local market development approach generally results in long-term participation in given markets, the retail store leases generally provide for an initial lease term of five to 10 years. The Company’s office and manufacturing leases provide for an initial lease term of up to 15 years. In addition, the Company’s mall-based retail store leases may require payment of variable rent based on net sales in excess of certain thresholds. Certain leases may contain options to extend the term of the original lease. The exercise of lease renewal options is at the Company’s sole discretion. Lease options are included in the lease term only if exercise is reasonably certain at lease commencement. The Company’s lease agreements do not contain any material residual value guarantees. The Company also leases vehicles and certain equipment under operating leases with an initial lease term of three to six years.

The Company’s operating lease costs include facility, vehicle and equipment lease costs, but exclude variable lease costs. Operating lease costs are recognized on a straight-line basis over the lease term, after consideration of rent escalations and rent holidays. The lease term for purposes of the calculation begins on the earlier of the lease commencement date or the date the Company takes possession of the property. During lease renewal negotiations that extend beyond the original lease term, the Company estimates straight-line rent expense based on current market conditions. Variable lease costs are recorded when it is probable the cost has been incurred and the amount can be reasonably estimated.

At April 1, 2023, the Company’s finance right-of-use assets and lease liabilities were not significant.

Lease costs were as follows (in thousands):

	Three Months Ended
	April 1, 2023		April 2, 2022
Operating lease costs(1)	$	28,289	$	27,078
Variable lease costs	$	56	$	330

___________________________

(1)Includes short-term lease costs which are not significant.

The maturities of operating lease liabilities as of April 1, 2023, were as follows(1) (in thousands):

2023 (excluding the three months ended April 1, 2023)	$	80,072
2024	97,674
2025	86,081
2026	73,814
2027	58,468
2028	46,420
Thereafter	80,899
Total operating lease payments(2)	523,428
Less: Interest	86,489
Present value of operating lease liabilities	$	436,939

___________________________

(1)Future payments for real estate taxes and certain building operating expenses for which the Company is obligated are not included in the operating lease liabilities. Total operating lease payments exclude $70 million of legally binding minimum lease payments for leases signed but not yet commenced.

(2)Includes the current portion of $81 million for operating lease liabilities.

Other information related to operating leases was as follows:

	April 1, 2023		December 31, 2022
Weighted-average remaining lease term (in years)	6.1		6.2
Weighted-average discount rate	6.3	%	6.2	%

	Three Months Ended
(in thousands)	April 1, 2023		April 2, 2022
Cash paid for amounts included in present value of operating lease liabilities	$	26,538	$	24,209
Right-of-use assets obtained in exchange for operating lease liabilities	$	14,717	$	17,564

XML

Repurchases of Common Stock

3 Months Ended

Apr. 01, 2023

Repurchases Of Common Stock [Abstract]

Repurchases of Common Stock

Repurchases of Common Stock

Repurchases of the Company’s common stock were as follows (in thousands):

	Three Months Ended
	April 1, 2023		April 2, 2022
Amount repurchased under Board-approved share repurchase program	$	—	$	42,308
Amount repurchased in connection with the vesting of employee restricted stock grants	3,363		8,690
Total amount repurchased (based on trade dates)	$	3,363	$	50,998

As of April 1, 2023, the remaining authorization under the Board-approved $600 million share repurchase program was $348 million.

XML

Revenue Recognition

3 Months Ended

Apr. 01, 2023

Revenue from Contract with Customer [Abstract]

Revenue Recognition

Revenue Recognition

Deferred contract assets and deferred contract liabilities are included in the condensed consolidated balance sheets as follows (in thousands):

	April 1, 2023		December 31, 2022
Deferred contract assets included in:
Other current assets	$	28,313	$	28,121
Other non-current assets	56,264		55,564
	$	84,577	$	83,685

	April 1, 2023		December 31, 2022
Deferred contract liabilities included in:
Other current liabilities	$	36,509	$	36,335
Other non-current liabilities	71,847		70,999
	$	108,356	$	107,334

Deferred revenue and costs related to SleepIQ® technology are currently recognized on a straight-line basis over the product's estimated life of 4.5 to 5.0 years because the Company’s inputs are generally expended evenly throughout the performance period. During the three months ended April 1, 2023 and April 2, 2022, the Company recognized revenue of $10 million and $9 million, respectively, that was included in the deferred contract liability balances at the beginning of the respective periods.

Revenue from goods and services transferred to customers at a point in time accounted for approximately 98% of revenues for both the three months ended April 1, 2023 and April 2, 2022.

Net sales were as follows (in thousands):

	Three Months Ended
	April 1, 2023		April 2, 2022
Retail stores	$	458,663	$	444,336
Online, phone, chat and other	67,864		82,794
Total Company	$	526,527	$	527,130

Obligation for Sales Returns

The activity in the sales returns liability account was as follows (in thousands):

	Three Months Ended
	April 1, 2023		April 2, 2022
Balance at beginning of year	$	25,594	$	22,368
Additions that reduce net sales	29,843		26,667
Deductions from reserves	(31,366)		(28,758)
Balance at end of period	$	24,071	$	20,277

XML

Stock-based Compensation Expense

3 Months Ended

Apr. 01, 2023

Share-Based Payment Arrangement [Abstract]

Stock-based Compensation Expense

Stock-based Compensation Expense

Total stock-based compensation expense (benefit) was as follows (in thousands):

	Three Months Ended
	April 1, 2023		April 2, 2022
Stock awards (1)	$	3,855	$	3,274
Stock options	784		859
Total stock-based compensation expense (1)	4,639		4,133
Income tax benefit	1,253		1,033
Total stock-based compensation expense, net of tax	$	3,386	$	3,100

___________________________

(1) Changes in stock-based compensation expense include the cumulative impact of the change in the expected achievements of certain performance targets.

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Profit Sharing and 401(k) Plan	3 Months Ended
	Apr. 01, 2023
Profit Sharing And 401 (k) Plan [Abstract]
Profit Sharing and 401(k) Plan	Profit Sharing and 401(k) PlanUnder the Company’s profit sharing and 401(k) plan, eligible employees may defer up to 50% of their compensation on a pre-tax basis, subject to Internal Revenue Service limitations. Each pay period, the Company may make a discretionary contribution equal to a percentage of the employee’s contribution. During the three months ended April 1, 2023 and April 2, 2022, the Company’s contributions, net of forfeitures, were $2.4 million and $2.8 million, respectively.

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Net Income per Common Share

3 Months Ended

Apr. 01, 2023

Earnings Per Share [Abstract]

Net Income per Common Share

Net Income per Common Share

The components of basic and diluted net income per share were as follows (in thousands, except per share amounts):

	Three Months Ended
	April 1, 2023		April 2, 2022
Net income	$	11,465	$	2,074
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	22,296		22,760
Dilutive effect of stock-based awards	287		831
Diluted weighted-average shares outstanding	22,583		23,591
Net income per share – basic	$	0.51	$	0.09
Net income per share – diluted	$	0.51	$	0.09

Additional potential dilutive stock-based awards totaling 1.1 million and 0.4 million for the three months ended April 1, 2023 and April 2, 2022, respectively, have been excluded from the diluted net income per share calculations because these stock-based awards were anti-dilutive.

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Commitments and Contingencies

3 Months Ended

Apr. 01, 2023

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

Warranty Liabilities

The activity in the accrued warranty liabilities account was as follows (in thousands):

	Three Months Ended
	April 1, 2023		April 2, 2022
Balance at beginning of year	$	8,997	$	10,069
Additions charged to costs and expenses for current-year sales	4,371		4,447
Deductions from reserves	(4,325)		(4,750)
Changes in liability for pre-existing warranties during the current year, including expirations	(88)		(31)
Balance at end of period	$	8,955	$	9,735

Legal Proceedings

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. In accordance with U.S. generally accepted accounting principles, the Company records a liability in its consolidated financial statements with respect to any of these matters when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. If a material loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. With respect to currently pending legal proceedings, the Company has not established an estimated range of reasonably possible material losses either because it believes that is has valid defenses to claims asserted against it, the proceeding has not advanced to a stage of discovery that would enable it to establish an estimate, or the potential loss is not material. The Company currently does not expect the outcome of pending legal proceedings to have a material effect on its 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 claims asserted against the Company could adversely impact its consolidated results of operations, financial position or cash flows. The Company expenses legal costs as incurred.

Shareholder Class Action Complaints

On December 14, 2021, purported Sleep Number shareholder, Steamfitters Local 449 Pension & Retirement Security Funds (Steamfitters), filed a putative class action complaint in the United States District Court for the District of Minnesota (the District of Minnesota) on behalf of all purchasers of Sleep Number common stock between February 18, 2021 and July 20, 2021, inclusive, against Sleep Number, Shelly Ibach and David Callen, the Company’s former Executive Vice President and Chief Financial Officer. Steamfitters alleges material misstatements and omissions in certain of Sleep Number’s public disclosures during the purported class period, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act). The complaint seeks, among other things, unspecified monetary damages, reasonable costs and expenses and equitable/injunctive or other relief as deemed appropriate by the District of Minnesota.

On February 14, 2022, a second purported Sleep Number shareholder, Ricardo Dario Schammas, moved for appointment as lead plaintiff in the action. On March 24, 2022, the District of Minnesota heard argument on Schammas’s motion, and subsequently appointed Steamfitters and Schammas as Co-Lead Plaintiffs (together, Co-Lead Plaintiffs). On July 19, 2022, Co-Lead Plaintiffs filed a consolidated amended complaint, which, like the predecessor complaint, asserts claims against Sleep Number, Shelly Ibach, and David Callen under Sections 10(b) and 20(a) of the Exchange Act. Co- Lead Plaintiffs purport to assert these claims on behalf of all purchasers of Sleep Number common stock between February 18, 2021 and July 20, 2021. Defendants moved to dismiss the consolidated complaint on September 19, 2022, which motion was heard by the Court on January 17, 2023, and remains pending.

Shareholder Derivative Complaint

On May 12, 2022, Gwendolyn Calla Moore, as the appointed representative of purported Sleep Number shareholder Matthew Gelb, filed a derivative action (the Derivative Action) in the District of Minnesota against Jean-Michel Valette, Shelly Ibach, Barbara Matas, Brenda Lauderback, Daniel Alegre, Deborah Kilpatrick, Julie Howard, Kathleen Nedorostek, Michael Harrison, Stephen Gulis, Jr., David Callen, and Kevin Brown. Moore purports to assert claims on behalf of Sleep Number for breaches of fiduciary duty, waste, and contribution under Sections 10(b) and 21(d) of the Exchange Act. Moore’s allegations generally mirror those asserted in the securities complaint described above. The Moore complaint seeks damages in an unspecified amount, disgorgement, interest, and costs and expenses, including attorneys’ and experts’ fees.

On September 13, 2022, the District of Minnesota entered a joint stipulation staying all proceedings in the Derivative Action pending the outcome of any motion to dismiss the Steamfitters consolidated amended complaint.

Stockholder Demand

On March 25, 2022, Sleep Number received a shareholder litigation demand (the “Demand”), requesting that the Board investigate the allegations in the securities class action complaint and pursue claims on Sleep Number’s behalf based on those allegations. On May 12, 2022, the Board established a special litigation committee to investigate the demand.

On October 5 and October 12, 2022, Sleep Number received two additional shareholder litigation demands, which adopted and incorporated the allegations and requests in the Demand. Both of these additional litigation demands were referred to the special litigation committee.

The special litigation committee has concluded that it would not be in the best interests of Sleep Number and its shareholders to take any of the actions requested in the demands at this time.

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Business and Summary of Significant Accounting Policies (Policies)

3 Months Ended

Apr. 01, 2023

Accounting Policies [Abstract]

Business & Basis of Presentation

Business & Basis of Presentation

The Company prepared the condensed consolidated financial statements as of and for the three months ended April 1, 2023 of Sleep Number Corporation and its 100%-owned subsidiaries (Sleep Number or the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and they reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly its financial position as of April 1, 2023 and December 31, 2022, and the consolidated results of operations and cash flows for the periods presented. The historical and quarterly consolidated results of operations may not be indicative of the results that may be achieved for the full year or any future period.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the most recent audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and other recent filings with the SEC.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of sales, expenses and income taxes during the reporting period. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates will be reflected in the consolidated financial statements in future periods and could be material. The Company’s critical accounting policies consist of stock-based compensation, warranty liabilities and revenue recognition.

Consolidation

The condensed consolidated financial statements include the accounts of Sleep Number Corporation and its 100%-owned subsidiaries. All significant intra-entity balances and transactions have been eliminated in consolidation.

Leases

The Company leases its retail, office and manufacturing space under operating leases which, in addition to the minimum lease payments, may require payment of a proportionate share of the real estate taxes and certain building operating expenses. While the Company’s local market development approach generally results in long-term participation in given markets, the retail store leases generally provide for an initial lease term of five to 10 years. The Company’s office and manufacturing leases provide for an initial lease term of up to 15 years. In addition, the Company’s mall-based retail store leases may require payment of variable rent based on net sales in excess of certain thresholds. Certain leases may contain options to extend the term of the original lease. The exercise of lease renewal options is at the Company’s sole discretion. Lease options are included in the lease term only if exercise is reasonably certain at lease commencement. The Company’s lease agreements do not contain any material residual value guarantees. The Company also leases vehicles and certain equipment under operating leases with an initial lease term of three to six years.

The Company’s operating lease costs include facility, vehicle and equipment lease costs, but exclude variable lease costs. Operating lease costs are recognized on a straight-line basis over the lease term, after consideration of rent escalations and rent holidays. The lease term for purposes of the calculation begins on the earlier of the lease commencement date or the date the Company takes possession of the property. During lease renewal negotiations that extend beyond the original lease term, the Company estimates straight-line rent expense based on current market conditions. Variable lease costs are recorded when it is probable the cost has been incurred and the amount can be reasonably estimated.

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Inventories (Tables)

3 Months Ended

Apr. 01, 2023

Inventory Disclosure [Abstract]

Schedule of Inventories

Inventories consisted of the following (in thousands):

	April 1, 2023		December 31, 2022
Raw materials	$	9,042	$	7,785
Work in progress	102		102
Finished goods	107,637		106,147
	$	116,781	$	114,034

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Goodwill and Intangible Assets, Net (Tables)

3 Months Ended

Apr. 01, 2023

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Annual Amortization of Definite-Lived Tangible Assets

Annual amortization for definite-lived intangible assets for subsequent years are as follows (in thousands):

2023 (excluding the three months ended April 1, 2023)	$	931
2024	222
2025	226
2026	222
2027	222
2028	156
Thereafter	144
Total future amortization for definite-lived intangible assets	$	2,123

Schedule of Finite-Lived Intangible Assets

Definite-lived Intangible Assets

	April 1, 2023				December 31, 2022
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Developed technologies	$	18,851	$	18,085	$	18,851	$	17,641
Patents	1,972		615		1,972		559
	$	20,823	$	18,700	$	20,823	$	18,200

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Credit Agreement (Tables)

3 Months Ended

Apr. 01, 2023

Debt Disclosure [Abstract]

Schedule of Borrowings Under Credit Facility

The following table summarizes the Company’s borrowings under the credit facility ($ in thousands):

	April 1, 2023			December 31, 2022
Outstanding borrowings	$	470,600		$	459,600
Outstanding letters of credit	$	7,147		$	5,947
Additional borrowing capacity	$	347,253		$	359,453
Weighted-average interest rate	7.1		%	6.7		%

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Leases (Tables)

3 Months Ended

Apr. 01, 2023

Leases [Abstract]

Schedule of Operating Lease Costs

Lease costs were as follows (in thousands):

	Three Months Ended
	April 1, 2023		April 2, 2022
Operating lease costs(1)	$	28,289	$	27,078
Variable lease costs	$	56	$	330

___________________________

(1)Includes short-term lease costs which are not significant.

Schedule of Maturities of Operating Lease Liabilities

The maturities of operating lease liabilities as of April 1, 2023, were as follows(1) (in thousands):

2023 (excluding the three months ended April 1, 2023)	$	80,072
2024	97,674
2025	86,081
2026	73,814
2027	58,468
2028	46,420
Thereafter	80,899
Total operating lease payments(2)	523,428
Less: Interest	86,489
Present value of operating lease liabilities	$	436,939

___________________________

(1)Future payments for real estate taxes and certain building operating expenses for which the Company is obligated are not included in the operating lease liabilities. Total operating lease payments exclude $70 million of legally binding minimum lease payments for leases signed but not yet commenced.

(2)Includes the current portion of $81 million for operating lease liabilities.

Schedule of Other Information Related Operating Leases

Other information related to operating leases was as follows:

	April 1, 2023		December 31, 2022
Weighted-average remaining lease term (in years)	6.1		6.2
Weighted-average discount rate	6.3	%	6.2	%

	Three Months Ended
(in thousands)	April 1, 2023		April 2, 2022
Cash paid for amounts included in present value of operating lease liabilities	$	26,538	$	24,209
Right-of-use assets obtained in exchange for operating lease liabilities	$	14,717	$	17,564

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Repurchases of Common Stock (Tables)

3 Months Ended

Apr. 01, 2023

Repurchases Of Common Stock [Abstract]

Schedule of Repurchases of Common Stock

Repurchases of the Company’s common stock were as follows (in thousands):

	Three Months Ended
	April 1, 2023		April 2, 2022
Amount repurchased under Board-approved share repurchase program	$	—	$	42,308
Amount repurchased in connection with the vesting of employee restricted stock grants	3,363		8,690
Total amount repurchased (based on trade dates)	$	3,363	$	50,998

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Revenue Recognition (Tables)

3 Months Ended

Apr. 01, 2023

Revenue from Contract with Customer [Abstract]

Schedule of Deferred Contract Liabilities and Deferred Contract Assets

Deferred contract assets and deferred contract liabilities are included in the condensed consolidated balance sheets as follows (in thousands):

	April 1, 2023		December 31, 2022
Deferred contract assets included in:
Other current assets	$	28,313	$	28,121
Other non-current assets	56,264		55,564
	$	84,577	$	83,685

	April 1, 2023		December 31, 2022
Deferred contract liabilities included in:
Other current liabilities	$	36,509	$	36,335
Other non-current liabilities	71,847		70,999
	$	108,356	$	107,334

Disaggregation of Revenue

Net sales were as follows (in thousands):

	Three Months Ended
	April 1, 2023		April 2, 2022
Retail stores	$	458,663	$	444,336
Online, phone, chat and other	67,864		82,794
Total Company	$	526,527	$	527,130

Schedule of Sales Return Liability

The activity in the sales returns liability account was as follows (in thousands):

	Three Months Ended
	April 1, 2023		April 2, 2022
Balance at beginning of year	$	25,594	$	22,368
Additions that reduce net sales	29,843		26,667
Deductions from reserves	(31,366)		(28,758)
Balance at end of period	$	24,071	$	20,277

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Stock-based Compensation Expense (Tables)

3 Months Ended

Apr. 01, 2023

Share-Based Payment Arrangement [Abstract]

Schedule of Stock-Based Compensation Expense

Total stock-based compensation expense (benefit) was as follows (in thousands):

	Three Months Ended
	April 1, 2023		April 2, 2022
Stock awards (1)	$	3,855	$	3,274
Stock options	784		859
Total stock-based compensation expense (1)	4,639		4,133
Income tax benefit	1,253		1,033
Total stock-based compensation expense, net of tax	$	3,386	$	3,100

___________________________

(1) Changes in stock-based compensation expense include the cumulative impact of the change in the expected achievements of certain performance targets.

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Net Income per Common Share (Tables)

3 Months Ended

Apr. 01, 2023

Earnings Per Share [Abstract]

Components of Basic and Diluted Net (Loss) Income per Share

The components of basic and diluted net income per share were as follows (in thousands, except per share amounts):

	Three Months Ended
	April 1, 2023		April 2, 2022
Net income	$	11,465	$	2,074
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	22,296		22,760
Dilutive effect of stock-based awards	287		831
Diluted weighted-average shares outstanding	22,583		23,591
Net income per share – basic	$	0.51	$	0.09
Net income per share – diluted	$	0.51	$	0.09

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Commitments and Contingencies (Tables)

3 Months Ended

Apr. 01, 2023

Commitments and Contingencies Disclosure [Abstract]

Warranty Liabilities

The activity in the accrued warranty liabilities account was as follows (in thousands):

	Three Months Ended
	April 1, 2023		April 2, 2022
Balance at beginning of year	$	8,997	$	10,069
Additions charged to costs and expenses for current-year sales	4,371		4,447
Deductions from reserves	(4,325)		(4,750)
Changes in liability for pre-existing warranties during the current year, including expirations	(88)		(31)
Balance at end of period	$	8,955	$	9,735

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Fair Value Measurements (Details) - Level 1 - USD ($) $ in Millions	Apr. 01, 2023	Dec. 31, 2022
Other non-current assets | Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Marketable securities assets funding the deferred compensation plan	$ 18	$ 17
Other non-current liabilities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Deferred compensation plan liability	$ 18	$ 17

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Inventories (Details) - USD ($) $ in Thousands	Apr. 01, 2023	Dec. 31, 2022
Inventory Disclosure [Abstract]
Raw materials	$ 9,042	$ 7,785
Work in progress	102	102
Finished goods	107,637	106,147
Inventories	$ 116,781	$ 114,034

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Goodwill and Intangible Assets, Net - Narrative (Details) - USD ($) $ in Thousands	3 Months Ended
	Apr. 01, 2023	Apr. 02, 2022	Dec. 31, 2022
Goodwill And Intangible Assets [Line Items]
Goodwill	$ 64,000		$ 64,000
Gross carrying amount	20,823		20,823
Accumulated amortization	18,700		18,200
Developed Technologies
Goodwill And Intangible Assets [Line Items]
Amortization expense	400	$ 500
Gross carrying amount	18,851		18,851
Accumulated amortization	18,085		17,641
Patents
Goodwill And Intangible Assets [Line Items]
Amortization expense	55	$ 55
Gross carrying amount	1,972		1,972
Accumulated amortization	615		559
Trade Names
Goodwill And Intangible Assets [Line Items]
Indefinite-lived trade name/trademarks	$ 1,400		$ 1,400

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Goodwill and Intangible Assets, Net - Definite-lived Intangible Assets (Details) - USD ($) $ in Thousands	Apr. 01, 2023	Dec. 31, 2022
Definite-Lived Intangible Assets [Line Items]
Gross carrying amount	$ 20,823	$ 20,823
Accumulated amortization	18,700	18,200
Developed Technologies
Definite-Lived Intangible Assets [Line Items]
Gross carrying amount	18,851	18,851
Accumulated amortization	18,085	17,641
Patents
Definite-Lived Intangible Assets [Line Items]
Gross carrying amount	1,972	1,972
Accumulated amortization	$ 615	$ 559

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Goodwill and Intangible Assets, Net - Annual Amortization for Definite-Lived Intangible (Details) $ in Thousands	Apr. 01, 2023 USD ($)
Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]
2023 (excluding the three months ended April 1, 2023)	$ 931
2024	222
2025	226
2026	222
2027	222
2028	156
Thereafter	144
Total future amortization for definite-lived intangible assets	$ 2,123

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Credit Agreement - Narrative (Details) - Revolving Credit Facility - Line of Credit $ in Millions	Oct. 26, 2022	Apr. 01, 2023 USD ($)	Oct. 25, 2022
Line of Credit Facility [Line Items]
Current borrowing capacity		$ 825
Total commitment amount		$ 1,200
Minimum interest coverage ratio		3.0
Net leverage ratio, maximum threshold	4.5	5.0	3.75
Net leverage ratio, maximum threshold for three consecutive quarterly reporting periods	5.0
Commitment fee rate	0.50%
Variable rate	0.50%
Secured Overnight Financing Rate (SOFR)
Line of Credit Facility [Line Items]
Variable rate	0.10%

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Credit Agreement - Schedule of Borrowings Under Credit Facility (Details) - USD ($) $ in Thousands	Apr. 01, 2023	Dec. 31, 2022
Debt Disclosure [Abstract]
Outstanding borrowings	$ 470,600	$ 459,600
Outstanding letters of credit	7,147	5,947
Additional borrowing capacity	$ 347,253	$ 359,453
Weighted-average interest rate	7.10%	6.70%

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Leases - Additional Information (Details)	Apr. 01, 2023
Minimum | Retail Store Leases
Lessee, Lease, Description [Line Items]
Lease term	5 years
Minimum | Lease Vehicles and Certain Equipment Under Operating Leases
Lessee, Lease, Description [Line Items]
Lease term	3 years
Maximum | Retail Store Leases
Lessee, Lease, Description [Line Items]
Lease term	10 years
Maximum | Office and Manufacturing Leases
Lessee, Lease, Description [Line Items]
Lease term	15 years
Maximum | Lease Vehicles and Certain Equipment Under Operating Leases
Lessee, Lease, Description [Line Items]
Lease term	6 years

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Leases - Schedule of Operating Lease Costs (Details) - USD ($) $ in Thousands	3 Months Ended
	Apr. 01, 2023	Apr. 02, 2022
Leases [Abstract]
Operating lease costs	$ 28,289	$ 27,078
Variable lease costs	$ 56	$ 330

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Leases - Schedule of Maturities of Operating Lease Liabilities (Details) - USD ($) $ in Thousands	Apr. 01, 2023	Dec. 31, 2022
Leases [Abstract]
2023 (excluding the three months ended April 1, 2023)	$ 80,072
2024	97,674
2025	86,081
2026	73,814
2027	58,468
2028	46,420
Thereafter	80,899
Total operating lease payments	523,428
Less: Interest	86,489
Present value of operating lease liabilities	436,939
Amount leases executed, not yet commenced, excluded from table.	70,000
Operating lease liabilities, current	$ 81,383	$ 79,533

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Leases - Schedule of Other Information Related Operating Leases (Details) - USD ($) $ in Thousands	3 Months Ended
	Apr. 01, 2023	Apr. 02, 2022	Dec. 31, 2022
Leases [Abstract]
Weighted-average remaining lease term (in years)	6 years 1 month 6 days		6 years 2 months 12 days
Weighted-average discount rate	6.30%		6.20%
Cash paid for amounts included in present value of operating lease liabilities	$ 26,538	$ 24,209
Right-of-use assets obtained in exchange for operating lease liabilities	$ 14,717	$ 17,564

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Repurchases of Common Stock - Schedule of Repurchase of Common Stock (Details) - USD ($) $ in Thousands	3 Months Ended
	Apr. 01, 2023	Apr. 02, 2022
Repurchases Of Common Stock [Abstract]
Amount repurchased under Board-approved share repurchase program	$ 0	$ 42,308
Amount repurchased in connection with the vesting of employee restricted stock grants	3,363	8,690
Total amount repurchased (based on trade dates)	$ 3,363	$ 50,998

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Repurchases of Common Stock - Additional Information (Details) $ in Millions	Apr. 01, 2023 USD ($)
Repurchases Of Common Stock [Abstract]
Authorized share repurchase program	$ 600
Remaining authorized stock purchase plan	$ 348

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Revenue Recognition - Schedule of Deferred Contract Assets and Deferred Contract Liabilities (Details) - USD ($) $ in Thousands	Apr. 01, 2023	Dec. 31, 2022
Deferred contract assets included in:
Deferred contract assets	$ 84,577	$ 83,685
Deferred contract liabilities included in:
Deferred contract liabilities	108,356	107,334
Other current assets
Deferred contract assets included in:
Other current assets	28,313	28,121
Other non-current assets
Deferred contract assets included in:
Other non-current assets	56,264	55,564
Other current liabilities
Deferred contract liabilities included in:
Other current liabilities	36,509	36,335
Other non-current liabilities
Deferred contract liabilities included in:
Other non-current liabilities	$ 71,847	$ 70,999

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Revenue Recognition - Additional Information (Details) - USD ($) $ in Millions	3 Months Ended
	Apr. 01, 2023	Apr. 02, 2022
Disaggregation of Revenue [Line Items]
Revenue recognized, included in beginning deferred contract liability balance	$ 10	$ 9
Transferred at Point in Time | Revenue from Contract with Customer Benchmark | Timing of Transfer of Goods or Services Concentration Risk
Disaggregation of Revenue [Line Items]
Revenue recognized at a point in time	98.00%	98.00%
SleepIQ Technology | Minimum
Disaggregation of Revenue [Line Items]
Estimated product life	4 years 6 months
SleepIQ Technology | Maximum
Disaggregation of Revenue [Line Items]
Estimated product life	5 years

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Revenue Recognition - Disaggregation of Revenue (Details) - USD ($) $ in Thousands	3 Months Ended
	Apr. 01, 2023	Apr. 02, 2022
Disaggregation of Revenue [Line Items]
Net sales	$ 526,527	$ 527,130
Retail stores
Disaggregation of Revenue [Line Items]
Net sales	458,663	444,336
Online, phone, chat and other
Disaggregation of Revenue [Line Items]
Net sales	$ 67,864	$ 82,794

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Revenue Recognition - Schedule of Sales Return Liability (Details) - USD ($) $ in Thousands	3 Months Ended
	Apr. 01, 2023	Apr. 02, 2022
Sales Return Liability [Roll Forward]
Balance at beginning of year	$ 25,594	$ 22,368
Additions that reduce net sales	29,843	26,667
Deductions from reserves	(31,366)	(28,758)
Balance at end of period	$ 24,071	$ 20,277

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Stock-based Compensation Expense (Details) - USD ($) $ in Thousands	3 Months Ended
	Apr. 01, 2023	Apr. 02, 2022
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock-based compensation expense	$ 4,639	$ 4,133
Income tax benefit	1,253	1,033
Total stock-based compensation expense, net of tax	3,386	3,100
Stock awards
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock-based compensation expense	3,855	3,274
Stock options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock-based compensation expense	$ 784	$ 859

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Profit Sharing and 401(k) Plan (Details) - USD ($) $ in Millions	3 Months Ended
	Apr. 01, 2023	Apr. 02, 2022
Profit Sharing And 401 (k) Plan [Abstract]
Employee compensation deferral (as a percent)	50.00%
Employer contributions	$ 2.4	$ 2.8

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Net Income per Common Share - Components of Basic and Diluted Net Income Per Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	Apr. 01, 2023	Apr. 02, 2022
Earnings Per Share [Abstract]
Net income	$ 11,465	$ 2,074
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding (in shares)	22,296	22,760
Dilutive effect of stock-based awards (in shares)	287	831
Diluted weighted-average shares outstanding (in shares)	22,583	23,591
Net income per share – basic (in dollars per share)	$ 0.51	$ 0.09
Net income per share – diluted (in dollars per share)	$ 0.51	$ 0.09

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Net Income per Common Share - Narrative (Details) - shares shares in Millions	3 Months Ended
	Apr. 01, 2023	Apr. 02, 2022
Earnings Per Share [Abstract]
Antidilutive securities excluded from computation of earnings per share (in shares)	1.1	0.4

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Commitments and Contingencies (Details) - USD ($) $ in Thousands	3 Months Ended
	Apr. 01, 2023	Apr. 02, 2022
Warranty Liabilities [Roll Forward]
Balance at beginning of year	$ 8,997	$ 10,069
Additions charged to costs and expenses for current-year sales	4,371	4,447
Deductions from reserves	(4,325)	(4,750)
Changes in liability for pre-existing warranties during the current year, including expirations	(88)	(31)
Balance at end of period	$ 8,955	$ 9,735

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Commitments and Contingencies - Narrative (Details)	Oct. 12, 2022 litigationDemand
Pending Litigation
Loss Contingencies [Line Items]
Number of litigation demands	2