Our fiscal year ends on the Saturday closest to December 31, and, unless the context otherwise requires, all references to years in this Form 10-K refer to our fiscal years. Our fiscal year is based on a 52- or 53-week year. All years presented in this Form 10-K are 52 weeks.

PART I

weeks, except for the 2020 fiscal year ended January 2, 2021, which is a 53-week year.

This Annual Report on Form 10-K contains or incorporates by reference certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in or incorporated by reference into this Annual Report on Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements, including but not limited to projections of revenues, results of operations, financial condition or other financial items; any statements of plans, strategies and objectives of management for future operations; any statements regarding proposed new products, services or developments;developments, including potential features of our products that may be developed in the future; any statements regarding future economic conditions, prospects or performance; statements of belief and any statement or assumptions underlying any of the foregoing. In addition, we or others on our behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or Webcasts open to the public, in press releases or reports, on our website or otherwise. We try to identify forward-looking statements in this report and elsewhere by using words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “predict,” “intend,” “potential,” “continue” or the negative of these or similar terms.

Our forward-looking statements speak only as of the date made and by their nature involve substantial risks and uncertainties. Our actual results may differ materially depending on a variety of factors, including the items discussed in greater detail below under the caption “Risk Factors.” These risks and uncertainties are not exclusive and further information concerning the Company and our business, including factors that potentially could materially affect our financial results or condition, may emerge from time to time, including factors that we may consider immaterial or do not anticipate at this time.

We wish to caution readers not to place undue reliance on any forward-looking statement and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. We assume no obligation to update forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. We advise you, however, to review and consider any further disclosures we make on related subjects in our quarterly reports on Form 10-Q and current reports on Form 8-K that we file with or furnish to the Securities and Exchange Commission.

Our 2021 fiscal year included 52 weeks, compared with 53 weeks in fiscal 2020. Adjusting to exclude the leaderestimated impact from this additional week in sleep innovation with our five significant competitive advantages: proprietary sleep innovations, longitudinal data, lifelong customer relationships, brand communications and exclusive direct-to-consumer distribution. We are committed to delivering superior shareholder value by: (1) increasing consumer demand; (2) leveraging our business model; and (3) deploying capital efficiently. In 2019,2020, we increased annual 2021 net sales by 11%20% to $1.7$2.2 billion, grew 2021 earnings per diluted share (EPS) by 41%34% to $2.70$6.16 and generated cash from operations of $300 million. Return on invested capital (ROIC) was 27.6%, a 260 basis point improvement from 2020. Our net sales in the fourth quarter of 2021 were constrained by 44%delayed receipt of critical semiconductor components, preventing deliveries and shifting more than $125 million of net sales to $189 million.

Our vertically integratedfuture periods. 2021 costs were also significantly impacted by inflation and inefficiencies arising from supply disruption and other global COVID challenges.

Breakthrough financial performance in 2021, despite significant headwinds, reflects the alignment of our sleep innovation strategy with consumers’ prioritization of their health and wellness, its connection to quality sleep and their increased adoption of digital products and services – all of which drive continued growth in demand for our life-changing 360 smart beds. In addition, in an environment characterized by ongoing and shifting pandemic impacts, including global supply chain disruption, labor shortages and inflationary cost pressures, our vertically-integrated business model and rolemission-focused team enabled Sleep Number to accelerate our operating efficiency, increase our organizational agility and advance sleep innovation, science and research while maintaining our focus on delivering an exceptional customer experience.

Artificial intelligence (AI) and data science enable the automatic adjustments to improve sleep and provide actionable insights for our Smart Sleeper℠ community, connecting quality sleep by over 15 minutes each night, nearly 100 hours each year. Third-party studies have shown that even 15 minutes more quality sleep per night increases a body’s ability to stave off weight gain or a cold, and can increase productivity. With the significant opportunity to improve peoples’ lives through higher quality sleep, in 2020 we entered into an extensive collaboration with world-renowned Mayo Clinic to advance sleep science and cardiovascular medicine. By uniting our unparalleled sleep knowledge and technology with world-class clinicians and researchers, we’re poised to make meaningful advancements to the science of sleep, with goals to materially foster better sleep – and health – for society.

Social Impact Commitment

Because excellent sleep is essential to a healthier and happier society, we are committed to helping future generations achieve quality sleep. In 2018, we announced a social impact commitment to help one million young people achieve life-changing sleep through our products and sleep expertise by 2025. We have established strong partnerships to accomplish our objectives with leading organizations, including GENYOUth, Alliance for a Healthier Generation, Good360, Blue Star Families and Bridging.

In 2019, we impacted the lives of nearly a half-million youth through advocacy, education and product donations. In addition to publishing a joint study with GENYOUth that highlighted the quality sleep deficit of our nation’s youth, we have contributed cash and in-kind donations to help children in housing transitions, to support underprivileged youth, to help children in military families get quality sleep and to benefit students who need sleep to support their overall health and wellness.

Sleep Innovation Leader

Sleep Number conducts extensive research to understand consumers’ needs, and operates R&D facilities in San Jose, California and Minneapolis, Minnesota. This research drives the design and delivery of our award-winning sleep innovations, our proprietary SleepIQ technology platform and our customer experience. Sleep Number is committed to advancing sleep health linking smart sleep to individualized wellness via innovation that is backed by data, scientific research and partnerships to advance the science of sleep. Our proprietary SleepIQ technology inside every smart bed accumulates over 10 billion biometric datapoints in the U.S. every night. We are using ourthrough highly accurate, comprehensive, longitudinal data and artificial intelligence capabilities to advance smart bed hardware and bio-signal features. Looking ahead, through our collaboration with Mayo Clinic and other initiatives, we will discover, identify and introduce solutions and technology that will make a meaningful impact on sleep for a healthier society. The 360 smart bed provides a form of preventative and proactive health care that one day may detect or prevent serious health conditions like sleep apnea, restless leg syndrome, heart disease and strokes. Today, we provide connected sleep solutions that deliver ongoing impact for consumers’ well-being. Our research and development expenses were $35 million in 2019, $29 million in 2018 and $28 million in 2017.

Proprietary Sleep Innovations

Sleep is vital for healthy living. It strengthens immunity, increases the ability to focus, sharpens cognitive function, and improves physical health and emotional well-being. Yet society still struggles with how to achieve adequate sleep, both quality and quantity.

Sleep Number introduced the world to integrated sleep tracking technology and the first commercialized smart bed at the Consumer Electronics Show in 2014. We subsequently began the transition to a total smart bed portfolio in 2017, the award-winning 360 smart bed, which delivers proven quality sleep. The 360 smart bed effortlessly adjusts throughout the night. SleepIQ technology – the operating system of the bed – uses artificial intelligence and machine learning to automatically adjust the comfort and support for each individual. It then provides a SleepIQ^® score, a nightly measure of quality sleep against an individual’s personal best, and delivers personalized insights to improve quality sleep via the SleepIQ^® mobile application. Sleep Number leverages the sleep and biometric data collected during each sleep sessions – expected to exceed one billion by the end of 2020 – to continuously improve all 360 smart beds with ongoing over-the-air updates.

At CES 2020, Sleep Number unveiled the next generation of 360 smart beds with technologysession. Ongoing advancements to help advance our health and wellness platform. The new Sleep Number Climate360™ smart bed is the first-ever bed that uses advanced temperature technology to create a personalized and responsive microclimate that has automatic firmness adjustability.This smart bed and Sleep Number’s new award winning 360 smart bed portfolio – which benefit from over 700 millionplatform via over-the-air updates enable real-time, effortless data collection and the delivery of sleep sessions of research – are designed to keep you effortlessly comfortable all night by providing innovative comfort materials and individual insights.

The Climate360wellness insights including Sleep Circadian Analytics, Sleep Wellness Reports, Heart Rate Variability, My Daytime Alertness and 360 smart beds help solve the most significant sleep challenges and effortlessly deliver proven quality sleep. Based on analysis of over 25 million sleep sessions, My Sleep Health.

Sleep Number research shows that sleepers who routinely use their 360 smart bed features and SleepIQ technology can improve quality sleep by over 15 minutes each night, nearly 100 hours each year. Third-party studies have shown that even 15 more minutes of quality sleep per night increase a body’s ability to stave off weight gain or a cold, and can increase productivity.

The Climate360 smart bed received the prestigious CES 2020 “Best of Innovation” award and was selected as CES Innovation Honorees across Health & Wellness and Tech for a Better World categories. It received eight additional “best of” awards from tech and consumer media during CES. The 360 smart beds were selected as CES 2020 Innovation Honorees in three categories: Smart Home, Health & Wellness and Tech for a Better World. The new 360 smart bed portfolio starts at $999 and is available in 2020. The Climate360 smart bed will be available in 2021.

Additional Sleep Number Innovations

We also offeroffers a full line of exclusive FlexFit^TMFlexFit™ smart adjustable bases that allow customers to raise the head or foot of the bed. OurThese industry-leading FlexFit bases seamlessly integrate with SleepIQ technologythe 360 smart bed to deliver features like our Partner Snore^TM feature,Snore™ technology, which allows youra sleeping partner to press a button and raise the head of the bed to temporarily relieve mild snoring.

The SleepIQ Kids^® k2 bed extends Sleep Number’s DualAir adjustability and SleepIQ technology tosnoring by raising the children’s mattress market. The k2 bed adjusts with children as they grow, giving themcompanion’s head at the best possible sleep.

touch of a button.

To date, we have leveraged and learned from over 13 billion hours of sleep data gathered from over 1.6 billion real-world sleep sessions, generating comprehensive longitudinal and ecologically-valid data to improve sleep quality. Ongoing sleep science research is enabled by the more comfortablethan 200,000 sleepers in the 360 smart bed Smart Sleeper community that have opted in to participate and advance the science of sleep and health. These sleepers have enabled rapid enrollment in Institutional Review Board (IRB)-approved studies, which combine the power of our broad sleep database with subjective understanding of sleeper behaviors to understand real-world outcomes.

The 360 smart beds stand out because of their continuous, longitudinal, ecologically-valid biosignal collection and they are effortless to use – with no need to wear or charge anything. They are the first and only smart bed with integrated and validated data collection and feedback that requires no action by the user to deliver proven quality sleep. The 360 smart bed is helping to advance the linkage of quality sleep to health, bringing significant benefits to real-world sleepers.

We also offercollaborate with renowned physicians and clinicians as part of our Scientific Advisory Board, an interdisciplinary group of physicians, clinicians and researchers with expertise in sleep science, research and health.

In 2020, we announced a wide assortmentcollaboration with Mayo Clinic. Our collective goal is to further sleep science and improve health care quality and clinical outcomes. We established foundational data sharing capabilities, which are being utilized by Mayo Clinic. The scalable data sharing infrastructure will allow us to expand data sharing to other research communities this year.

In 2022, we formed a landmark partnership with the American Cancer Society to study the connection between cancer and quality sleep, with the goal of temperature-balancing products includingdeveloping the DualTemp^™ layer. Thisfirst-ever sleep strategies and guidance for cancer patients and survivors. Over six years, American Cancer Society will conduct research with contributions from Sleep Number’s proprietary sleep data, leading to improved sleep outcomes for cancer patients and survivors. Our partnership will advance not only the fundamental understanding of the science of sleep but also the translation of that knowledge into practical actions that provide meaningful outcomes.

Our Minneapolis, MN-based R&D team leads the innovation of our smart bed, adjustable base design and bedding solutions and is comprised of experts in mechanical engineering, comfort, adjustability, temperature, anthropometrics and test systems. Our Sleep Number Labs team in San Jose, CA supports the evolution of SleepIQ technology with leading experts in sleep research, data science, analytics and full-stack Internet of Things platform development.

We have accelerated our investments in R&D to enhance our competitive advantage. We continue to enhance our expertise and capabilities specific to the healthcare industry, forming an internal SleepIQ health team, advancing Sleep Number’s leadership in connected sleep health and further underscoring the commitment to innovation in health and wellness. As a result of our R&D and strategic efforts, we have continued to grow our patent portfolio, with a particular focus on smart features active air technology that allows each sleeperimprove sleep quality, and thermal solutions to select their idealsolve temperature at the simple touchdisruptions to sleep. Our world-wide patent portfolio now contains more than 380 patents, which enhances our protection of a buttonour exclusive and can be used with any mattress brand or adjustable base.

proprietary technologies. Our research and development expenses were $59 million in 2021, $41 million in 2020 and $35 million in 2019.

Our exclusive, direct-to-consumer distribution model supports lifelong relationships with our customers. Across our customer touchpoints which include Stores, Online, Phone and Chat, we deliver a value-added retail experience that seamlessly integrates our digital and physical experiences to meet customer needs. We offer an engaging and dynamic online experience to educate consumers and advance their purchase path, driving highly-qualified traffic to all our retail touchpoints. Our mission-driven, highly-trained sleep experts use digital technology and our best-in-class relationship-based selling process, which is continually tested and refined, to find the right sleep solutions for our customers — wherever and whenever they want to shop. This “sell-from-anywhere” model supports our customers’ shopping preferences and results in new customer acquisition, sustained repeat and referral, high conversion and strong revenue per smart bed unit — all of our netwhich drive continued sales are generated by our direct-to-consumer business, through a cohesive experience across our Sleep Number stores, online at SleepNumber.com and via phone.

profitable growth.

Our sleep experts in each store recognize that sleep is not “one size fits all” and provide individualized sleep solutions for each person. Shopping online is easy too, at SleepNumber.com. Working in conjunction with our retail stores, we have a cohesive online experience that helps customers easily research our products and solutions, find and purchase products online, find a store to experience the product and receive post-sales support. Our omni-channel experience expands our digital brand, connecting with consumers to drive deeper awareness, consideration and engagement.

Our retail storesStores accounted for 91.8%87% of our net sales in 2019.2021. Average annual net sales per store in 2021, based on Company-Controlled comparable sales,Total Retail (which includes Stores, Online, Phone and Chat), were $2.9$3.6 million, in 2019.a new record. In 2019, 70%2021, 84% of our storesStores open for a full year generated net sales overof greater than $2 million, and 30%48% of our storesStores open for a full year generated more than $3 million in net sales over $3 million.sales. In 2019,2021, our onlineOnline, Phone, Chat and phoneOther sales accounted for 7.6%13% of our net salessales.

Sleep Number has become a beloved brand, which was built on a foundation of individuality and increased double digits year-over-year.

Brand Communications

wellbeing. Our relevant, engaging and individualized communications help to drive sustained demand and market share gains for our award-winning 360 smart beds. Our consumer innovation strategy — which has guided us since 2012 — enables a deep understanding of, and insights about, our target customers. These insights give us the perceptual acuity to see ahead of structural consumer-behavior shifts and helps us pivot when necessary, such as during the recent global pandemic.

Our brand communications strategies are designed to emotionally connect consumers with high-quality content about the benefits of life-changing sleep and the value of our 360 smart beds. We use a wide-ranging set ofleverage and amplify our brand and advertising communications to expand brand reach, drive emotional brand engagementthrough highly-visible strategic partnerships; engage consumers seamlessly across multiple touchpoints with an emphasis on digital; and create lifelong customer relationships. This relationship with our customers isrelationships and brand advocacy by delivering an effective driver of repeat purchases and newunparalleled sleep experience. Together, these actions result in driving strong brand health, increased brand interest, heightened consumer consideration, customer acquisition through referrals. Our marketing efforts target a broad customer demographic: 35-64 years old with greater than $75,000 household income for our core line of products. Our customers care about their own and their family’s overall health and wellness and know quality sleep leads to achieving this.

Marketing drives growth in our business by building brand relevance, reputation, awareness, consideration and ongoing engagement through integrated and authentic communications thatadvocacy for Sleep Number’s brand, innovations and services.

Strategic partnerships amplify the value of the 360 smart bed. This results in quality traffic to our websiteeffectiveness, impact and stores. Our advertising communications use a mix of national and local marketing to target existing customers for referral and repeat purchases and to attract new customers. Television (including streaming video) is our most efficient media, followed by digital and social media. Our in-house digital capabilities, content marketing, user experience and data-driven tools allow us to optimize media investment, messages and audience in real-time. In 2019, media expense represented 14.3% of net sales.

We build lifelong relationships with our customers. Our award-winning InnerCircle^SM loyalty program is integrated with our SleepIQ^® platform, making it easy for Insiders to receive additional value from the brand in terms of advance notice of innovations, upcoming sales events, relevant content to improve their sleep quality and for referring new customers to the brand. Insider referral and repeat sales represent greater than 45%scale of our businessbrand and marketing efforts:

We continue to strengthen our digital interactions with a new “sell-from-anywhere” model which makes it easy for our customers to select the best Sleep Number solution for their needs, however they want to interact with us. And by delivering a superior, personalized customer connection with our highly-knowledgeable sleep professionals, we are building lifelong relationships. Overall, 2021 represented our fourth straight year of double-digit, digital-traffic growth.

We focus on lifelong relationships with our customers, whom we refer to as our Insiders, part of our Smart Sleeper community. The more deeply engaged our Insiders are with the brand, the greater their advocacy. Our Smart Sleeper community, now 2.1 million strong, regularly interacts with our brand through their 360 smart bed and SleepIQ technology. Our award-winning InnerCircle Rewards program amplifies this engagement and drives acquisition of new customers through referral, and greater retention with repeat purchases. That brand loyalty and advocacy has grown significantly in recent years — representing approximately 50% of our business — and we expect that the incremental health and wellbeing features introduced through their 360 smart beds will continue to work withdrive Insider loyalty. Our Smart Sleeper community is our most efficient, and most valuable, source of new customers to the NFL,brand.

We continue to invest in our demand drivers for the NFLPA, PFATS, coaching staffs, teamsnear- and players as they integratelong-term success of our brand, delivering a simpler and even more engaging experience for our customers. Our newly launched enterprise customer identity platform creates a seamless connection for deeper customer engagement. This enables efficient customer acquisition and increased revenue, and empowers our customers to participate more deeply in the brand. By making it easier for our Smart Sleeper community to share their personal sleep insightshealth success stories from our 360 smart beds, we are driving lifetime value, richer customer relationships and lean into their overall performance regimens.our purpose of improving the health and wellbeing of society through higher quality sleep.

Our commitments to innovation and continuous improvement are employed to leverage our vertical business model by optimizing culture, processes and technology. In addition to a network of global suppliers, we currently operate two component manufacturing plants (Irmo, SC and Salt Lake City, UT) and threefive assembly distribution centers (Irmo, SC,SC; Salt Lake City, UTUT; Ontario, CA; Baltimore, MD; and Baltimore, MD).Tampa, FL) with three additional assembly distribution centers (Dallas, TX; Cincinnati, OH; and Minneapolis, MN) opening in 2022. Primary operations at thesethe manufacturing sites, which have consistently won awards for safety and manufacturing excellence, include cutting and sewing of the fabric covers for our beds and final assembly and packaging of mattresses and bases. Webeds. In our Utah plant, we also assemble our electrical Firmness Control™ systemssystems. Teams at our assembly distribution centers fulfill customer orders that are made-to-order daily and assemble final mattress and order kitting with bases and accessories for shipment. We also operate a national bedding-fulfillment center.

We source the raw materials and components used in our Utah plant. Our plantsproducts from third parties. Throughout 2021, we encountered temporary disruptions in our supply of various materials and components due to well-documented shortages and constraints in the global supply chain. We have consistently won awards fortaken, and continue to take, various measures to mitigate the potential impact of supply disruptions, including strengthening relationships with primary suppliers, identifying new alternate suppliers, redesigning products, exploring alternative components and maintaining safety stocks. While we expect some supply constraints to persist through 2022, we are leveraging the flexibility, visibility and manufacturing excellence.

resilience of our vertically-integrated model to respond nimbly as conditions change and communicate clearly with customers regarding their delivery experience.

At the end of 2019,2021, approximately 40%60% of our smart beds were pre-assembled forin our assembly distribution centers prior to delivery to customers’ homes while the remaining deliveries wereversus being assembled in customers’ homes.homes by Sleep Number technicians. We are pursuingexpect to complete a multi-year evolution of our supply chain distribution network to pre-assemble 100% of our smart beds by the end of 2022. Additionally in six assembly distribution centers around the U.S. by 2021.2022, we will move our bedding fulfillment center from Minnesota to Ohio to be closer to our customers. We are advancing our outbound logistics network by adding full truckload carriers and dedicated cross docks to reduce product handling, hand-offs, damage and costs while in transit to customers’ homes. We see these initiativesThis new network design enables scale and agility to support volume spikes and disruptions, providing a superior and reliable experience for customers with lower costs for the business.

Our home delivery teams are another direct touchpoint with our entire core mattress line to 360 smart beds. With this change,customers. Since 2018, 100% of our 360 smart beds sold are now delivered and installed by our home delivery technicians or by our third-party service providers in certain markets.

providers.

Serving our customers remains a strong focus. Through our U.S.-based, in-house customer service team based in Minneapolis, MN and New Orleans, LA, we provide direct post-purchase support that improves the customer experience and drives our business. This team providesThrough frequent service and support interactions with customers via phone, email, “live chat”live chat and social media. Theymedia, these team members also provide a unique opportunity to gather insights that help us continuously improve our products, strengthen our service quality and advance our innovation. This integration enables operational synergies and drives organizational efficiencies.

We use information technology systems to operate, analyze and manage our business, to reduce operating costs and to enhance our customers’ experience. Our major systems include an in-store order entry system, a retail portal system, a payment processing system, in-bound and out-bound telecommunications systems for direct marketing, delivery scheduling and customer service systems, e-commerce systems, a data warehouse system and an enterprise resource planning (ERP) system. These systems are primarily comprised of packaged applications licensed from various software vendors plus a limited number of internally developed programs. Please refer to the information set forth in Part I, Item 1A., programs and digital solutions.

We hold various U.S. and foreign patents and patent applications regarding certain elements of the design and function of our products, including air control systems, remote control systems, air chamber features, mattress construction, foundation systems, sensing systems, automated adjustments, in-bed temperature control, as well as other technology. We have numerous U.S. patents, expiring at various dates between June 2020January 2022 and February 2037,August 2045, and numerous U.S. patent applications pending. We also have numerous foreign patents and patent applications pending. Notwithstanding these patents and patent applications, we cannot ensure that these patent rights will provide substantial protection or that others will not be able to develop products that are similar to, or competitive with, our products.

Several of our trademarks have been registered, or are the subject of pending applications for registration, in various foreign countries. We also have other intellectual property rights related to our products, processes and technologies, including trade secrets, trade dress and copyrights. We protect and enforce our intellectual property rights, including through litigation as necessary.

Sleep disorders have been declared a public health epidemic by the U.S. Center for Disease Control. One in three adults suffer from a lack of adequate sleep. Sleep Number is focused on producing products to address this growing problem. The total U.S. sleep-health economy was estimated to be $30 billion to $40 billion in a 2017 report published by McKinsey & Company. This reflects the traditional view of the bedding industry which includes the sales of mattresses and foundations, as well as emerging solutions for insufficient sleep such as routine modification and therapeutic treatment. We believe the sleep economy will continue to evolve and grow as consumers look for products and reliable data sources to address sleep deprivation challenges.

The traditional view of the U.S. bedding industry, including mattresses and foundations (static and adjustable), is measured through data provided by the International Sleep Products Association (ISPA). According to ISPA, the industry has grown by approximately 4%5% annually over the last 20 years, including 5%6% annually, on average, over the past five years. According to ISPA and our estimates, industry wholesale shipments of mattresses and foundations (including imported products and adjustable bases) were approximately $10.7$13 billion in 20192021 (approximately $21$26 billion at retail). Furniture/

The retail bedding industry is commoditized and highly competitive. Sleep Number competes against regional and local specialty bedding retailers, home furnishing stores, mass merchants, national discount stores and online marketers. Furniture Today, a furniture industry trade publication, has ranked Sleep Number as the 5th largest mattress manufacturer and 2nd largest U.S. bedding retailer for 2018,2020, with an estimated 8% market share of industry retail revenue.

The retail bedding industry is commoditized and highly competitive. Our Company-Controlled distribution channel is exclusive, and we compete against regional and local specialty bedding retailers, home furnishing stores, mass merchants, national discount stores and online marketers. Our consumer innovation strategy with proprietary sleep innovations and exclusive direct-to-consumer distribution is highly differentiated, and resultsresulting in a lifelong customer relationships.

relationships and contributing to our continued profitable growth.

Manufacturers in the bedding industry compete through retail partners on price, quality, brand name recognition, product availability and product performance, including the perceived levels of comfort and support provided by a mattress. There is a high degree of concentration among manufacturers, who produce innerspring, memory foam and hybrid beds, under nationally recognized brand names, including Tempur Sealy, Stearns & Foster, Serta and Simmons. In recent years, numerous (approximately 200) direct-to-consumer companies and low-cost importers have entered the market, offering “bed-in-a-box” products to consumers, primarily through online distribution.distribution though many now partner with traditional mattress retailers. Their products are generally foam-based and undifferentiated in terms of sleep benefits.

As a vertically integrated manufacturer and retailer, we are subject to extensive federal, state and local laws and regulations affecting all aspects of our business.

As a manufacturer, we are committed to product quality and safety, including adherence to all applicable laws and regulations affecting our products.products and services. Compliance with health, safety and environmental laws and regulations, including the federal fire retardant standards developed by the U.S. Consumer Product Safety Commission, which requires rigorous and costly testing, has increased the cost and complexity of manufacturing our products and may adversely impact the speed and cost of product development efforts. Further, our manufacturing, distribution, delivery and other business operations and facilities are subject to additional federal, state or local laws or regulations relating toincluding supply chain transparency, conflict minerals sourcing and disclosure, end-of-life disposal and recycling requirements, transportation and other laws or regulations relating to environmental protection and health and safety requirements.

requirements, including COVID-19 safety and prevention.

As a retailer, we are subject to additional laws and regulations that apply to retailers generally and govern the marketing and sale of our products and the operation of both our retail stores and our e-commerce activities. Many of the statutory and regulatory requirements that impact our retail and e-commerce operations are consumer-focused and pertain to activities such as theour promotions, advertising and selling ofclaims, pricing, credit-based promotional offers, truth-in-advertising, privacy, “do not call/mail” requirements, text messaging requirements, warranty disclosure, delivery timing requirements, accessibility and similar requirements.

Our operations are subject to federal, state and local labor laws including, but not limited to, those relating to occupational health and safety, employee privacy, wage and hour, overtime pay, harassment and discrimination, equal opportunity and employee leaves and benefits. We are also subject to existing and emerging federal and state laws relating to data security and privacy.

It is our policy and practice to comply with all legal and regulatory requirements and ourrequirements. Our procedures and internal controls are designed to promote such compliance.

Customers

No single customer accounts for 10% or more of our net sales.

Our business is modestly impacted by seasonal influences inherent in the U.S. bedding industry and general retail shopping patterns. The U.S. bedding industry generally experiences lower sales demand in the second quarter of the calendar year and increased sales demand during selected holiday or promotional periods.

We are able to operate with minimal working capital requirements because we sell directly to customers, utilize a primarily hybridboth “make-to-order” and “make-to-stock” production processprocesses and operate retail stores that serve mainly as showrooms. We have historically generated sufficient cash flows to self-fund operations through an accelerated cash-conversion cycle. In February 2019, we amended our revolving credit facility (Credit Agreement) with a syndicate of banks (Lenders). TheOur Credit Agreement provides a revolving credit facility for general corporate purposes with net aggregate availability of $450$825 million. The Credit Agreement contains an accordion feature that allows us to increase the amount of the credit facility from $450$825 million up to $600 million$1.2 billion in total availability, subject to Lenders’ approval. The Credit Agreement matures in February 2024.

December 2026.

Qualified customers are offered revolving credit to finance purchases through a private-label consumer credit facility provided by Synchrony Bank. Approximately 52%50% of our net sales in 20192021 were financed by Synchrony Bank. Our current agreement with Synchrony Bank expires December 31, 2023, subject to earlier termination upon certain events. We pay Synchrony Bank a fee for extended credit promotional financing offers. Under the terms of our agreement, Synchrony Bank sets the minimum acceptable credit ratings, interest rates, fees and all other terms and conditions of the customercustomers’ accounts, including collection policies and procedures. As the receivables are owned by Synchrony Bank, at no time are the receivables purchased or acquired from us. We are not liable to Synchrony Bank for our customers’ credit defaults. In connection with all purchases financed under these arrangements, Synchrony Bank pays us an amount equal to the total amount of such purchases, net of promotional related discounts, upon delivery to the customer. Customers that do not qualify for credit under our agreement with Synchrony Bank may apply for credit under a secondary program that we offer through another provider.

Team Members

At December 28, 2019,January 1, 2022, we employed 4,476 individuals, including 2,334a total of 5,515 team members, of which 145 were classified as part-time and 110 were employed on a temporary basis. The breakdown of team members by area was as follows: 2,487 in retail sales and support, team members, 3801,054 in field services, 415 in customer service, team members, 1,241642 in manufacturing and logistics, team members, and 521917 in technology, corporate, management and administrative positions.

We are committed to leveraging the power of sleep, and sleep science, to improve lives and create a healthier, kinder, more inclusive world. To further support this commitment and amplify our positive community impact, we are honored to partner with regardseveral national organizations to engagement,fulfill our purpose of improving the health and review engagementwellbeing of society through higher quality sleep. The strength of our purpose meets the needs of military personnel, children and adults facing health challenges and families in transition, including:

Our Corporate Responsibility and Sustainability Report, posted within the Investor Relations section of our Company website, provides additional information about our commitment to talent management and human rights at Sleep Number, including strategy details, performance metrics and inputour engagement. The report highlights our commitments:

This report may be accessed at www.sleepnumber.com by clicking on the “INVESTORS” link, then click on the “ESG” link and “Sustainability Reports.” The information contained on our website or connected to our website is important for an innovation company with an aspirational visionnot incorporated by reference into this Form 10-K and life-changing mission.should not be considered part of this report.

We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the Securities and Exchange Commission (SEC).

Our corporate website is www.SleepNumber.com.www.SleepNumber.com. Through a link to a third-party content provider, our corporate website provides free access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after electronic filingwe electronically file such material with, or furnish it to, the SEC. These documents are posted on our website at www.SleepNumber.com — select the “Investors”“Investors” link, the "Financials & Filings"“Financials” link, and then the “SEC Filings”“SEC Filings” link. The information contained on our website or connected to our website is not incorporated by reference into this Form 10-K and should not be considered part of this report.

We also make available, free of charge on our website, the charters of the Audit Committee, Management Development and Compensation Committee and Corporate Governance and Nominating Committee, as well as our Code of Business Conduct (including any amendment to, or waiver from, a provision of our Code of Business Conduct) adopted by our Board. These documents are posted on our website — select the “Investors”“Investors” link, the “Governance”“Governance” link and then the "“Governance Documents” link. The information contained on our website or connected to our website is not incorporated by reference into this Form 10-K and should not be considered part of this report.

Copies of any of the above-referenced information will also be made available, free of charge, upon written request to:

Investor Relations Department

1001 Third Avenue South

Minneapolis, MN 55404

Our longer-term Company-ControlledTotal Retail distribution strategy is also dependent on our ability to renew existing store leases and to secure suitable locations for new store openings, in each case on a cost-effective basis. We may encounter higher than anticipated rents and other costs in connection with managing our retail store base. We may also be unable to find or obtain suitable new locations.

Our products are highly differentiated from traditional innerspring mattresses and from viscoelastic and other foam mattresses, which have little or no technology and do not rely on electronics and air control systems. As a result, our

beds may be susceptible to failures that do not exist with traditional or foam mattresses. Failure to achieve and maintain acceptable quality standards could impact consumer acceptance of our products or result in negative media and Internet reports or owner dissatisfaction that could negatively impact our brand image and sales levels.

In addition, a decline in product quality could result in an increase in return rates and a corresponding decrease in sales, or an increase in product warranty claims in excess of our warranty reserves. An unexpected increase in return rates or warranty claims could harm our sales, profitability, cash flows and financial condition.

As a consumer innovation companyCompany with differentiated products, we face an inherent risk of exposure to product liability claims or regulatory actions if the use of our products is alleged to have resulted in personal injury or property damage. If any of our products proves to be defective or non-compliant with applicable regulations such as the federal Consumer Product Safety Commission flammability standards, we may be required to recall or redesign such products. We have at times experienced increased returns and adverse impacts on sales, as well as product liability litigation, as a result of media reports related to the alleged propensity of our products to develop mold. We may experience additional adverse impacts on sales and additional litigation if any similar media reports were to occur in the future. We maintain insurance against some forms of product liability claims, but such coverage may not be applicable to, or adequate for, liabilities actually incurred. A successful claim brought against us outside of, or in excess of, available insurance coverage, or any claim or product recall that results in significant adverse publicity about us, may have a material adverse effect on our sales, profitability, cash flows and financial condition.

As described in greater detail below, the bedding industry, as well as the market for sleep monitoring products, are both highly competitive, and our ability to compete effectively and to profitably grow our market share depend in part on our ability to continue to improve and expand our product line of adjustable firmness air beds, SleepIQ technology and related accessory products. We incur significant research and development and other expenditures in the pursuit of improvements and additions to our product line. If these efforts do not result in meaningful product improvements or new product introductions, or if we are not able to gain widespread consumer acceptance of product improvements or new product introductions, or there are delays or production limitations with respect to our product improvements or new product introductions, our sales, profitability, cash flows and financial condition may be adversely affected. In addition, if any significant product improvements or new product introductions are not successful, delayed, or constrained our reputation and brand image may be adversely affected.

Significant competition could adversely affect our business

We own various U.S. and foreign patents and patent applications related to certain elements of the design and function of our beds and related products. We own numerous registered and unregistered trademarks and trademark applications, including in particular our Sleep Number,, Sleep Number 360,, 360,,and SleepIQ trademarks, as well as other intellectual property rights, including trade secrets, trade dress and copyrights, which we believe have significant value and are important to the development, function, and marketing of our products. These intellectual property rights may not provide adequate protection against infringement or piracy, may not prevent competitors from developing and marketing products that are similar to or competitive with our beds or other products, and may be costly and time-consuming to protect and enforce. Our patents are also subject to varying expiration dates. In addition, the laws of some foreign countries may not protect our intellectual property rights and confidential information to the same extent as the laws of the United States. If we are unable to protect and enforce our intellectual property, we may be unable to prevent other companies from using our technology or trademarks in connection with competitive products, which could adversely affect our sales, profitability, cash flows and financial condition.

We are from time to time subject to claims that our products, processes, advertising, or trademarks infringe the intellectual property rights of others. The defense of these claims, even if we are ultimately successful, may result in costly litigation, and if we are not successful in our defense, we could be subject to injunctions and liability for damages or royalty obligations, and our sales, profitability, cash flows and financial condition could be adversely affected.

A reduction in the availability of credit

Because of the vertical integration of our business model, our products and distribution face significant competition from both manufacturers of different types of mattresses and a variety of retailers. Our SleepIQ technology also faces significant competition from various manufacturers and retailers of sleep tracking and monitoring products.

Some of our competitors have substantially greater financial, condition.

We rely upon several key suppliersmarketing and third parties that are, in some instances,manufacturing resources and greater brand name recognition than we do and sell products through broader and more established distribution touchpoints. Our national, exclusive distribution competes with other retailers who generally provide a wider selection of mattress alternatives than we offer. A number of these retailers also have more points of distribution, greater marketing resources, and greater brand name recognition than we do.

These manufacturing and retailing competitors, or new entrants into the only source of supplymarket, may compete aggressively and gain market share with existing or services currently used by us for particular materials, componentsnew products, and may pursue or services. A disruptionexpand their presence in the supply or substantial increase in costadjustable firmness air bed segment of any of these products or services could harm our sales, profitability, cash flows and financial condition.

We currently obtain all the materials and components used to produce our beds from outside sources including some that are located outside the United States. In several cases, including our air chambers, integrated non-adjustable foundations, adjustable foundations, various components for our Firmness Control™ systems, certain foam formulations,market as well as our fabrics and zippers, we have chosen to obtain these materials and components from suppliers who serve as the only source of supply, or who supply the vast majority of our needs of the particular material or component. While we believe that these materials and components, or suitable replacements, could be obtained from other sources in the eventmarket for sleep tracking and monitoring products. We have limited ability to anticipate the timing and scale of a disruptionnew product introductions, advertising campaigns or loss of supply, we may not be ablenew pricing strategies by our competitors, which could inhibit our ability to find alternative sources of supplyretain or alternative sources of supply on comparable terms. Ifincrease market share, or to maintain our relationship with the primary supplier of our air chambers or the supplier of our adjustable foundations is terminated, we could have difficulty in replacing these sources since there are relatively few other suppliers presently capable of manufacturing these components.profit margins.

If we are unable to offset any such increased costs through value engineeringeffectively compete with other manufacturers and similar initiatives, or through price increases,retailers of mattress and sleep tracking and monitoring products, our sales, profitability, cash flows and financial condition may be adversely impacted. If we choose

We have two main manufacturing plants, which are located in Irmo, South Carolina and Salt Lake City, Utah. We haveUtah, and a network of several assembly distribution centers which assemble the final mattress product before delivery to the customer, across the US.county. A significant

percentage of our products are assembled to fulfill orders rather than stocking finished goods inventory in our plants, or stores. Therefore, the disruption of operations of either of our two main manufacturing plants or our assembly distribution centers, for a significant period of time may increase our costs of doing businessor stores. We have home delivery operations and lead to delays in deliveries ofcontractors that deliver our products to customers.customers across the country as well as a bedding fulfillment center that ships bedding products to consumers via third-party services. Our product development and testing operations primarily occur in our corporate headquarters in Minneapolis, Minnesota and Sleep Number Labs facility in San Jose, California. Our customer service operations are located in New Orleans, Louisiana and Minneapolis, Minnesota and we have retail stores across the country. Disruption to any of these operations, facilities, workforce, or our nationwide logistics network could harm or delay our ability to satisfy customer demand, develop, test and launch new products, service our products and customers, and increase our costs. Such impacts and delays could adversely affect our sales, customer satisfaction, profitability, cash flows and financial condition.results.

We are subject to a wide variety of laws and regulations relating to the bedding industry or to various aspects of our business. Laws and regulations at the federal, state and local levels frequently change and we cannot always reasonably predict the impact from, or the ultimate cost of compliance with, future regulatory or administrative changes. Changes in

law, the imposition of new or additional regulations or the enactment of any new or more stringent legislation that impacts employment and labor, trade, advertising and marketing practices, pricing, consumer credit offerings, “do not call/mail” requirements, text messaging requirements, product testing and safety, transportation and logistics, health care, tax, accounting, privacy and data security, health and safety or environmental issues, warranty disclosures, delivery timing requirements, accessibility requirements, among others, could require us to change the way we do business and could have a material adverse impact on our sales, profitability, cash flows and financial condition. New or different laws or regulations could increase direct compliance costs for us or may cause our vendors to raise the prices they charge us because of increased compliance costs. Further, the adoption of a multi-layered regulatory approach to any one of the state or federal laws or regulations to which we are currently subject, particularly where the layers are in conflict, could require alteration of our manufacturing processes or operational parameters which may adversely impact our business.

Legislative or regulatory changes that impact our relationship with our workforce, such as minimum wage requirements or health insurance or other employee benefits mandates, could increase our expenses and adversely affect our operations. While it is our policy and practice to comply with legal and regulatory requirements and our procedures and internal controls are designed to promote such compliance, we cannot assure that all of our operations will comply with all such legal and regulatory requirements. Further, laws and regulations change over time and we may be required to incur significant expenses and/or to modify our operations in order to ensure compliance. This could harm our profitability or financial condition. If we are found to be in violation of any laws or regulations, we could become subject to fines, penalties, damages or other sanctions as well as potential adverse publicity or litigation exposure. This could adversely impact our business, reputation, sales, profitability, cash flows or financial condition.

Regulatory

As we work to develop innovations with enhanced health capabilities, including possible capabilities of providing advanced monitoring and health risk evaluations, depending on the features that ultimately become commercially available, some features may require regulatory requirements related to flammability standards for mattresses may increase our product costs and increase the risk of disruptionor approvals beyond those that apply to our business.

Compliance with the federal Consumer Product Safety Commission flammability standards and related regulations for mattresses and mattress and foundation sets has resulted in higher materials and manufacturing costs for ourcurrent products and has required modifications to our information systems and business operations, further increasing our costs and negatively impacting our capacity.

or features. These regulations require manufacturers to implement quality assurance programs and encourage manufacturers to conduct random testing of products. These regulations also require maintenance and retention of compliance documentation. These quality assurance and documentationadditional regulatory requirements are costly to implement and maintain. If any product testing, other evidence, or regulatory inspections yield results indicating that any of our products may not meet the flammability standards, weapprovals may be required to temporarily cease production and distribution and/prohibitively expensive or to recall productsotherwise delay or prevent certain features, innovations, or product from the field, and we may be subject to fines or penalties, any of which outcomes could harm our business, reputation, sales, profitability, cash flows and financial condition.

being commercialized.

We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, product liability, employment and intellectual property claims. We currently do not expect the outcome of any pending matters to have a material effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more pending claims asserted against us, or claims that may be asserted in the future that we are currently not aware of, or adverse publicity resulting from any such litigation, could adversely impact our business, reputation, sales, profitability, cash flows and financial condition.

action and attacks, team member error, access to our data and systems, malfeasance or otherwise, could compromise the security of our data and customers’ and team members’ personal information. Like many other businesses, we have and will likely continue to experience cyber-based attacks and incidents from time to time. As the techniques used to breach such security measures change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. Any failure of our systems and processes or our third-party vendors’ systems and processes to adequately protect our data or customer or team member personal information from exposure, theft or loss could adversely impact our business, reputation, sales, profitability, cash flows and financial condition.

As a vertically integrated manufacturer and retailer, our future growth and profitability will depend in part upon our ability to attract, retain and motivate qualified personnel in a wide variety of areas to execute our growth strategy, including qualified management and executive personnel, and qualified retail sales professionals and managers.managers, and manufacturing, home delivery and technical personnel. The current labor shortage, the world-wide trends of corporate resignations, COVID-19 or other economic factors may prevent us, and our suppliers and vendors, from successfully hiring and retaining qualified personnel. The failure to attract, retain and motivate qualified personnel may hinder our ability to execute our business strategy and growth initiatives and may adversely impact our sales, profitability, cash flows and financial condition.

None.

We lease our 238,000 square-foot corporate headquarters in Minneapolis, Minnesota.MN. The lease term commenced in November 2017 and runs through October 2032. The lease includes three five-year renewal options.

We lease two manufacturing assembly and distribution centersfacilities in Irmo, South CarolinaSC and Salt Lake City, UtahUT of approximately 151,000 square feet and approximately 101,000 square feet, respectively. The Irmo facility lease runs through June 2026, with two five-year renewal options. The Salt Lake City facility lease runs through July 2025, with one five-year renewal option.

We also lease one storage facilityhave five distribution centers and four other distribution-related facilities located in Brooklyn Park, MN; Redlands, CA; Dallas, TX; Tampa, FL; Cincinnati, OH; Baltimore, MD; Salt Lake City, UT and Irmo, SC, with a total square footage of approximately 57,0001.0 million square feet and lease terms ending in July 2023 through April 2023, and a second storage facility in Salt Lake City of approximately 64,000 square feet through April 2020.

July 2031.

Not applicable.

Our common stock trades on The Nasdaq Stock Market LLC (Nasdaq Global Select Market) under the symbol “SNBR.” As of January 25, 2020,29, 2022, there were approximately 207192 holders of record of our common stock.

We are not restricted from paying cash dividends under our Credit Agreement so long as we are not in default under the Credit Agreement,, our leverage ratio (as defined in our Credit Agreement) after giving effect to such restricted payments (as defined in our Credit Agreement) would not exceed 3.75:1.00 and no default or event of default (as defined in our Credit Agreement) would result therefrom. However, we have not historically paid, and have no current plans to pay, cash dividends on our common stock.

Information concerning share repurchases completed during the fourth quarter of fiscal 20192021 is set forth below:

The graph below compares the total cumulative shareholder return on our common stock over the last five years to the total cumulative return on the Standard and Poor’s (S&P) 400 Specialty Stores Index and The Nasdaq Stock Market (U.S.) Index assuming a $100 investment made on January 3, 2015.December 31, 2016. Each of the three measures of cumulative total return assumes reinvestment of dividends. The stock performance shown on the graph below is not necessarily indicative of future price performance. The information contained in this “Comparative Stock Performance” section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that we specifically request that it be treated as soliciting material or incorporate it by reference into a document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN

AMONG SLEEP NUMBER CORPORATION, S&P 400 SPECIALTY STORES INDEX,

AND THE NASDAQ STOCK MARKET (U.S.) INDEX