Sleep Number Corporation Stock

Welcome to Sleep Number's First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, Tuesday, May 12, 2026. This conference call will be available on the company's website, ir.sleepnumber.com. Please refer to today's news release to access the replay.

On today's call, we have Linda Findley, President and CEO; and Amy O'Keefe Chief Financial Officer of Sleep Number. Before handing the call over to the company, we will review the safe harbor statement.

The primary purpose of this call is to discuss the results of the fiscal period ending on April 4, 2026. This call, including commentary and responses to questions, may include certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties outlined in the company's earnings news release and discussed in some detail in the annual report on Form 10-K and other periodic filings with the SEC.

The company's actual future results may vary materially. In addition, any forward-looking statements represent the company's views only as of today and should not be relied upon as representing its views as of any subsequent date. The company specifically disclaims any obligation to update these statements.

Please also refer to the company's news release and SEC filings for a reconciliation of certain non-GAAP financial measures [ for ] applicable and for additional supplemental financial information included in the news release or that may be discussed on this call.

I will now turn the call over to Linda Findley, Sleep Number's President and CEO.

Good morning, and thank you for joining us. I'll start with a brief update on our capital position. On April 27, we reached an agreement with our existing lenders that provides near-term relief from certain financial covenants, adding $55 million of incremental liquidity, including a new $25 million term loan.

This matters for two reasons. First, we believe it allows us to continue executing our turnaround plan for the business and actively market and sell our new products without disruption. Second, it gives us time to focus on a longer-term solution for our capital structure, including evaluating a range of strategic and financing options best for the business. Amy will walk through the details shortly.

Turning to the quarter, as we said on our last call, we saw a significant impact on sales in early January and February based on weather and macro conditions. However, demand improved as the quarter progressed. March demand increased approximately 6%, marking our first year-over-year demand growth on a comparable basis in 2 years. That improvement was driven by the launch of [ Comfort mode ], updated marketing and promotions to clear legacy inventory.

We delivered net sales of $319 million, in line with our expectations and adjusted EBITDA of $6 million ahead of our internal plan. While we just discussed the March demand metric, we recognize revenue when the [ bed ] is delivered. Since the majority of new products launched on March 23, most of the net sales will be reflected in Q2 rather than in Q1.

Now let me talk about the progress we're seeing against -- across the business and why we're encouraged by the early results.

Let's start with the product. We completed a full product reset across all of our stores in less than 4 weeks. At the same time, our [ manufacturing and home delivery ] teams transitioned to the new lineup seamlessly and without disruption.

The rollout also gave us an early read on product success. During the launch period, stores set with the new lineup saw 12% higher [ ARU ] than stores with previous products. Given the product rollout happened at the end of Q1, I'm going to share some metrics we are seeing in Q2 that help us determine progress.

First, we have the success of [ Comfort ] mode, the first best bed we launched in January. We are seeing 15 points of improvements in overall Net Promoter Score. And when we compare to our prior entry-level mattresses, the [ C Series ], Net Promoter Score improved by 27 points.

With this improvement in NPS and with more than 100 days in market, we are seeing this flow through to our financials with 100 bps reduction in return rate for [ comfort ] mode versus historical return rates of the product it replaces.

Second, across the full portfolio, we are seeing a strong attach in our premium ComfortNext line, which features our unique [ Tribrid ] technology. More specifically, ComfortNext [ Lux ] is now our top selling bed at approximately $4,000 for a [ clean ] size at a healthy margin and representing an early shift into the planned product mix.

To be clear, the new beds have a better average margin profile than the beds they replaced, and the planned mix of the new line should return us to historic gross margin levels once we get past all onetime launch and clearance cost pressures.

We also conducted in-home user testing during the rollout and saw the direct and measurable impact of our beds. Compared to their original mattresses, 9 in 10 people slept better, 8 in 10 people got more sleep and 8 in 10 people experienced less pain on a Sleep Number bed.

Shifting to marketing, we continue to drive improvements in our website experience. This has improved organic search visibility and simplified the purchase process. E-commerce demand grew year-over-year by approximately 5% in April, partly because of this work. In addition, our ongoing work in AI discoverability has improved AI citations by approximately 25% year-to-date.

To support the product launch, we introduced a new integrated brand campaign to a [ good life fleet ], which features brand spots along with product-specific [ creative ]. These reinforce what differentiates Sleep Number, a personalized bed that adapts your life and sleep needs as your life and sleep needs change. The early response is positive and is trending above benchmarks in the category.

Lastly, we launched our first [ Travis Kelcy [ content last week, alongside expanded influencer activity, both designed to drive awareness and store traffic. We continue to see high engagement on our social content. For example, the [ Travis Kelsey ] video garnered over 7 million views and high-value engagement, especially in [ shares and phase ].

We continue to expand distribution in a disciplined way. A recent example is our test with [ COSCO ]. We launched an exclusive online bet at costco.com, and early indications are encouraging through both direct sales and increased visibility in our stores.

We also remain focused on cost discipline. Since the start of 2025, we've identified over $235 million of annualized savings, $200 million of which has already been executed. With the cost savings implemented, we expect to stay on track for our EBITDA plan.

Looking ahead, we are measured in our outlook, consistent with what we said on our last earnings call. April demand was in line with our internal expectations and seasonal trends. We continue to plan conservatively given ongoing consumer uncertainty and macro volatility. That said, we're encouraged by customer response to the new beds and the performance of our refreshed marketing, which continue -- which reinforces confidence in our plans.

As I reflect on my 1-year anniversary as CEO, I want to step back for a moment. When I joined Sleep Number, I saw a powerful brand, a compelling mission and a deeply committed team. I also saw a cost structure, product offering, marketing approach and balance sheet that limited long-term performance.

Over the past year, we've taken meaningful steps to address those challenges, reducing costs, modernizing our marketing and executing the most significant product reset we've had in years. We're confident in our marketing and product execution, and our capital structure is the final major piece of the turnaround that we're focused on solving.

Finally, I want to thank our Sleep member team members. None of this progress happens without your focus, dedication and commitment to quality sleep. I'm grateful for your work and proud of the resilience you show every day.

With that, I'll turn it over to Amy.

Thank you, Linda, and good morning. we are pleased to have finalized negotiations with our lenders that resulted in approximately [ $55 million ] of near-term incremental liquidity through covenant relief and $25 million of new capital.

As we disclosed in the 10-K, our plan to alleviate the risk to continuing operations was threefold: Number one, execute on the turnaround strategy centered on products, marketing and distribution while rightsizing the fixed cost base; two, engage in negotiations with lenders with the goal of amending or waiving financial covenants; and three, engage financial advisers to identify and secure additional capital and other comprehensive solutions to address the capital structure for the creation of long-term value.

We are progressing well against that plan. As Linda described, the turnaround strategy is well underway. As we head into Memorial Day, our new lineup of products has launched, the stores were fully reset as of April 17, and new marketing creative is live with significantly increased investment in Q2 compared to last year. Additionally, we are executing against our $50 million annualized cost savings plan, having executed approximately 30% on a year-to-date basis.

Related to the recently executed credit agreement amendment, we were able to alleviate the near-term pressure on liquidity and covenants.

The agreement provides for the following: one, a new senior secured term loan facility of $25 million due June 30, 2026; two, relief from the $30 million minimum liquidity covenant through June 30, 2026; and three, forbearance by the agent and lenders from exercising their rights under the credit agreement for specified covenant defaults as of April 4.

With respect to a long-term solution to our capital structure, we have work to do over the next few months using the short-term relief we received from our lenders. Along with our advisers, we continue to progress plans to finalize the strategic transaction designed to maximize stakeholder value.

Now let's get into Q1 results, which were consistent with the expectations that we shared on our last earnings call. Net sales were $319 million in Q1, which was 19% below the same period in the prior year. Note that in Q1, consistent with our plan, investment in media was down 21%.

In addition, as Linda mentioned, and as we discussed on our last call, demand performance in January and early February was soft. However, we did see sequential improvement across the quarter, culminating with year-over-year demand growth in March, aided by discounting to move legacy SKUs in advance of the launch of new products on March 23.

Gross profit margin was 57.9% in the quarter, which was ahead of plan. but 329 basis points below last year, primarily driven by a shift in mix to the new [ Comfort ] mode bed and discounting of legacy inventory. As the full line of products are now in the market and as supply of legacy inventory diminishes, we expect that gross margin will improve to at or above historical levels.

Adjusted operating expenses before restructuring and other nonrecurring costs were $195 million, down [ $42 million ] or 18% year-over-year. The reduction was driven by ongoing cost savings initiatives to rightsize the fixed cost base and lower variable selling expenses. Adjusted EBITDA was $5.8 million, down [ $16 million ] versus the same period last year.

Turning to the balance sheet and cash flow, total liquidity, including cash and revolver capacity was $40 million at the end of Q1, above the $30 million covenant floor, which remained in place until the execution of the amendment to the credit agreement on April 27.

Free cash flow in the quarter was a use of $13.2 million, which was just over $20 million favorable to expectations. However, it was unfavorable by $6 million compared to the prior year, primarily due to top line pressure, partially offset by favorable working capital. Capital expenditures in the quarter were $5.4 million.

Looking ahead to Q2 and the balance of fiscal year 2026, starting with Q2, the demand improvement in March has translated to sequentially improved year-over-year performance in net sales for the month of April, despite a promotional comparability headwind versus prior year. I expect that our media investment in Q2 will be roughly flat to Q1 but up significantly versus the prior year, which was a trough.

Consistent with the indications of performance expectations that we provided on our last earnings call for the quarter, we expect net sales to be down in the range of low single digits to flat versus the prior year.

Given our previously announced engagement of Guggenheim Securities to evaluate strategic and financing options, we will not provide any further financial guidance at this time. But I will say that my expectations of performance are consistent with the indications that we provided on the last earnings call.

And with that, I will turn it back to the operator for Q&A.

[Operator Instructions] Your first question comes from the line of Peter Keith with Piper Sandler.

I wanted to focus on the Q2 because I guess our view has been that there's kind of a lot riding on Q2 to show meaningful improvement as you've got the full product line rolled out. And then the media spend sounds like it should at least be flat or not up year-on-year.

So I guess you are guiding sales down slightly in Q2. But how do you feel about the whole plan coming together with the media and the new products and driving positive demand growth over time?

I'll start with that, and then I can turn it over to Amy. So nothing's changed about our media spend plan really for Q2 and beyond based on what we previously said. So we still anticipate, as we said on Q4, an improvement but down, as Amy just sort of illustrated.

There is obviously a little bit of bumpiness in the media spend as far as how it's planned. I mean, it would be fairly standard for us to back [ weight ] it, given the Memorial Day holiday, which is what we've done. So we are leaning in now that the products are fully set and in market, and that's where most of the media spend is coming together, which is in the coming weeks.

Okay. And I guess with the new term loan that's due on June 30, is that -- should we think about it as some type of new sort of financial plan or recapitalization should happen by that date?

Yes, that's the expectation here. So the short maturities, I mean, as we've talked about on the Q1 call and through the script, we've been working towards this goal for months and months. And so we hired advisers, and we've been working in parallel.

And so I think given -- I think that we're well positioned to be able to continue to progress those transactions, and our lenders are going to hold us accountable for that.

And last question, a popular topic these days is higher input costs that was not mentioned in the prepared remarks. Obviously, there's a lot of other things going on. But how are you managing through that environment right now? Do you have some flexibility around pricing or other cost mitigation efforts?

So I guess I would say that we have a bit of an advantage -- and then I'll turn it over to Amy to talk about more detail, but we have a bit of an advantage in that we just launched a new product line that was priced according to pretty current data when it came to either thinking about tariffs or other macro information.

So I think we're in pretty good shape from a consumer standpoint. We'll continue to evaluate how that comes together. We had actually anticipated a certain amount of pressure on inflation anyway just because of the signals we were seeing earlier in the year. So that is already built into the plan as far as price pressure.

Yes. I mean, we definitely expect to see some headwind. It hasn't changed our view of internal performance expectations. And we're also executing cost savings initiatives against it. And so we expect to be able to hold to our plan despite the input cost

Your next question comes from the line of Dan Silverstone with

Amy, could you just provide detail around your liquidity position as of today? And if Memorial Day kind of went to plan, which it sounds like April is trending in line with expectations, what would that mean for the cash flow dynamics in the second quarter?

Yes. So I'm not going to comment on our liquidity position as of today. I will say that the support of our lenders -- we're in trough liquidity. I mean, our business goes from President's Day through Memorial Day, and we're investing into new product launch, new creative, new sponsorships with [ Travis Kelsey ].

And so we're definitely using cash, that should be no surprise, And we got support from our lenders to manage through the liquidity to execute our plans for Memorial Day.

And so what I will say is that we manage liquidity very, very tightly. And as we expect, collections to ramp over the Memorial Day holiday, which is consistent with our plan, and so we worked very closely with our lenders on our forecast. And thus far, we have been at or above the forecast that we provided. So we expect to continue to manage liquidity tightly through Memorial Day selling season.

Very helpful. Next, a very encouraging start with the new product rollout. How many customers that are buying the [ Comfort ] mode products just because there's a little more data there, are new to file? And how are they engaging with the brand? And how could you capitalize on that for Memorial Day and later out?

Yes. So as we've discussed, before part of the strategy behind the new product launch was to attract new buyers to the products. and we have seen that play out. We're not giving exact numbers on that, but we have seen new buyers coming into the product at a higher rate than previously.

We love our [ smart sleevers ] and our existing customers, and we continue to nurture our existing customers as well as obviously upgrading and/or replacing old with new products is a behavior that we also want to encourage. But we're happy with the progress that we've made with new customer acquisition during this time.

Your next question comes from the line of Bobby Griffin with Raymond James.

Congrats on some of the early improvements there in March. I guess, Linda, first one to start, because this is the first time you guys have some of the new products out for big holiday as well as your team in place. So maybe can you just elaborate a little bit on how you're approaching the Memorial Day weekend holiday versus historical standards of sleep number?

And anything there from a promotional aspect? You talked a little bit about marketing, but just anything more to kind of help us connect how you're going about this holiday season, maybe a little different than what we're used to?

Sure. I can give a high level as we go through. But obviously, part of our role and part of our job is to continue to adapt to whatever we see in market. So we will continue to be flexible as we get into the holiday on what's best for the business and what's best for the product.

It is very early with the new products. Again, we are encouraged by what we're seeing from the simplified purchase process. both in discoverability as well as people moving into other beds in the line beyond the [ Comfort ] mode launch, including our ComfortNext [ Lux ], which we're very proud of.

So we're seeing the patterns that we wanted to see when it comes to that. And we are also seeing, as I mentioned in our script, good response to the new brand campaign that we've put out. It's early, so it's trending in the right direction. It takes time for those things to really take hold, but we are seeing good response.

From a promotional standpoint, when we price these beds, when we were creating the new product line; we price these beds very competitively compared to their predecessors. So while they are all premium price points, they are all premium price points that are slightly better than the beds that they replace and also with more comfort materials and value sort of moved into those.

So that's really what we're leaning into for our selling for the holiday season. is comfort, value durability, as we noted before. The simplified selling process allows people to try the individual [ fit ] process on one of the new beds. So they're trying it on ComfortNext [ in those luck ]. And that [ iFIT ] process has been adapted for the simplified selling process of showing people the best bed for them.

As far as promotions, honestly, what we're doing is we're really moving towards what I would call more industry standard promotional approach, which so far has worked well for us. But as I mentioned, we will continue to be flexible on how we think about promotions going into the holiday based on what we see with consumer behavior and the macro environment.

That's helpful. And then, Amy, maybe a follow-up on the gross margins for the quarter. How much of the decline year-over-year was the discounting of the legacy products? And then my apologies if I missed it in the script, but are we largely done with that discounting? Or will it be done by 2Q? Just anything on the timing of clearing out the legacy products?

Yes. So certainly, supplies on the legacy products are diminishing. We continue to sell the -- I mean, we think it's really important to recover the component inventory costs, and we will continue to sell them until -- while the supplies last, so to speak.

In the quarter of the [ 3, call it, 30 ] basis point change the discounting was under 100 basis points of that change. It was really that Q1 because we had launched the [ Comfort mode ] bed early in the quarter and had great success with that, sort of outselling versus the prior year. mix shifted in that direction. And I would say closer to half of the basis point difference was as it relates to the mix shift.

As we launched the new products on March 23, we expect that mix to evolve and to balance out over time. And so as I noted in my comments, while gross margin was relatively flat on a sequential basis from Q4 to Q1, when you remove the impact of the inventory obsolescence charges that we've taken, we expect that to sequentially improve as mix balances out for the rest of the year.

Okay. That's helpful. I appreciate the detail. best luck here in this period, trying to get some more long-term financing and good luck over the holiday.

Your next question comes from the line of Brad Thomas with KeyBanc Capital Markets.

I wanted to maybe follow up on one of [ Bobby's ] last questions. I know the company historically talked about ARU. Can you maybe share a little bit more detail on how ARU or maybe average ticket or the average transaction size has been trending of late? And how you're thinking about that going forward? .

Yes. On a year-over-year basis in Q1, so ARU for the quarter was about [ $6, 021 ], which was up slightly versus the last -- versus prior year as we planned. So we have been we had planned these new product launches to expand ARU, and we certainly expect continued expansion of ARU as the rest of the product line rolls out. But we did see an improvement quarter-over-quarter versus last year.

Yes. And the only other thing I'll note is, I mentioned in the script that when we did the rollout of the new bed starting March 23, stores that were set with the new bed did have a higher 12% higher ARU than the stores that were set with legacy inventory.

And as I mentioned in our previous call, our new product design was really designed to create the right value at the right price point. But now with [ comfort ] mode being our entry price point into the line and previously having had 2 beds that were priced below, that obviously also is part of the ARU mix we plan going forward because we will no longer have those lower-end beds. So that's part of the improvement.

That's helpful. And then on the sales guidance, this is, of course, with the store count being about 9% lower. So if we try to back into like a same-store sales metric, it looks like that might be up mid- to high single digits for 2Q. Is that the right way of thinking about things?

I mean -- so we definitely -- so we're definitely expecting through the Memorial Day season of return to demand growth like we saw in March. And so I think that's -- I think overall, as I mentioned, will be down low single digits to flat from a net revenue perspective in the quarter. And so later in the quarter through Memorial Day, you might see a return to growth in same-store sales. That's kind of how I think about it.

Yes. And then just the last one for me. On 2Q, is there still a quantifiable amount of launch costs falling into 2Q, just as we think about expense puts and takes here?

For the most part, I would say -- as I think about launch costs, I think about inventory obsolescence, which I feel like is behind us, we took the biggest piece of that in Q4, which we talked about on the last call, we had a bit more not to the magnitude that we took in Q4, a little bit more in Q1; I would say that from a creative perspective, those costs have been borne already. And so I would say that it is -- there are some in Q2, but not to the magnitude that they were in Q1.

As we have no further questions, ladies and gentlemen, this will conclude today's question-and-answer session. I'd like to turn the conference back over to Linda for any closing comments.

Thank you all for your time today. We remain focused on the work ahead, and I look forward to updating you on our continued progress in the coming months. As always, if you have questions, please contact us directly. Thank you.

This concludes today's call. Thank you all for joining. You may now disconnect.

Welcome to Sleep Number's Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, Thursday, March 12, 2026. This conference call will be available on the company's website, ir.sleepnumber.com. Please refer to today's news release to access the replay.

On today's call, we have Linda Findley, President and CEO; and Amy O'Keefe, Chief Financial Officer of Sleep Number. Before handing the call over to the company, we will review the safe harbor statement. The primary purpose of this call is to discuss the results of the fiscal period ending on January 3, 2026.

Commentary and responses to questions may include certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties outlined in the company's earnings news release and discussed in some detail in the annual report on Form 10-K and other periodic filings with the SEC. The company's actual future results may vary materially.

In addition, any forward-looking statements represent the company's views only as of today and should not be relied upon as representing its views as any subsequent date. The company specifically disclaims any obligation to update these statements.

Please also refer to the company's news release and SEC filings for a reconciliation of certain non-GAAP financial measures and supplemental financial information included in the news release or that may be discussed on this call.

I will now turn the call over to Linda Findley, Sleep Number's CEO.

Thank you, Rob, and good morning, everyone. Before I begin, I want to welcome Amy O'Keefe, our new CFO. After an extensive search, she joined us in December and brings with her decades of experience leading operational and financial transformations across public and private companies. Her focus has been on streamlining our business operations and strengthening our capital structure to support our turnaround strategy. You'll hear more from her shortly.

In today's call, I will cover 3 things: First, how we're executing on our strategy, both for growth and cost cutting; second, why we believe that our new marketing and product strategies are working; and third, what we're doing to manage liquidity and the capital structure.

First, on delivering our strategy. 2025 was a pivotal year for Sleep Number as our reshaped team drove big turnaround changes at every level of the company, from retail and corporate operations to marketing strategy and the rapid development of our new product line. Importantly, we delivered on the guidance we provided in our last call.

Full year net sales were $1.41 billion, in line with our guidance despite reduced marketing spend and lower traffic throughout the year. Adjusted EBITDA was $78 million, exceeding our guidance of $70 million. Our use of cash for 2025 was $18 million compared to the $50 million guidance.

For the full year, pro forma adjusted EBITDA margin was approximately 9%, and Amy will discuss how we plan to improve margins further in 2026. The long-term benefit to adjusted EBITDA margin comes from 2 places: First, the renewed growth from our product line redesign; and second, the significant cost savings we have already done and will continue to do this year.

We radically reset the business by lowering our fixed cost structure and built a leaner, more nimble organization. We removed more than $185 million of annualized costs and have identified another $50 million of annualized fixed costs that we are executing on now. We are still in full turnaround mode, and our progress in 2025 doesn't change the fact that we still have hurdles to clear in 2026.

We saw the same pressures as the rest of the industry in January and early February from severe weather and macroeconomic impacts. We had 236 stores that were closed for at least 1 day in the month of January, and therefore, sales at the start of the year were significantly down. We adjusted our marketing spend and strategy to lean in when things improved, and we have seen sequential improvement into February and March, driven mostly by our product launch.

That brings us to our next point about why we believe our product and marketing strategies are working and will carry us through the next phase of the turnaround. We launched our first new bed and a new adjustable base in January and the response from customers has been fantastic. The ComfortMode mattress priced under $1,600 gives us access to a new group of customers while maintaining personalized comfort as the core of the experience.

As of the end of February, sales are 3.5x what we expected and nearly twice all the sales of all 3 C Series beds that this bed replaces. In addition, we are seeing very strong attach rates for adjustable bases and bedding. The success of the first ComfortMode bed is an important indicator for the rest of the portfolio we announced this morning as it's built off the same principles and the same value proposition.

We listened to both current and prospective customers and built a product line that addresses their most critical needs of comfort, durability and value. We also refer to the core of what only Sleep Number can offer, personalized comfort, adjustability, smart technology and temperature benefits, the only bed in the industry that bed owners can fully control whenever they want.

It's comfort that shifts with you night after night. With 4 new beds available in-store and online starting March 23, Sleep Number beds will now reach a broader set of consumers in the premium category. We are leveraging years of innovation and experience servicing luxury materials, features, comfort, temperature management and adjustability at better price points than ever before.

This enabled us to build more value per dollar in each bed, protecting our margins while also achieving a lower price point for today's premium customer. In addition to these innovative new beds, we are also making it easier to find the right bed for you by simplifying the buying experience in-store and online.

With this launch, we are reducing our core lineup from 12 mattresses to 7, organized into 3 clear collections. First, ComfortMode is our new entry point to the brand. It delivers personalized comfort and temperature management controlled without an app, all at an accessible price.

In January, we launched the 10-inch ComfortMode bed, and now we're adding an 11-inch model called ComfortMode Lux with 3-zone comfort layer and advanced temperature materials starting at just $2,099 for a Queen. Second, the ComfortNext line, starting at $2,999 for a Queen, is our biggest innovation in the launch with 3 all-new beds, including 2 that feature our new Tri-Brid design.

We are the first company to combine foam, advanced temperature materials and micro coils on top of air adjustability to deliver improved comfort, pressure release and durability with personalized comfort we are known for. These exceptionally luxurious beds will be the start of our smart technology in our portfolio and will track and improve your sleep at incredibly competitive price points.

Third, we have our Climate Collection, starting at $5,499 for a Queen, and it includes our existing ClimateCool and Climate360 beds that differentiate with true active temperature management. This category represents the ultimate and luxurious comfort. When combined with the base, it remains the only line of mattresses on the market that offers personalized firmness, smart technology, adjustability and active temperature control, all in one bed.

In fact, our temperature programs on Climate360 result in up to 52 more minutes of restful sleep per night. But the new product alone isn't what gives us confidence. The marketing changes we have made are substantial.

As I've said before, we can do more with the dollars we spend, and that is happening. First, we rebuilt our marketing foundation and modernized how we identify and attract customers. As a result, we saw meaningful improvements throughout 2025 in our funnel metrics. Our marketing into Q4 maintained this improvement, and we're seeing accelerated year-over-year improvement in cost per acquisition so far in 2026.

Second, we also started refreshing our creative and messaging last year in social and digital channels. We also recently launched our first new commercial in more than 2 years with a dedicated ComfortMode spot, where recent performance has now surpassed our prior campaign and current competitive benchmarks. The combination of this work is showing up in our annual brand tracker that we completed in January just before we announced our partnership with Travis Kelce.

Despite overall pressure in the industry, we saw significant increases in every aspect of Sleep Number's brand. Brand consideration among premium shoppers grew 10% and achieved the highest consideration in the premium category. We also saw the highest levels in 6 years of critical consideration drivers, including value, quality, aspirational fit, comfort and individualized comfort.

Now it's up to us to build on that success and turn that brand strength into sales growth. The marketing changes are still underway, and you will continue to see new creative, new strategies and our partnership with Travis Kelce come to life.

Finally, let's talk about liquidity and capital structure. It isn't news to anyone that we need to fix our capital structure. I knew that when I joined the business less than a year ago, and it remains our top priority. Three things hit us particularly hard in the end of 2025 and beginning of 2026. The industry-wide softness we already spoke about, our work to clear out inventory as we roll out the new product line and our continued careful management of marketing spend as we lap a very high inefficient spend of Q1 last year.

This puts pressure on our liquidity, and we are implementing a plan to address this. As part of that plan, we hired Guggenheim Securities to evaluate the inbound interest we have received and advise on other opportunities to refinance our credit facility as we shape Sleep Number back into a profitable growing company. Amy will talk about this in more detail.

Before I turn the call over, I want to thank our team members. Delivering a product reset of this scale in just 10 months, work that typically takes more than 2 years, reflects a new level of speed, collaboration and execution across the company. Our work is focused on delivering better value for our customers, shareholders and team members and on bringing Sleep Number back to profitable growth.

With that, I'll turn it over to Amy.

Thank you, Linda, and good morning. I joined Sleep Number in mid-December because I view it as a company whose intrinsic value far exceeds its market capitalization.

While Sleep Number is in the midst of a turnaround, the value of its underlying assets is undeniable, leading brand recognition, differentiated product and the tens of billions of hours of sleep data that validate the benefit our beds have on the quality of your sleep. We have a lot of work ahead of us, but fortunately for me, Linda and the team have already done a significant amount of the hard work to put the company on a path to profitable growth.

One, rightsizing the cost structure to a lower revenue base by executing on $185 million of annualized cost reductions with line of sight to an incremental $50 million to be executed in 2026. Two, executing in record speed for Sleep Number on a completely new line of products that Linda described, which we are launching on March 23. And three, modernizing our marketing engine with new leadership, new creative, new channel-specific media strategies and a new partnership with Travis Kelce to strengthen the brand and drive top line growth.

This is a pivotal time for the company, and I'm excited to partner with Linda and add my deep turnaround experience to unlock value for our shareholders. I want to thank the team for their very warm welcome and efforts to get me up to speed quickly.

Now let's get into Q4 results, which were better than expected. Net sales were $347 million in Q4 or 8% below the same period in the prior year. As a reminder, fiscal year '25 benefited from a 53rd week, which favorably impacted year-over-year results by approximately 660 basis points.

Notably, the performance trend across the year improved sequentially, while the number of stores decreased by 40, exiting the year with 600 stores. And as Linda noted, the impact of our improved marketing offense continues to drive efficiencies.

Gross profit margin was 55.6% in the quarter, a 430 basis point decline versus the prior year, primarily driven by a $9.6 million nonrecurring inventory obsolescence charge associated with our new product launch and the impact of unit deleverage and higher tariffs. Excluding the impact of the inventory charge, adjusted gross profit margin was 58.4%.

Operating expenses in the quarter were $197 million, down 9% year-over-year, excluding restructuring and other nonrecurring costs. The reduction was driven by ongoing cost savings initiatives to rightsize the fixed cost base and lower variable selling expenses.

Media investments were comparable to the fourth quarter of the prior year despite a 53rd fiscal week. Adjusted EBITDA was $19 million, down $7 million versus the same period last year.

For the full year, net sales were $1.41 billion, consistent with our expectations, but down 16% versus the prior year. Full year gross margin was 59%, and down 60 basis points year-over-year, and aligned with the guidance of 60% that we shared last quarter when excluding the impact of the fourth quarter inventory charge.

Operating expenses for the full year were $824 million, a $136 million reduction from the prior year, excluding restructuring and other nonrecurring costs. On an annualized basis, we've executed approximately $185 million of cost savings initiatives, which gives us an estimated $50 million tailwind as we head into 2026.

As Linda mentioned, 2025 adjusted EBITDA was $78 million, exceeding our most recent outlook of $70 million. Importantly, for the full year, pro forma adjusted EBITDA margin was approximately 9%, a 200 basis point improvement versus the prior year.

Turning to the balance sheet and cash flow. We ended the year in full compliance with our credit agreement and debt covenants. Total liquidity, including cash and revolver capacity, was $58 million at year-end, well above the amended $30 million covenant floor.

Full year free cash flow was a use of $18 million, which was just over $30 million favorable to expectations. However, it was unfavorable by $21 million compared to the prior year, primarily due to top line pressure and nonrecurring cash restructuring costs.

Capital expenditures of $14 million were down $9 million compared to the prior year. Looking ahead to 2026, as Linda mentioned, January demand was soft versus last year and our internal expectations. As we planned, the media investment in January was down significantly year-over-year and reallocated to after the launch of our new products when the return on investment is likely to be much higher.

Moving into February, we saw a sequential improvement in performance during the President's Day event as we launched ComfortMode. Not only were we pleased with ComfortMode's sales performance, but gross margin is well above our legacy opening price point beds. This provides another proof point that we can regain competitive positioning in the premium opening price point as we planned. We're excited to launch the rest of our product line in late March.

Given the magnitude of the change that we are executing in 2026 as part of our turnaround plan, we will not be providing guidance today. However, I will provide some indications of our performance expectations for the balance of the year.

I will also note that we are planning cautiously to ensure that our cost base and our liquidity planning are set appropriately as revenue ramps sequentially over the balance of the year. While we expect Q1 net sales to decline in the high teens because of the softness we saw at the beginning of the year, with the full impact of the new product launch in the second quarter along with an increase in year-over-year media spend, we expect a significant improvement in year-over-year revenue performance in Q2.

We further expect double-digit sales growth in the second half with the full benefit of; one, new products; two, new creative assets; and three, marketing reach with our new strategic partner, Travis Kelce. As a result of cost savings initiatives and the expected ARU improvement from new products, adjusted EBITDA for the full year is expected to increase in the high teens to mid-20s percent range year-over-year, and we expect free cash flow to be positive.

Lastly, but importantly, and as Linda mentioned, while we are seeing improvement in the business, the softness from the start of the year and the clearance of our existing products have put pressure on our liquidity and covenants. We are actively implementing a plan to address this as further detailed in our Form 10-K, and have engaged an advisory bank, Guggenheim Securities, to help us.

We will continue to monitor our liquidity position and covenant compliance and we'll work with our advisers to address our credit facility and evaluate inbound interest and other opportunities to improve the company's liquidity, balance sheet and financial flexibility.

With that, I will turn it to the operator for Q&A.

[Operator Instructions] Your first question today comes from the line of Dan Silverstein from UBS.

Congrats on the announcement of the product launch. First question is just on that. So with the new product launches, what were the main pain points you were trying to address?

And then the ComfortMode product replaced its predecessor at a higher margin. How will this new announcement today, how will these new beds reset the impact on ASPs, cost per bed and margins going forward?

Sure. Yes. So I'll start on both of those, and then I'll have Amy jump in as well. So first of all, thanks very much for the congratulations and the questions.

So pain points, first of all, was, going back to exactly what we talked about before, customers right now, when you think about the people who are most interested in the premium category, we really wanted to expand our audience to be able to serve our existing customer base and then broaden into younger demographics and additional demographics that would want access to the benefits of a Sleep Number bed.

So we focused on comfort, value and durability in everything that we built. But one of the advantages that we have is all of the investments that Sleep Number has made in innovation over the years really came to pay off in this particular product line, where we were able to take incredibly luxurious materials, temperature management materials and other new innovations around comfort, including foam and our new micro coils that we're putting into 2 of our new beds, to really say we're going to take luxury materials and bring them to a much more accessible premium price point.

So what this allows us to do is both more directly address comfort and improve sleep from our past innovation history in a better price point for our customers. And there's a much clearer step-up strategy too now. So there's the beds that don't require an app that allow people to experience the brand for the first time. And then you can move into some of our smart technology and our other beds that we're rolling out today or introducing today.

In that concept, we built these beds for manufacturability. And one of the challenges, and you've heard us say in the past is that in order to really maintain our margin, we were kind of selling up the line. We have some incredible beds, and we still have our Climate Series beds that we mentioned today, they are doing extremely well.

But we wanted to make every bed in the line the same margin and a strong margin profile in order to make sure that our sales team could really sell the best bed for whoever the customer is and not have to worry about the impact to the margin profile.

So our ComfortMode bed is as margin accretive as our Climate360 beds, and that allows us to serve the customer more clearly, more directly and also protect our margins at the same time. So sort of 2 -- double answers there to your questions, but we are really excited about this launch, not only for what it means for customers, but what it does mean for our margin profile.

Anything you want to add, Amy?

And I'll just jump in on gross margin. We are expecting, as I mentioned, a sequential increase in ARU as these products transition out and the legacy products are discontinued.

The exciting part for a finance person is that gross margin, if I just look at the ComfortMode bed compared -- and this is just the one SKU that we've already launched, which is performing, as Linda mentioned, well above our expectations, 3.5x the plan, the best part of that for me is the gross margin.

If I just look at that compared to the 2 beds in the C Series that it's replacing, it's a 10 percentage point gross margin improvement compared to the prior year. So it's really exciting not only for early indications of the performance, but also the margin profile of the business.

Very, very helpful. And just one quick follow-up. Could you just touch on the major sources of the $50 million of additional savings you think you can drive this year? And will there be any further clearance activity as we nudge up to March 23?

Sure. And so last year, Linda and the team, as we mentioned, took a significant amount of cost out of the business, annualized basis, it was $185 million. And I think those were -- forgive the term, but sort of blunt force, right? The team needed to move fast in order to protect our liquidity position.

I think over the last several months, a quarter or more, we have been looking, I think, more surgically at where opportunity remains to take costs out of the business. And at a super high level on the incremental annualized $50 million, there's a lot of logistics, delivery, last mile, labor model resets, and we're still taking a look at our corporate overhead structure. And so I think those things -- those are the big activities in the $50 million.

And importantly, just to add to that, all of the $50 million has already been identified, we're already executing on it, and it is all fixed costs.

Yes, all fixed costs.

Your next question comes from the line of Bobby Griffin from Raymond James.

Congrats on the first product launch there. I guess, first for me, I think the release or maybe the prepared remarks called out March 23 as the date, but like what's the phasing as we look at getting these -- the 6 new beds now that you talked about on the floors and kind of across the portfolio, how is that phasing work throughout the year? And if you can, just give us a date that you feel the floors will be largely set and the stores will look as you want them to be?

So I'll jump in on that. First of all, the -- all 4 -- so we launched 1 bed earlier this year. That was the ComfortMode bed, the first bed that we launched. There are 4 new beds plus the base -- sorry, we launched the first new bed and base in January.

There are 4 new beds and a new base that are all going to be available for purchase starting on March 23. Those are the ones that we announced today. And that completes the product reset, plus, of course, the existing Climate Series that we have, Climate360, ClimateCool, that are already obviously on floor.

So all the beds will be available for purchase starting on March 23, and we will start setting floors on March 23. So we will start with our first highest volume stores and most of the stores will be set by mid-April. Then we'll have a few more stores that might roll out into May. But for the most part, the key stores will be -- will all be set by mid-April.

Okay. So basically, floor will be in good shape for the Memorial Day holiday. That's what I was getting at.

Absolutely. That is exactly what we're planning for. Yes.

Okay. That's very encouraging. And I guess, just on -- I understand the dynamics around not wanting to give the guide. But just one clarification, Amy, and then maybe a little help. But the EBITDA number that -- the growth that you're referencing, that's versus the reported number in '25, not the pro forma number?

That's correct. That's correct. Of the $78 million adjusted EBITDA base. High teens to mid-20s percent range improvement.

Yes. Okay. Perfect. And then if that comes to fruition and you guys are able to deliver that, would that translate into positive free cash flow for the year? I understand this business typically has really good cash flow metrics, but it would?

Absolutely.

Your next question comes from the line of Peter Keith from Piper Sandler.

This is [ Sarah ] on for Peter. First, just on marketing spend, given the meaningful reductions in 2025, how are you guys thinking about investment in '26? Should we expect those marketing dollars to start trending back up, particularly as the new product lineup rolls out? Or is current spend kind of sufficient to drive demand?

Right. So as we spoke about before, what we're actually doing in 2026 compared to 2025 is you'll see marketing held flat as total spend in 2026 over 2025. But what that means in reality because 2025 had very high spend in Q1, much lower spend in Q2 and Q3 and then moderated sort of relatively flat spend in Q4, that was the shape of the curve in 2025, someone compared it to a square root at one point.

So when you look at 2026, what we're actually doing is evening that spend out across the entire year. So you don't have any peaks and valleys of spend that can create inefficiencies, and so what that means in reality is Q1 is actually down because, again, Q1 spend last year was extremely high before I joined the business.

So Q1 spend is slightly down. Q2, 3 and 4 will be up year-over-year relative to last year because of the fact that we're evening out the spend. So you are going to see increased spending, as Amy mentioned, in line with our full rollout of the products.

And the only thing I'd add is that Q2 is up higher, right?

Yes, correct.

The back half by quarter is roughly flat, but the flip flop is really between Q1 and Q2.

Okay. Very helpful. And then just a quick follow-up on the clearance of existing products. Was that primarily greater markdowns than expected? And then did you say that was expected to be a headwind in 1H with those newer products and on the reduction?

Sorry, are you finished with your question?

No. Yes, that was...

Got you. We are going to see unquestionably some margin pressure in Q1. So this new product rollout is monumental compared to other product launches in the company's history. I mean, I think we say we haven't seen such significant change in a decade, and so with a hard stop, and we definitely didn't want to do a rolling change of these products because we wanted to get the revenue ramp and the margin benefits as early as we possibly could.

So we're definitely going to be taking some discounting and hits to margin in Q1 because of the hard stop and the softness that we talked about in January and February. We had a little bit more inventory hangover than we would have liked, and we're working through that in the month of March.

Yes. The only thing I would add to that is it was -- you were asking if it was expected, and we did expect to do some clearance work. So I think that's fairly standard in a launch of this magnitude.

One of the things that we are excited about with what we've seen from the launch of ComfortMode is this -- it outsold 3.5x our plan, but it's also outselling all 3 of the beds it replaces by 2x. So you get leverage with volume as well.

And that's a big part of what we're thinking about long term is, of course, the volume play and how we can increase leverage that way, too. So there's trade-offs in everything that we're looking at, but this one was expected.

And as we have no further questions, ladies and gentlemen, this will conclude today's question-and-answer session. I'd now like to turn the conference back over to Linda for any closing remarks.

Thank you very much for your time today. We're excited for our customers to experience our new product lineup later this month, and we remain very focused on the key elements of our turnaround strategies as we actively address our capital structure.

I look forward to updating you on our continued progress in the coming months. As always, if you have any questions, please contact us directly.

This concludes today's conference call. Thank you all for joining. You may now disconnect.

Welcome to Sleep Number's Q3 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, Wednesday, November 5, 2025. This conference call will be available on the company's website, ir.sleepnumber.com. Please refer to today's news release to access the replay.

On today's call, we have Linda Findley, President and CEO; and Bob Ryder, Interim Financial -- Chief Financial Officer of Sleep Number.

Before handing the call over to the company, we will review the safe harbor statement. The primary purpose of this call is to discuss the results of the fiscal period ending on September 27, 2025. Commentary and responses to questions may include certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties outlined in the company's earnings news release and discussed in some detail in the annual report on Form 10-K and other periodic filings with the SEC. The company's actual future results may vary materially. In addition, any forward-looking statements represent the company's views only as of today and should not be relied upon as representing its views as of any subsequent date. The company specifically disclaims any obligation to update these statements.

Please also refer to the company's news release and SEC filings for a reconciliation of certain non-GAAP financial measures and supplemental financial information included in the news release or that may be discussed on this call.

I will now turn the call over to Linda Findley, Sleep Number's CEO.

Thank you, Tiffany, and good morning. I have now been on the job for over 6 months. My learnings thus far make me incredibly optimistic about Sleep Number's future and the ability to create significant shareholder value in the coming years. But nobody should be confused. This is a full turnaround of an inherently great company. I came to Sleep Number because I saw huge potential for the company, and I remain excited about what's ahead. As in many situations like this, there were more challenges than I expected, which required us to move extremely fast to fix the business. The pace of our work, along with constraints imposed by our capital structure, has made the first 6 months choppy. We've accomplished a lot, and we're optimistic that the work that we've accomplished positions us to execute the turnaround in 2026.

Importantly, after close collaboration with our banking partners, we have secured an amendment and extension of our bank agreement through 2027. This now provides financial flexibility to focus on sales-driving initiatives and execute our turnaround. Our new agreement, combined with meaningful fixed cost reductions achieved in 2025, will allow us to invest in growth in 2026, but more on these initiatives later.

Q3 operating results were disappointing. I am not pleased, but we're on top of the reasons, and we're moving quickly to stabilize all elements of the company. As we articulated last quarter, we were hopeful that a more efficient marketing strategy could mitigate some of the top line headwinds associated with significantly cutting spend. Our results early in the quarter gave us confidence that this approach would be successful. However, competitive behaviors became even more aggressive than we had expected during the Labor Day period, and we did not have the financial flexibility to counter with our own messaging, which hurt our top line. We believe the new bank agreement and our fixed cost reductions will allow us to go on offense in the future.

I want to take a few moments to explain why I'm confident that we can turn the top line in 2026. First, our new product initiatives will simplify our offering and should attract a broader set of new customers, while building on demand from our repeat buyers. This product evolution will capitalize on Sleep Number's strong differentiators in adjustable firmness and temperature. While other brands deliver elements of what we do, we deliver it all, and in my opinion, we do it better.

Second, we are refreshing our creative to focus more on product value and benefits to drive greater interest and excitement about the brand. We are deploying our dollars into more efficient, higher-return channels to drive traffic to our stores and digital channels. When our customers arrive, we know they're going to like what they see. Across the organization, we are changing everything from creative to social to customer interaction. We're already seeing notable payback improvement with our new marketing initiatives.

Third, we're taking a fresh look at our distribution strategy. While we continue to see big benefits in our vertically integrated model, we believe there are opportunities to expand distribution into new channels, both physical and digital. We are optimizing our store footprint and leaning into digital to meet customers where they are, while exploring selective partnerships and new routes to market. For example, next week, we will host a show on HSN with an exclusive bet as part of an ongoing testing of channel opportunities. Our vertical model is still our strategic advantage, but we feel strongly that we can build on that model, while retaining its strength.

Finally, our substantial progress on fixed costs and our amendment agreement with our bank group means that the total marketing spend in 2026 will be slightly up compared to 2025, while still reducing our operating expenses. To put that in perspective, media investments in Q2 and Q3 of this year were down by 32%. Together, we are confident these initiatives put us on a path to stabilize our top line in 2026, while meaningfully growing our adjusted EBITDA and free cash flow. We are working with urgency and at breakneck speed. In my 6 months at Sleep Number, there is no part of the company that hasn't been touched.

Before I turn the call to Bob, I wanted to take a moment to thank all Sleep Number team members. Their continued dedication is exemplary. They are urgently pacing, prioritizing and executing on the things we know [ we're ] going to bring the biggest value. I'm proud to stand shoulder to shoulder with them as we continue to forge ahead to bring Sleep Number back to growth.

With that, I will now turn the call over to Bob.

Thanks, Linda, and good morning, everyone. Third quarter results are certainly not where we want them to be. Profits and cash flow were well below expectations due to disappointing sales. I'll get into the details of the third quarter results in just a moment.

As we shared 90 days ago, we're in the midst of a business turnaround that's comprehensive and will impact almost every aspect of the business. I want to highlight 3 important elements of our turnaround from a financial perspective. First, costs. We've made considerable progress on costs in 2025. Following 2 years of significant cost actions, we further reduced operating expenses, excluding restructuring and nonrecurring costs, by $115 million since the beginning of the year and now expect to exceed our $130 million cost-out target. These reductions have come from all dimensions of the business, headcount reductions, streamlining the organization, research and development costs, selling expenses and marketing.

The goal was to reduce costs aggressively, while minimizing any negative business impact. The significant reductions in Q2 and Q3 media spend, however, did have a negative impact on the top line. And as aggressive as our fixed cost reductions were, they were not enough to offset the impact of reduced sales on our high-gross margin product. As such, we have reduced our full year net sales, adjusted EBITDA and free cash flow expectations. We're certainly not done reducing costs. There will be additional fixed cost reductions in Q4 and 2026 to further align our cost to our new lower sales base.

Second, financing. We successfully executed an amendment and extension of our bank agreement, extending maturity to the end of 2027. The revised covenants and terms align with our planned turnaround trajectory and provide the flexibility to invest in specific parts of the business with strong returns. This agreement reflects lender alignment with our strategic reset and supports both near-term stability and long-term growth.

Third, our commercial strategies. The greatest shareholder value will be created by implementing our commercial strategies. We have a strongly recognized brand and a highly differentiated product, but we do have room to improve. In 2026, we will be repositioning our product lineup to better resonate with a larger consumer base, execute a more efficient and effective marketing approach, and expand channels of distribution, including website improvements, to drive better conversion. We've been working on this commercial reset throughout 2025, and we will see the results of these initiatives in 2026. And importantly, our amended covenants provide us the flexibility to execute our plan.

Now, let me walk through our Q3 results. Net sales of $343 million were down 19.6% year-over-year. This decline reflects the opportunity within our product portfolio and the impact of our significant marketing and media investment reductions. Marketing efficiency continues to improve as we saw cost per acquisition decline 6% versus the prior year. However, we need to drive more traffic into both our stores and our website. We expect our marketing efforts to begin to do that in the fourth quarter.

Gross profit margin was 59.9%, down 93 basis points versus last year, but up 82 basis points from Q2. The year-over-year decline was driven primarily by unit volume deleverage, partially offset by favorable product mix and lower promotional activity.

Operating expenses, excluding restructuring and other nonrecurring costs, were $204 million, an 18% decline from 2024. This reflects the continued cost-outs we've been implementing across the organization to align with our sales reduction. We recorded $41 million in restructuring and other nonrecurring costs in the quarter related to these ongoing transformation initiatives. These included severance and employee-related benefits, contract termination costs, and asset impairment charges. Approximately $30 million of these charges were noncash and are attributable to sunsetting technology assets and closing several underperforming retail locations.

Adjusted EBITDA was $13.3 million, down $14.4 million from last year. The decline was driven by lower net sales and gross profit margin compression, partially offset by lower media, fixed operating expenses and variable selling expenses.

In addition to reducing costs, we are also actively managing working capital with net year-to-date changes in inventory, accounts payable, receivables and prepayments being a $20 million source of cash. We have also reduced year-to-date capital expenditures by approximately $5 million compared to the prior year.

We acknowledge current performance is not where we expected it or where we want it to be. However, we remain confident that actions we are taking will result in a turnaround of demand trends. As we are resetting the business and executing elements of our own plan, we are also realistic about the timing of the impact of our actions.

We now expect net sales for the year to be approximately $1.4 billion and gross profit margin of approximately 60%. The incremental cost reductions, excluding restructuring and other nonrecurring items, are expected to result in a full year operating expenses of $825 million, or $135 million less than 2024. The resulting adjusted EBITDA is now expected to be approximately $70 million with negative free cash flow of approximately $50 million. With these anticipated outcomes, we expect to be in compliance with our new debt covenants.

Looking ahead to 2026, we are approaching our plan process with 3 key objectives. First and most importantly, stabilize sales and return to growth after we revamp our product offering with more emphasis on serving the consumers' priorities of comfort, durability and total value. To support that endeavor, we will continue to modernize our marketing approach, improve our website and expand distribution into new channels. Second, continue to take fixed costs out of the business, including continued consolidation of our real estate footprint. And finally, as stated before, generate free cash flow to pay down debt.

With that, I'll turn it back to the operator for questions.

[Operator Instructions] Our first question will come from the line of Bobby Griffin with Raymond James.

I guess, 2 questions here. One, just on more modeling, but can you tell us what is the cash part of the restructuring for all of '25 and the noncash part of the restructuring for all of '25? And then, what level of cash restructuring charges will carry over into '26? I'm just trying to get a cleaner view on just the cash flow generation capabilities as we stand here at today's revenue base.

And then, my second question is, just the comments on the commercial strategies. I think you called out an expanded website, but any comments on wholesale? Just what is the expansion that you guys have been working on for the commercial strategies?

Sure. I'll take the first half, right, and then I'll let Linda talk the second half. So the first half, look, of the cash restructuring charges, I'd say the cash charges are kind of the normal ones you see, contract termination costs and employee severance costs. And we're not giving guidance on what they will be in 2026, and there might be some more in Q4. But they are included in the $50 million negative free cash flow guidance that we provided -- I'm sorry, for 2025. And the noncash costs were primarily write-offs for stores that we've stopped operating. It was a big piece of it. You can see this in the free cash flow statement. And the second part was a write-off of some intellectual property assets that we had that we just don't think are worth as much as they -- we thought they had been historically. And the total noncash was about $30 million.

Bob, that's for the year or for the quarter? I guess, I probably didn't ask it. Sorry.

That's year-to-date.

Okay. I was just trying to get a sense of the cash restructuring for all of '25, what it's expected to be. And then, what cash restructuring could carry over into '26, if you have any guidance? Just because when we look at free cash flow and cash flow from ops, we should kind of keep both of those in mind as we try to think about the level of what this business is doing today as hopefully, the cash restructuring won't be repeating at the same level in '26.

Sure. And so, the -- for '25, the numbers I provided were year-to-date, right? You'll see them pop right off the GAAP cash flow statement. That's year-to-date '25, right? The negative $50 million, that would include all the cash -- well, it's just cash, all the cash charges that we expect for '25. And '26, we're not giving guidance on, but what you'll see when the debt agreement is filed on the 8-K and it might already be out there, there are some covenants around restructuring charges, right? So you can model a max at least.

Yes. But I will say, just jumping in on that to sort of finish up before I jump into the commercial side of it, we did take most of those this year. Like that's the focus. That's why we went so aggressively on some of these cost reductions this year. So, that is our intention is to really drive most of those into 2025.

Okay. Perfect. And then, just the commercial strategies and larger consumer base you called out, things like that.

Yes, of course. So looking at the commercial strategies, a big part of this is what we talked about with sort of refining our product offering in order to drive to a much larger audience. We already have a significantly larger audience coming to look at our brand on our website, coming to check out the product. But we mainly convert a certain subset of that product today. And so, by expanding our website and actually expanding the product offering and simplifying the product offering, we are confident we're going to be able to appeal to that larger customer base that's already looking to us and already knows our brand and aspires to our brand [ but ] create more product value fit for them starting in 2026 to increase conversion for that group. So that's sort of the website and product part of it.

That goes hand-in-hand with the distribution piece of it. So we just mentioned that we're doing our first test on HSN. There are several other wholesaler and other channel tests that we'll be announcing probably in the coming weeks and months. That will give you an idea of how we think we can expand while maintaining the strength of that vertical footprint, but actually supplementing it -- not cannibalizing it, but supplementing it with additional channels that reach some of those different expanded audience segments. So that's really how we're approaching this. We think that a lot of those aren't necessarily traditional wholesalers from a mattress industry perspective, but rather broader value-add channels that we can lean into that will add to the distribution and create additional brand awareness of the business. So again, look in the coming weeks and months for some more announcements on what some of those are, but that is a big part of our strategy going forward is how can we supplement with distribution.

Our next question comes from the line of Daniel Silverstein with UBS.

Maybe just to start, just to level set, what are the biggest strategic changes that Sleep Number can make to improve the sales trajectory in the near term? I guess, if the competitive environment remains aggressive like it was in the third quarter, how can Sleep Number drive that improved traffic that Bob mentioned with kind of the marketing budget it has today?

Sure. Well, I think that's actually an important part of it is, it isn't just about the marketing budget we have today. So first of all, I do think the competitive environment will remain intense and it should remain intense. That's actually part of what makes this industry what it is. So we are anticipating that, that intensity will continue, the difference being that we took about a 32% year-over-year cut in our marketing -- sorry, media spend specifically in Q2 and Q3 because we needed to move aggressively while we were negotiating with the banks. That reduction is very, very impactful on our ability to scale the business. Now, at the same time, that reduction also helped us reset our marketing stack to be more efficient in the future and to lean into more channels more effectively. So we are seeing those efficiency improvements already play out. But we were capping our spend not just in an overall year-over-year reduction, but it's important to note that we were looking at marketing spend that would only pay back in the quarter previously because we were managing to our bank debt.

With the new covenants that we've put in place and with the negotiations with the bank, we've allowed ourselves the room not only to reinvest back into marketing, so we will be putting more dollars back and have already started putting more dollars back into marketing into Q4 based on efficient return on spend. So we're not -- we aren't going inefficient on any spend because we've been leaving money on the table in the past, while we are constraining spend. And that spend will not only benefit us in Q4 but again will benefit us in Q1 going forward because when you're rolling into marketing spend, you not only want to spend for where you are now, but you want to continue to build the pipeline for future quarters, and we couldn't afford to do that before.

So with the way that we both created more efficiency in marketing and been able to get leeway on our covenants to be able to lean in not just to spend that benefit this quarter, but spend that builds the pipeline for future quarters. That's how you restart that flywheel, and that's the process that we're in right now. So it's all of those things together. But I want to be really, really clear that there are multiple aspects that we are looking at in the business here. It isn't just about that marketing efficiency. It is also about this product reset. And we do still see continued cost reduction opportunities in the fixed costs that were built and are not necessarily contributing to the longer-term profitability of the business. So, as Bob said in his section of the script, we are really focusing now on how can we take those fixed costs out of the business strategically and over time without actually incurring additional expenses to take those costs out of the business. And that's mostly going to be on the real estate front as we consolidate our sales into our highest-performing stores.

Very helpful and a good segue into our next question. As you're thinking about the larger scale strategic initiatives you laid out for 2026, is it fair to assume that rationalizing the store fleet is kind of the most tangible piece of that today? Any update on kind of the rank order of those things you mentioned would be really helpful.

Sure. So just to give a little bit of context, as you know, we've gone very aggressively on cost savings. And as a little bit of just mental background and level setting, our headcount is currently now back at 2017 levels. So we went very aggressively on our headcount moves, and that is really, really impactful to the bottom line once we start to scale again. So we've been able to move quite a bit on creating, again, not only cost efficiency in some of our corporate costs, but also be able to create that scale and that speed of operations within the business. So yes, real estate and store footprint would be the next level of what we can look at. We have very, very high transfer rates when we're strategic about the stores that we actually shift and close down, and we've done several of those so far this year. But I think very specifically, it's important that we look at our strategic benefit of where we can actually have the most productive stores and make each one of those stores more efficient and drive more sales to the leaders in each of those stores so they can create that volume on top of a lighter fixed base from what we've had in the past.

Our next question comes from the line of Brad Thomas, KeyBanc Capital Markets.

Linda, I was hoping to follow up just on your thoughts on product and product evolution. We've talked in the past about an opportunity to bring in lower price point items. Could you just give us an update on your thinking and perhaps the timing of refreshed assortment?

So I will give you as much detail as I can, given we are still under wraps, so to speak. But we are still looking at early 2026 in timing, just as we had mentioned before. And it's important to note that it's partially about price point and it's partially about value at that price point. So this is really a radical focus on the consumer and what the consumer is looking for. So you will see price point moderation, but it's not necessarily going low end. I want to be super clear about that. We are a premium product, and we have a very, very loyal and excited customer base that loves the products that we have. What we're looking to do with the new product assortment, which will include simplification of our product assortment, is how do we actually bring more value to a broader audience of people. So, that means driving value into price points that are more accessible to a broader amount of people still in the premium space. So, that's where we see the fact that we have strong differentiators in adjustability. We have strong differentiators in creating better sleep night after night. We have some of the best differentiators when it comes to temperature and adjustability. How can we bring that to a broader audience by creating that value alongside comfort and durability that we're known for into a broader audience? So I can't give you much more detail than that, but it isn't just about price point. It's about driving value deeper into our lower price points.

That's very helpful. And if I could follow up on sales. Could we just touch a little bit on what the trajectory was through the quarter, what you're seeing more recently? And then, what the sort of underlying assumptions are in terms of the new revenue guide and what you're expecting for 4Q here?

Sure. So I'll start on that, and then Bob, feel free to jump in and add anything you would like. But what we saw is, we actually saw a strong start to the quarter, and we saw pretty good performance in the beginning of the summer. And then, we saw it get very, very choppy. And what I mean by that is, we saw a lot of spikes and phases of demand as you got closer to the Labor Day cycle. And then, as I mentioned, for us, we were managing our cash very carefully. We were managing our cash probably more than I would normally want to manage on a marketing program. And we were not as able to lean into the highly competitive Labor Day cycle as maybe others would have been able to do so from a marketing spend. So, that impacted our demand towards the end of the quarter. So the quarter started off quite positively. And then, sort of our biggest challenges came around the Labor Day, highly competitive cycle just because of our constraints that we had put into place in order to negotiate our debt.

Yes. I'll just follow up on that, Linda. So for Q4, we are expecting some improving trends, certainly not where we want it to be long term. But our Q4 media spend will be a little less than Q4 last year, but not the down 30% or so we saw in Q2, Q3. So we think that should help us some additional media focused on the things that we think have returns. Also last year's Q4 was a pretty down quarter. So I think the overlap helps us a little bit. But it will all get a little bit confusing because remember, the fourth quarter has that dreaded 53rd week, which just confuses everybody. But we do expect slightly better sales in Q4, but not where we expect them to be in '25.

Yes. And I think one other important...

[indiscernible] '26.

One other point I want to make about that, and then happy to take another follow-up, Brad, if you need it. But the spend that we're leaning into in Q4, as I mentioned in my previous comments, not only will benefit us in Q4, but it will also benefit us in Q1. So we are now back in a cycle of doing what you would normally do in a business, which is invest not just for that quarter, but be able to invest and start to set up the next quarter as well. So that's a factor there. You also asked a little bit about some of the trends that we're seeing so far in Q4. The most I can give you on that is, we just completed this renegotiation with our banks, and we just gave guidance, and we are in line with both of those models that we have put in place to date as far as performance.

Great. If I could just ask 2 quick clarifying questions. So for the fourth quarter, is it fair to assume that you all are thinking about the underlying sales trends improving slightly? And then, on a reported basis, we also get the lift of the 53rd week. Is that the way to think about it?

Yes. That's the way to think about it.

Great. And then to be clear, when we think about the marketing underlying run rate, Linda, have we passed the kind of most conservative point you've been at and are now at a point where you can test and start to lean in a little bit more because you've got this new bank loan? Is that the way to think about the marketing opportunity ahead?

Correct. Yes. Correct. So the 32% down on media spend, and that's -- again, we called out 32% down on media spend. There is obviously some broader marketing spend on top of that. But the 32% down on media spend only applied to Q2 and Q3. Q4 will only be slightly down, as Bob said, on media spend year-over-year, and we do not anticipate any of that baseline for 2026. Now, I want to be also very clear that we are seeing efficiencies, and we don't ever expect to get to the spend levels that we were at before because we think that we are building a more efficient marketing program that, with the right level of investment, will continue to pay off.

Our next question comes from the line of Peter Keith with Piper Sandler.

Following up on one of Brad's questions regarding the new products. Could you give us a sense of timing when we might start to see some of the newness in 2026?

Again, all we've said publicly is early 2026, and so we're staying with that. But I will tell you this team is working at lightning speed on everything that we're doing. So I can't give you much more detail than that, unfortunately.

Okay. Fair enough. And then, I guess, going back 3 months, a lot of the theme from the Q2 call was the improved conversion rates that you were seeing in late Q2 and July. And I guess, what happened there? Was it -- did the conversion rates go down or did the competitive advertising kind of [ drain ] you out? Just help me understand what changed so much.

Sure. Well, again, the conversion rates did not go down. As a matter of fact, we continue to see improved efficiency. This is the reminder that a 32% decrease in media spend, even with conversion improvements, resulted in a 19-ish percent down on revenue. So we are actually continuing to see those conversion improvements. We mentioned a 6% lift in -- or improvement in overall cost of acquisition. So we're continuing to see that cycle pay back faster and faster. We are also shortening our payback times as part of that. So all of that is actually going really well. We just simply had to limit the number of actual dollars that we can put out that would apply in the quarter. And particularly in Q3, when you have the Labor Day [ MSC ], which is the most competitive of all the [ MSCs ], cost of media goes up because everyone is pushing into the same channels. And so, we were not able to lean into that spend based on restrictions from our current negotiations. So that's really what I mean by that. We're still seeing all of those efficiencies, and we're seeing even more so. And we continue to see improvement as we run into new channels. It's just that previously, we were restricted on the actual dollars we could put against that.

Okay. Fair enough. And then, I guess, I was kind of curious if you're doing anything different at the store level. Certainly, you have a lot of employees that are commission-based. And with the big cut in advertising, it's probably making them harder to get paid. So how do you resolve that issue? Are you seeing more turnover at the store level? Or can you, I guess, recompensate people next year?

So we continue to actually look at our compensation structures to think about the right way to generate the best environment for our employees. So we're currently about 50-50 on commission and fixed. And we continue to actually look at it and we continue to evolve those programs as we go forward. We have actually simplified the selling process as well. So we just went through a big process where we created new sort of simplified selling paths for our employees so they could actually drive more conversion. And we did see decent conversion lift in store same-day sales during not just Labor Day, but during the entire quarter. So we're confident that we're making the right moves to improve our actual in-store sales process. But yes, a big part of the initiatives that we're doing are focused on getting that funnel bigger into the stores so that we can drive more traffic into the stores and drive more traffic via the website into the stores in order to increase the volume that we can actually convert off of.

Okay. All right. Great. One last question then I had for Bob. Just on the new -- the debt structure. So the press release notes a 5.25 debt covenant limit. Is that -- does that scale up or down like the previous debt agreement? And then, what's the new interest rate?

It does scale up and down. Q4, Q1 and Q2 are all a little bit different. And then, the covenants get tighter in Q3, Q4, right? I think you'll see that in the in the 8-K. And yes, all the fees and interest rates also changed, which you'll also see in that 8-K release.

As we have no further questions, ladies and gentlemen, this will conclude today's question-and-answer session. I'd like to turn the conference call back over to Linda for any closing comments.

Thanks, everyone, for your time today. Our teams remain focused on the work ahead, and I look forward to updating you on progress in the coming months and quarters. Should you have any further questions, please contact us directly. Thank you.

This concludes today's call. Thank you all for joining. You may now disconnect.