UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~July 3,~~October 2, 2021


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

Commission File Number: 000-25121

SLEEP NUMBER CORPORATION

(Exact name of registrant as specified in its charter)


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

1001 Third Avenue South

Minneapolis,

Minnesota

55404

(Address of principal executive offices)

(Zip Code)

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

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

Title of each class

Trading
Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

SNBR

Nasdaq Global Select Market

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

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

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

As of ~~July 3,~~October 2, 2021, ~~23,622,000~~22,647,000 shares of the registrant’s Common Stock were outstanding.

Table of contents

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Table of contents

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited - in thousands, except per share amounts)


		July 3, 2021		January 2, 2021			October 2, 2021		January 2, 2021
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	2,173	$	4,243	Cash and cash equivalents	$	1,830	$	4,243
Accounts receivable, net of allowances of $1,098 and $1,046, respectively		23,205		31,871
Accounts receivable, net of allowances of $1,116 and $1,046, respectively						Accounts receivable, net of allowances of $1,116 and $1,046, respectively	33,388		31,871
Inventories	Inventories	88,577		81,362		Inventories	86,129		81,362
Income taxes receivable		1,578		0

Prepaid expenses	Prepaid expenses	28,900		20,839		Prepaid expenses	24,346		20,839
Other current assets	Other current assets	42,564		43,489		Other current assets	49,634		43,489
Total current assets	Total current assets	186,997		181,804		Total current assets	195,327		181,804

Non-current assets:	Non-current assets:					Non-current assets:
Property and equipment, net	Property and equipment, net	182,398		175,223		Property and equipment, net	184,697		175,223
Operating lease right-of-use assets	Operating lease right-of-use assets	344,423		314,226		Operating lease right-of-use assets	360,269		314,226
Goodwill and intangible assets, net	Goodwill and intangible assets, net	71,669		72,871		Goodwill and intangible assets, net	71,069		72,871
Other non-current assets	Other non-current assets	69,009		56,012		Other non-current assets	72,258		56,012
Total assets	Total assets	$	854,496	$	800,136	Total assets	$	883,620	$	800,136

Liabilities and Shareholders’ Deficit	Liabilities and Shareholders’ Deficit					Liabilities and Shareholders’ Deficit
Current liabilities:	Current liabilities:					Current liabilities:
Borrowings under credit facility		$	382,200	$	244,200
Borrowings under revolving credit facility						Borrowings under revolving credit facility	$	359,100	$	244,200
Accounts payable	Accounts payable	129,922		91,904		Accounts payable	163,894		91,904
Customer prepayments	Customer prepayments	119,435		72,017		Customer prepayments	107,802		72,017
Accrued sales returns	Accrued sales returns	21,217		24,765		Accrued sales returns	28,518		24,765
Compensation and benefits	Compensation and benefits	54,219		76,786		Compensation and benefits	63,896		76,786
Taxes and withholding	Taxes and withholding	13,779		23,339		Taxes and withholding	36,590		23,339
Operating lease liabilities	Operating lease liabilities	67,648		62,077		Operating lease liabilities	69,316		62,077
Other current liabilities	Other current liabilities	57,708		60,856		Other current liabilities	61,767		60,856
Total current liabilities	Total current liabilities	846,128		655,944		Total current liabilities	890,883		655,944

Non-current liabilities:	Non-current liabilities:					Non-current liabilities:
Deferred income taxes	Deferred income taxes	663		242		Deferred income taxes	533		242
Operating lease liabilities	Operating lease liabilities	311,672		283,084		Operating lease liabilities	327,521		283,084
Other non-current liabilities	Other non-current liabilities	99,691		84,844		Other non-current liabilities	104,749		84,844
Total liabilities	Total liabilities	1,258,154		1,024,114		Total liabilities	1,323,686		1,024,114

Shareholders’ deficit:	Shareholders’ deficit:					Shareholders’ deficit:
Undesignated preferred stock; 5,000 shares authorized, 0 shares issued and outstanding		0		0
Common stock, $0.01 par value; 142,500 shares authorized, 23,622 and 25,390 shares issued and outstanding, respectively		236		254
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding						Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding	—		—
Common stock, $0.01 par value; 142,500 shares authorized, 22,647 and 25,390 shares issued and outstanding, respectively						Common stock, $0.01 par value; 142,500 shares authorized, 22,647 and 25,390 shares issued and outstanding, respectively	226		254
Additional paid-in capital	Additional paid-in capital	0		0		Additional paid-in capital	—		—
Accumulated deficit	Accumulated deficit	(403,894)		(224,232)		Accumulated deficit	(440,292)		(224,232)
Total shareholders’ deficit	Total shareholders’ deficit	(403,658)		(223,978)		Total shareholders’ deficit	(440,066)		(223,978)
Total liabilities and shareholders’ deficit	Total liabilities and shareholders’ deficit	$	854,496	$	800,136	Total liabilities and shareholders’ deficit	$	883,620	$	800,136

See accompanying notes to condensed consolidated financial statements.

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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited - in thousands, except per share amounts)


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020			October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Net sales	Net sales	$	484,316	$	284,938	$	1,052,572	$	757,504	Net sales	$	640,393	$	531,155	$	1,692,965	$	1,288,659
Cost of sales	Cost of sales	191,465		121,928		403,803		292,363		Cost of sales	250,039		196,195		653,842		488,558
Gross profit	Gross profit	292,851		163,010		648,769		465,141		Gross profit	390,354		334,960		1,039,123		800,101

Operating expenses:	Operating expenses:									Operating expenses:
Sales and marketing	Sales and marketing	205,994		130,165		429,611		337,909		Sales and marketing	255,512		211,574		685,123		549,483
General and administrative	General and administrative	41,220		36,716		83,812		67,788		General and administrative	47,676		44,127		131,488		111,915
Research and development	Research and development	15,916		8,254		29,202		18,755		Research and development	14,431		9,644		43,633		28,399
Total operating expenses	Total operating expenses	263,130		175,135		542,625		424,452		Total operating expenses	317,619		265,345		860,244		689,797
Operating income (loss)		29,721		(12,125)		106,144		40,689
Operating income										Operating income	72,735		69,615		178,879		110,304
Interest expense, net	Interest expense, net	1,607		3,940		2,584		6,284		Interest expense, net	1,816		1,827		4,400		8,111
Income (loss) before income taxes		28,114		(16,065)		103,560		34,405
Income tax expense (benefit)		5,864		(3,435)		14,676		7,895
Net income (loss)		$	22,250	$	(12,630)	$	88,884	$	26,510
Income before income taxes										Income before income taxes	70,919		67,788		174,479		102,193
Income tax expense										Income tax expense	17,198		16,468		31,874		24,363
Net income										Net income	$	53,721	$	51,320	$	142,605	$	77,830

Basic net income (loss) per share:
Net income (loss) per share – basic		$	0.91	$	(0.45)	$	3.57	$	0.95
Basic net income per share:										Basic net income per share:
Net income per share – basic										Net income per share – basic	$	2.29	$	1.83	$	5.84	$	2.79
Weighted-average shares – basic	Weighted-average shares – basic	24,371		27,923		24,874		27,890		Weighted-average shares – basic	23,464		27,973		24,404		27,918

Diluted net income (loss) per share:
Net income (loss) per share – diluted		$	0.88	$	(0.45)	$	3.44	$	0.93
Diluted net income per share:										Diluted net income per share:
Net income per share – diluted										Net income per share – diluted	$	2.22	$	1.79	$	5.63	$	2.73
Weighted-average shares – diluted	Weighted-average shares – diluted	25,194		27,923		25,869		28,523		Weighted-average shares – diluted	24,233		28,634		25,324		28,560

See accompanying notes to condensed consolidated financial statements.

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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Deficit

(unaudited - in thousands)


		Common Stock			Additional Paid-in Capital				Accumulated Deficit					Total			Common Stock							Additional Paid-in Capital		Accumulated Deficit		Total
		Shares	Amount										Shares					Amount
Balance at January 2, 2021	Balance at January 2, 2021	25,390	$	254			$	0			$	(224,232)					$	(223,978)	Balance at January 2, 2021	25,390			$		254	$	—	$	(224,232)	$	(223,978)
Net income	Net income	—	—		—				66,634					66,634		Net income	—				—			—		66,634		66,634
Exercise of common stock options	Exercise of common stock options	106	1		2,459				—					2,460		Exercise of common stock options	106				1			2,459		—		2,460
Stock-based compensation	Stock-based compensation	314	3		6,413				—					6,416		Stock-based compensation	314				3			6,413		—		6,416
Repurchases of common stock	Repurchases of common stock	(1,346)	(13)		(8,872)				(175,297)					(184,182)		Repurchases of common stock	(1,346)				(13)			(8,872)		(175,297)		(184,182)
Balance at April 3, 2021	Balance at April 3, 2021	24,464	$	245	$	0			$	(332,895)				$	(332,650)	Balance at April 3, 2021	24,464				$	245		$	—	$	(332,895)	$	(332,650)
Net income	Net income	—	—		—				22,250					22,250		Net income	—				—			—		22,250		22,250
Exercise of common stock options	Exercise of common stock options	35	—		1,075				—					1,075		Exercise of common stock options	35				—			1,075		—		1,075
Stock-based compensation	Stock-based compensation	22	0		5,969				—					5,969		Stock-based compensation	22				—			5,969		—		5,969
Repurchases of common stock	Repurchases of common stock	(899)	(9)		(7,044)				(93,249)					(100,302)		Repurchases of common stock	(899)				(9)			(7,044)		(93,249)		(100,302)

Balance at July 3, 2021	Balance at July 3, 2021	23,622	$	236	$	0			$	(403,894)				$	(403,658)	Balance at July 3, 2021	23,622				$	236		$	—	$	(403,894)	$	(403,658)
Net income																Net income	—				—			—		53,721		53,721
Exercise of common stock options																Exercise of common stock options	10				—			312		—		312
Stock-based compensation																Stock-based compensation	19				—			7,316		—		7,316
Repurchases of common stock																Repurchases of common stock	(1,004)				(10)			(7,628)		(90,119)		(97,757)
Balance at October 2, 2021																Balance at October 2, 2021	22,647				$	226		$	—	$	(440,292)	$	(440,066)

Common Stock
Additional
Paid-in
Capital
Accumulated Deficit Total
Shares Amount
Balance at December 28, 2019 27,961 $ 280 $ 0 $ (159,711) $ (159,431)
Net income — — — 39,140 39,140
Exercise of common stock options 167 1 3,282 — 3,283
Stock-based compensation 396 4 2,047 — 2,051
Repurchases of common stock (888) (9) (5,329) (35,614) (40,952)
Balance at March 28, 2020 27,636 $ 276 $ 0 $ (156,185) $ (155,909)
Net loss — — — (12,630) (12,630)
Exercise of common stock options 33 — 817 — 817
Stock-based compensation 71 1 5,032 — 5,033
Repurchases of common stock (15) — (330) 1 (329)
Balance at June 27, 2020 27,725 $ 277 $ 5,519 $ (168,814) $ (163,018)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total
	Shares	Amount
Balance at December 28, 2019	27,961	$	280	$	—	$	(159,711)	$	(159,431)
Net income	—	—		—		39,140		39,140
Exercise of common stock options	167	1		3,282		—		3,283
Stock-based compensation	396	4		2,047		—		2,051
Repurchases of common stock	(888)	(9)		(5,329)		(35,614)		(40,952)
Balance at March 28, 2020	27,636	$	276	$	—	$	(156,185)	$	(155,909)
Net loss	—	—		—		(12,630)		(12,630)
Exercise of common stock options	33	—		817		—		817
Stock-based compensation	71	1		5,032		—		5,033
Repurchases of common stock	(15)	—		(330)		1		(329)
Balance at June 27, 2020	27,725	$	277	$	5,519	$	(168,814)	$	(163,018)
Net income	—	—		—		51,320		51,320
Exercise of common stock options	20	1		549		—		550
Stock-based compensation	14	—		8,470		—		8,470
Repurchases of common stock	(2)	—		(148)		(1)		(149)
Balance at September 26, 2020	27,757	$	278	$	14,390	$	(117,495)	$	(102,827)

See accompanying notes to condensed consolidated financial statements.

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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited - in thousands)


		Six Months Ended					Nine Months Ended
		July 3, 2021		June 27, 2020			October 2, 2021		September 26, 2020
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	88,884	$	26,510	Net income	$	142,605	$	77,830
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	29,800		30,811		Depreciation and amortization	44,786		46,244
Stock-based compensation	Stock-based compensation	12,385		7,084		Stock-based compensation	19,701		15,554
Net loss on disposals and impairments of assets		78		224
Net (gain) loss on disposals and impairments of assets						Net (gain) loss on disposals and impairments of assets	(20)		208
Deferred income taxes	Deferred income taxes	421		4,383		Deferred income taxes	291		3,229
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable	Accounts receivable	8,666		4,224		Accounts receivable	(1,517)		(12,710)
Inventories	Inventories	(7,215)		5,391		Inventories	(4,767)		3,807
Income taxes	Income taxes	(11,625)		2,508		Income taxes	5,615		5,103
Prepaid expenses and other assets	Prepaid expenses and other assets	(13,407)		7,018		Prepaid expenses and other assets	(13,879)		3,666
Accounts payable	Accounts payable	23,232		(14,804)		Accounts payable	51,543		58,547
Customer prepayments	Customer prepayments	47,418		16,987		Customer prepayments	35,785		40,795
Accrued compensation and benefits	Accrued compensation and benefits	(22,387)		(7,405)		Accrued compensation and benefits	(12,725)		21,376
Other taxes and withholding	Other taxes and withholding	487		(3,594)		Other taxes and withholding	7,636		4,756
Other accruals and liabilities	Other accruals and liabilities	4,683		7,664		Other accruals and liabilities	17,630		18,877
Net cash provided by operating activities	Net cash provided by operating activities	161,420		87,001		Net cash provided by operating activities	292,684		287,282

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Purchases of property and equipment	Purchases of property and equipment	(32,012)		(21,695)		Purchases of property and equipment	(49,370)		(28,074)
Proceeds from sales of property and equipment	Proceeds from sales of property and equipment	12		25		Proceeds from sales of property and equipment	257		53
Purchase of intangible assets	Purchase of intangible assets	0		(945)		Purchase of intangible assets	—		(945)
Net cash used in investing activities	Net cash used in investing activities	(32,000)		(22,615)		Net cash used in investing activities	(49,113)		(28,966)

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Repurchases of common stock	Repurchases of common stock	(280,915)		(41,774)		Repurchases of common stock	(381,496)		(41,923)
Net increase (decrease) in short-term borrowings	Net increase (decrease) in short-term borrowings	146,447		(26,364)		Net increase (decrease) in short-term borrowings	132,222		(220,968)
Proceeds from issuance of common stock	Proceeds from issuance of common stock	3,535		4,100		Proceeds from issuance of common stock	3,847		4,650
Debt issuance costs	Debt issuance costs	(557)		(290)		Debt issuance costs	(557)		(303)
Net cash used in financing activities	Net cash used in financing activities	(131,490)		(64,328)		Net cash used in financing activities	(245,984)		(258,544)

Net (decrease) increase in cash and cash equivalents		(2,070)		58
Net decrease in cash and cash equivalents						Net decrease in cash and cash equivalents	(2,413)		(228)
Cash and cash equivalents, at beginning of period	Cash and cash equivalents, at beginning of period	4,243		1,593		Cash and cash equivalents, at beginning of period	4,243		1,593
Cash and cash equivalents, at end of period	Cash and cash equivalents, at end of period	$	2,173	$	1,651	Cash and cash equivalents, at end of period	$	1,830	$	1,365

See accompanying notes to condensed consolidated financial statements.

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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Business and Summary of Significant Accounting Policies

Business & Basis of Presentation

We prepared the condensed consolidated financial statements as of and for the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021 of Sleep Number Corporation and our 100%-owned subsidiaries (Sleep Number or the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and they reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position as of ~~July 3,~~October 2, 2021 and January 2, 2021, and the consolidated results of operations and cash flows for the periods presented. Our historical and quarterly consolidated results of operations may not be indicative of the results that may be achieved for the full year or any future period. Additionally, based on the duration and severity of the current global situation involving the novel coronavirus (COVID-19) pandemic, including but not limited to general economic conditions, consumer confidence, store restrictions mandated by federal, state or local authorities and ~~possible supply chain~~global supply-chain disruptions, the extent to which COVID-19 will impact our business and our consolidated financial results will depend on future developments, which are highly uncertain and cannot be predicted.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with our most recent audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021 and other recent filings with the SEC.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of sales, expenses and income taxes during the reporting period. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. In addition, during the current environment involving COVID-19, predicting future events will be especially challenging for management. Changes in these estimates will be reflected in the consolidated financial statements in future periods and could be material. Our critical accounting policies consist of stock-based compensation, warranty liabilities and revenue recognition.

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

2. Fair Value Measurements

At ~~July 3,~~October 2, 2021 and January 2, 2021, we had ~~$17~~$18 million and $12 million, respectively, of debt and equity securities that fund our deferred compensation plan and are classified in other non-current assets. We also had corresponding deferred compensation plan liabilities of ~~$17~~$18 million and $12 million at ~~July 3,~~October 2, 2021 and January 2, 2021, respectively, which are included in other non-current liabilities. The majority of the debt and equity securities are Level 1 as they trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis. Unrealized gains/(losses) on the debt and equity securities offset those associated with the corresponding deferred compensation plan liabilities.

3. Inventories

Inventories consisted of the following (in thousands):


		July 3, 2021		January 2, 2021			October 2, 2021		January 2, 2021
Raw materials	Raw materials	$	7,730	$	12,599	Raw materials	$	8,748	$	12,599
Work in progress	Work in progress	98		103		Work in progress	93		103
Finished goods	Finished goods	80,749		68,660		Finished goods	77,288		68,660
		$	88,577	$	81,362		$	86,129	$	81,362

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SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

4. Goodwill and Intangible Assets, Net

Goodwill and Indefinite-lived Intangible Assets

Goodwill was $64 million at ~~July 3,~~October 2, 2021 and January 2, 2021. Indefinite-lived trade name/trademarks totaled $1.4 million at ~~July 3,~~October 2, 2021 and January 2, 2021.

Definite-lived Intangible Assets

The gross carrying amount of our developed technologies was $19 million at ~~July 3,~~October 2, 2021 and January 2, 2021. Accumulated amortization was ~~$14~~$15 million and $13 million at ~~July 3,~~October 2, 2021 and January 2, 2021, respectively. Amortization expense for ~~both~~ the three months ended ~~July 3,~~October 2, 2021 and ~~June 27,~~September 26, 2020, was $0.5 ~~million.~~million and $0.6 million, respectively. Amortization expense for ~~both~~ the ~~six~~nine months ended ~~July 3,~~October 2, 2021 and ~~June 27,~~September 26, 2020, was ~~$1.1 million.~~$1.6 million and $1.7 million, respectively.

The gross carrying amount of our patents, which were acquired in June 2020, was $2.0 million at ~~July 3,~~both October 2, 2021 and January 2, ~~2021, respectively.~~2021. Accumulated amortization was ~~$0.2~~$0.3 million and $0.1 million at ~~July 3,~~October 2, 2021 and January 2, 2021, respectively. Amortization expense for the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021 was $55 thousand and ~~$0.1~~$0.2 million, respectively. Amortization expense for the three and ~~six~~nine months ended ~~June 27,~~September 26, 2020 was ~~not significant.~~$55 thousand.

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


2021 (excluding the six months ended July 3, 2021)		$	1,201
2021 (excluding the nine months ended October 2, 2021)				2021 (excluding the nine months ended October 2, 2021)	$	600
2022	2022	2,403		2022	2,403
2023	2023	1,431		2023	1,431
2024	2024	222		2024	222
2025	2025	226		2025	226
2026	2026	222		2026	222
Thereafter	Thereafter	522		Thereafter	522
Total future amortization for definite-lived intangible assets	Total future amortization for definite-lived intangible assets	$	6,227	Total future amortization for definite-lived intangible assets	$	5,626

5. Credit Agreement

Our credit facility as of ~~July 3,~~October 2, 2021, has a net aggregate commitment amount of $600 million. The credit facility is for general corporate purposes, to meet our seasonal working capital requirements and to repurchase our stock. The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio (4.5x) and a minimum interest coverage ratio (3.0x). The credit agreement includes an accordion feature which allows us to increase the amount of the credit facility from $600 million to $800 million, subject to lenders' approval. Under the terms of the credit agreement, we pay a variable rate of interest and a commitment fee based on our leverage ratio. We were in compliance with all financial covenants as of ~~July 3,~~October 2, 2021. The credit facility matures in February 2024.

The following table summarizes our borrowings under the credit facility ($ in thousands):


		July 3, 2021			January 2, 2021				October 2, 2021			January 2, 2021
Outstanding borrowings	Outstanding borrowings	$	382,200		$	244,200		Outstanding borrowings	$	359,100		$	244,200
Outstanding letters of credit	Outstanding letters of credit	$	3,997		$	3,997		Outstanding letters of credit	$	3,997		$	3,997
Additional borrowing capacity	Additional borrowing capacity	$	213,803		$	201,803		Additional borrowing capacity	$	236,903		$	201,803
Weighted-average interest rate	Weighted-average interest rate	1.6		%	1.5		%	Weighted-average interest rate	1.6		%	1.5		%

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6. Leases

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

Our operating lease costs include facility, vehicle and equipment lease costs, but exclude variable lease costs. Operating lease costs are recognized on a straight-line basis over the lease term, after consideration of rent escalations and rent holidays. The lease term for purposes of the calculation begins on the earlier of the lease commencement date or the date we take possession of the property. During lease renewal negotiations that extend beyond the original lease term, we estimate straight-line rent expense based on current market conditions. Variable lease costs are recorded when it is probable the cost has been incurred and the amount can be reasonably estimated. Future payments for real estate taxes and certain building operating expenses for which we are obligated are not included in operating lease costs.

At ~~July 3,~~October 2, 2021, our finance right-of-use assets and lease liabilities were not significant.

Lease costs were as follows (in thousands):


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020			October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Operating lease costs(1)	Operating lease costs(1)	$	24,352	$	22,357	$	47,991	$	45,303	Operating lease costs(1)	$	25,632	$	22,512	$	73,623	$	67,815
Variable lease costs	Variable lease costs	$	840	$	263	$	1,355	$	275	Variable lease costs	$	826	$	333	$	2,181	$	608

___________________________

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

The maturities of operating lease liabilities as of ~~July 3,~~October 2, 2021, were as follows(1) (in thousands):


2021 (excluding the six months ended July 3, 2021)		$	45,819
2021 (excluding the nine months ended October 2, 2021)				2021 (excluding the nine months ended October 2, 2021)	$	23,414
2022	2022	85,828		2022	90,193
2023	2023	75,838		2023	80,741
2024	2024	64,013		2024	68,961
2025	2025	54,458		2025	59,384
2026	2026	43,974		2026	48,662
Thereafter	Thereafter	92,392		Thereafter	109,699
Total operating lease payments(2)	Total operating lease payments(2)	462,322		Total operating lease payments(2)	481,054
Less: Interest	Less: Interest	82,942		Less: Interest	84,158
Present value of operating lease liabilities(3)	Present value of operating lease liabilities(3)	$	379,380	Present value of operating lease liabilities(3)	$	396,896

___________________________

(1)During 2020, we deferred certain cash lease payments to future periods. At ~~July 3,~~October 2, 2021, we had deferred cash rent payments of ~~$1.6~~$0.8 million which are excluded from this table and are included in Other current liabilities and Other non-current liabilities.

(2)Total operating lease payments exclude ~~$78~~$69 million of legally binding minimum lease payments for leases signed but not yet commenced.

(3)Includes the current portion of ~~$68~~$69 million for operating lease liabilities.

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Other information related to operating leases was as follows:


		July 3, 2021		January 2, 2021			October 2, 2021		January 2, 2021
Weighted-average remaining lease term (years)	Weighted-average remaining lease term (years)	6.4		6.3		Weighted-average remaining lease term (years)	6.5		6.3
Weighted-average discount rate	Weighted-average discount rate	6.5	%	6.9	%	Weighted-average discount rate	6.2	%	6.9	%


		Six Months Ended					Nine Months Ended
(in thousands)	(in thousands)	July 3, 2021		June 27, 2020		(in thousands)	October 2, 2021		September 26, 2020
Cash paid for amounts included in present value of operating lease liabilities	Cash paid for amounts included in present value of operating lease liabilities	$	43,414	$	42,773	Cash paid for amounts included in present value of operating lease liabilities	$	66,561	$	64,208
Right-of-use assets obtained in exchange for operating lease liabilities	Right-of-use assets obtained in exchange for operating lease liabilities	$	50,667	$	17,670	Right-of-use assets obtained in exchange for operating lease liabilities	$	78,192	$	28,772

7. Repurchases of Common Stock

Repurchases of our common stock were as follows (in thousands):


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020			October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Amount repurchased under Board-approved share repurchase program	Amount repurchased under Board-approved share repurchase program	$	100,015	$	0	$	267,433	$	38,111	Amount repurchased under Board-approved share repurchase program	$	97,046	$	—	$	364,478	$	38,111
Amount repurchased in connection with the vesting of employee restricted stock grants	Amount repurchased in connection with the vesting of employee restricted stock grants	287		329		17,051		3,170		Amount repurchased in connection with the vesting of employee restricted stock grants	711		149		17,763		3,319
Total amount repurchased (based on trade dates)	Total amount repurchased (based on trade dates)	$	100,302	$	329	$	284,484	$	41,281	Total amount repurchased (based on trade dates)	$	97,757	$	149	$	382,241	$	41,430

As of ~~July 3,~~October 2, 2021, the remaining authorization under the $600 million share repurchase program was ~~$500~~$403 million.

8. Revenue Recognition

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


		July 3, 2021		January 2, 2021			October 2, 2021		January 2, 2021
Deferred Contract Assets included in:	Deferred Contract Assets included in:					Deferred Contract Assets included in:
Other current assets	Other current assets	$	25,293	$	26,593	Other current assets	$	27,115	$	26,593
Other non-current assets	Other non-current assets	45,998		37,976		Other non-current assets	49,125		37,976
		$	71,291	$	64,569		$	76,240	$	64,569


		July 3, 2021		January 2, 2021			October 2, 2021		January 2, 2021
Deferred Contract Liabilities included in:	Deferred Contract Liabilities included in:					Deferred Contract Liabilities included in:
Other current liabilities	Other current liabilities	$	33,228	$	35,288	Other current liabilities	$	35,430	$	35,288
Other non-current liabilities	Other non-current liabilities	59,813		49,689		Other non-current liabilities	63,703		49,689
		$	93,041	$	84,977		$	99,133	$	84,977

The deferred revenue and costs related to SleepIQ technology are recognized on a straight-line basis over the product's estimated life of 4.5 years because our inputs are generally expended evenly throughout the performance period. During the three months ended ~~July 3,~~October 2, 2021 and ~~June 27,~~September 26, 2020, we recognized revenue of $8 million and ~~$10~~$9 million, respectively, that were included in the deferred contract liability balances at the beginning of the respective periods. During the ~~six~~nine months ended ~~July 3,~~October 2, 2021 and ~~June 27,~~September 26, 2020, we recognized revenue of ~~$15~~$22 million and ~~$18~~$27 million, respectively, that were included in the deferred contract liability balances at the beginning of the respective periods.

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Revenue from goods and services transferred to customers at a point in time accounted for approximately 99% of our revenues for the three and nine months ended October 2, 2021 and 98% of our revenues for the three and ~~six~~nine months ended ~~July 3, 2021 and 97% of our revenues for the three and six months ended June 27,~~September 26, 2020.

Net sales were as follows (in thousands):


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020			October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Retail stores	Retail stores	$	426,653	$	206,476	$	915,841	$	643,125	Retail stores	$	565,939	$	456,756	$	1,481,780	$	1,097,872
Online, phone, chat and other	Online, phone, chat and other	57,663		78,462		136,731		114,379		Online, phone, chat and other	74,454		74,399		211,185		190,787
Total Company	Total Company	$	484,316	$	284,938	$	1,052,572	$	757,504	Total Company	$	640,393	$	531,155	$	1,692,965	$	1,288,659

Obligation for Sales Returns

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


		Six Months Ended					Nine Months Ended
		July 3, 2021		June 27, 2020			October 2, 2021		September 26, 2020
Balance at beginning of year	Balance at beginning of year	$	24,765	$	19,809	Balance at beginning of year	$	24,765	$	19,809
Additions that reduce net sales	Additions that reduce net sales	42,272		30,901		Additions that reduce net sales	69,877		55,086
Deductions from reserves	Deductions from reserves	(45,820)		(33,514)		Deductions from reserves	(66,124)		(50,810)
Balance at end of period	Balance at end of period	$	21,217	$	17,196	Balance at end of period	$	28,518	$	24,085

9. Stock-based Compensation Expense

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


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020			October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Stock awards	Stock awards	$	5,218	$	4,440	11,027		$	5,846	Stock awards	$	6,506	$	7,930	17,533		$	13,776
Stock options	Stock options	750		593		1,358		1,238		Stock options	810		540		2,168		1,778
Total stock-based compensation expense (1)	Total stock-based compensation expense (1)	5,968		5,033		12,385		7,084		Total stock-based compensation expense (1)	7,316		8,470		19,701		15,554
Income tax benefit	Income tax benefit	1,473		1,218		3,071		1,714		Income tax benefit	1,835		2,081		4,906		3,795
Total stock-based compensation expense, net of tax	Total stock-based compensation expense, net of tax	$	4,495	$	3,815	$	9,314	$	5,370	Total stock-based compensation expense, net of tax	$	5,481	$	6,389	$	14,795	$	11,759

___________________________

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

10. Profit Sharing and 401(k) Plan

Under our profit sharing and 401(k) plan, eligible employees may defer up to 50% of their compensation on a pre-tax basis, subject to Internal Revenue Service limitations. Each pay period, we may make a discretionary contribution equal to a percentage of the employee’s contribution. During the three months ended ~~July 3,~~October 2, 2021 and ~~June 27,~~September 26, 2020, our contributions, net of forfeitures, were ~~$1.8~~$2.0 million and ~~$0.5~~$2.1 million, respectively. During the ~~six~~nine months ended ~~July 3,~~October 2, 2021 and ~~June 27,~~September 26, 2020, our contributions, net of forfeitures, were ~~$3.7~~$5.7 million and ~~$2.1~~$4.2 million, respectively.

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11. Net Income ~~(Loss)~~ per Common Share

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


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020			October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Net income (loss)		$	22,250	$	(12,630)	$	88,884	$	26,510
Net income										Net income	$	53,721	$	51,320	$	142,605	$	77,830
Reconciliation of weighted-average shares outstanding:	Reconciliation of weighted-average shares outstanding:									Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding	Basic weighted-average shares outstanding	24,371		27,923		24,874		27,890		Basic weighted-average shares outstanding	23,464		27,973		24,404		27,918
Dilutive effect of stock-based awards	Dilutive effect of stock-based awards	823		0		995		633		Dilutive effect of stock-based awards	769		661		920		642
Diluted weighted-average shares outstanding	Diluted weighted-average shares outstanding	25,194		27,923		25,869		28,523		Diluted weighted-average shares outstanding	24,233		28,634		25,324		28,560
Net income (loss) per share – basic		$	0.91	$	(0.45)	$	3.57	$	0.95
Net income (loss) per share – diluted		$	0.88	$	(0.45)	$	3.44	$	0.93
Net income per share – basic										Net income per share – basic	$	2.29	$	1.83	$	5.84	$	2.79
Net income per share – diluted										Net income per share – diluted	$	2.22	$	1.79	$	5.63	$	2.73

For the three and ~~six~~nine months ended ~~July 3,~~October 2, 2021 and ~~the six months ended June 27,~~September 26, 2020, anti-dilutive stock-based awards excluded from the diluted net income per share calculations were immaterial. For the three months ended June 27, 2020, potentially dilutive stock-based awards have been excluded from the calculation of diluted weighted-average shares outstanding, as their inclusion would have had an anti-dilutive effect on our net loss per diluted share.

12. Commitments and Contingencies

Warranty Liabilities

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


		Six Months Ended					Nine Months Ended
		July 3, 2021		June 27, 2020			October 2, 2021		September 26, 2020
Balance at beginning of year	Balance at beginning of year	$	12,152	$	11,345	Balance at beginning of year	$	12,152	$	11,345
Additions charged to costs and expenses for current-year sales	Additions charged to costs and expenses for current-year sales	7,863		4,965		Additions charged to costs and expenses for current-year sales	12,780		9,111
Deductions from reserves	Deductions from reserves	(9,235)		(4,789)		Deductions from reserves	(13,489)		(8,034)
Changes in liability for pre-existing warranties during the current year, including expirations	Changes in liability for pre-existing warranties during the current year, including expirations	(237)		(89)		Changes in liability for pre-existing warranties during the current year, including expirations	(380)		(381)
Balance at end of period	Balance at end of period	$	10,543	$	11,432	Balance at end of period	$	11,063	$	12,041

Legal Proceedings

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

On March 27, 2018, Level Sleep, LLC (Level Sleep) filed a patent infringement lawsuit against Sleep Number in the Federal District Court for the Eastern District of Texas. In its Complaint, Level Sleep claims that Sleep Number infringed two patents owned by Level Sleep, U.S. Patent Nos. 6,807,698 and 7,036,172 (the Patents), by, among other things, making, using, offering for sale, or selling within the United States, and/or importing into the United States, beds with sleep surfaces having foam with multiple zones in the longitudinal direction. Level Sleep has asserted that five non-360® beds no longer sold and two current non-360 beds infringe the

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Patents. Level Sleep seeks damages in the form of a reasonable royalty. Sleep Number has asserted that the Patents are invalid and that our products do not infringe the Patents. On January 14, 2020, the Court granted summary judgment in favor of Sleep Number, finding

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that Sleep Number’s products do not infringe the Patents. Level Sleep filed an appeal of the Court’s summary judgment order to the Federal Circuit Court of Appeals which issued a decision on July 13, 2021, affirming the Court's summary judgment order and dismissal of Level Sleep's claims.

13. COVID-19 Pandemic

At the onset of the COVID-19 pandemic in mid-March 2020, government restrictions resulted in the temporary closure of most of our retail stores, with 47% of our stores closed on average during the second quarter of 2020. While prioritizing the safety of our team, serving our customers and ensuring business continuity, we swiftly took decisive actions to strengthen our liquidity, cash flows and financial position, and mitigate the future impact on our operations and financial performance.

The COVID-19 pandemic mainly impacted our second quarter of 2020 financial performance, as we generated strong demand and financial performance during the full-year of 2020 and the first ~~six~~nine months of 2021. However, the pandemic's future ~~effect~~effects on our global supply chain, consumer demand and ~~our~~ ongoing financial performance remains uncertain. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q and Part I: Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, for additional discussion on the COVID-19 pandemic and the impact on our business.

Index

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

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

•Forward-Looking Statements and Risk Factors

•Business Overview

•COVID-19 Pandemic - Impact on our Business

•Results of Operations

•Liquidity and Capital Resources

•Non-GAAP Data Reconciliations

•Off-Balance-Sheet Arrangements and Contractual Obligations

•Critical Accounting Policies

Forward-Looking Statements and Risk Factors

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

•Current and future general and industry economic trends and consumer confidence;

•Risks inherent in outbreaks of pandemics or contagious disease, including the COVID-19 pandemic;

•The effectiveness of our marketing messages;

•The efficiency of our advertising and promotional efforts;

•Our ability to execute our Total Retail distribution strategy;

•Our ability to achieve and maintain acceptable levels of product and service quality, and acceptable product return and warranty claims rates;

•Our ability to continue to improve and expand our product line, and consumer acceptance of our products, product quality, innovation and brand image;

•Industry competition, the emergence of additional competitive products and the adequacy of our intellectual property rights to protect our products and brand from competitive or infringing activities;

•Claims that our products, processes, advertising, or trademarks infringe the intellectual property rights of others;

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

•Our manufacturing processes with minimal levels of inventory, which may leave us vulnerable to shortages in supply;

•Our dependence on significant suppliers and third parties and our ability to maintain relationships with key suppliers or ~~third-parties,~~third parties, including several sole-source suppliers or providers of services;

•Rising commodity costs and other inflationary pressures;

•Risks inherent in global sourcing activities, including tariffs, outbreaks of pandemics or contagious diseases, strikes and the potential for shortages in supply;

•Risks of disruption in the operation of any of our main manufacturing facilities or assembly facilities;

•Increasing government regulation;

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

•The adequacy of our and third-party information systems to meet the evolving needs of our business and existing and evolving risks and regulatory standards applicable to data privacy and security;

•The costs and potential disruptions to our business related to upgrading our information systems;

•The vulnerability of our and third-party information systems to attacks by hackers or other cyber threats that could compromise the security of our systems, result in a data breach or disrupt our business; and

•Our ability to attract, retain and motivate qualified management, executive and other key team members, including qualified retail sales professionals and managers.

Additional information concerning these, and other risks and uncertainties is contained under the caption “Risk Factors” below in Part II: Item 1A of this Quarterly Report on Form 10-Q and under the same caption in our Annual Report on Form 10-K.

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

Business Overview

Individuality is core to Sleep Number. Our purpose driven Company is comprised of over 5,000 passionate team members who are dedicated to our mission of improving lives by individualizing sleep experiences. Our award-winning 360 smart beds provide each sleeper with effortlessly adjustable, individualized comfort for proven-quality sleep. With a purpose of improving the health and wellbeing of society through higher-quality sleep, we have already improved over 13 million lives.

Sleep science and data are the foundation of our innovations. Our 360 smart beds benefit from our proprietary SleepIQ technology, which leverages and learns from nearly 1112 billion hours' worth of highly-accurate sleep data. This enables our 360 smart beds to provide effortless comfort and sleep health insights for each sleeper, including their daily SleepIQ score.

Sleep Number is a leader in sleep innovation. By pairing our data and innovations with meaningful collaborations including world-leading partners in sleep, we are leveraging the potential of our research and technology to advance sleep health and sleep science, develop new products, services and synergistic interactions. Our vertically integrated business model and role as the exclusive designer, manufacturer, marketer, retailer and servicer of Sleep Number beds allows us to offer consumers high-quality, individualized sleep solutions and services.

We generate revenue by marketing our innovations directly to new and existing customers, and selling products through our Stores, Online, Phone, ~~and~~ Chat (Total Retail). and Other.

We are committed to delivering superior shareholder value by: (1) increasing consumer demand; (2) leveraging our business model; and (3) deploying capital efficiently.

COVID-19 Pandemic - Impact on our Business

The COVID-19 pandemic mainly impacted our second quarter of 2020 financial performance, as we generated strong demand and financial performance during the full-year of 2020 and the first ~~six~~nine months of 2021. However, the pandemic's future effects on our global supply chain, consumer demand and our ongoing financial performance remains uncertain. See Part I: Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q and Part I: Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, for additional discussion on the COVID-19 pandemic and the impact on our business.

Results of Operations

Quarterly and Year-to-Date Results

Quarterly and year-to-date operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in sales, timing, amount and effectiveness of advertising expenditures, changes in sales return rates or warranty experience, timing of investments in growth initiatives and infrastructure, timing of store openings/closings and related expenses, changes in net sales resulting from changes in our store base, timing of new product introductions and related expenses, timing of promotional offerings, competitive factors, changes in commodity costs, disruptions in global supplies or third-party service providers, seasonality of retail and bedding industry sales, consumer confidence and general economic conditions. In addition, based on the duration and severity of the current global situation involving the COVID-19 pandemic, the extent to which our business and our condensed consolidated financial results are impacted will depend on future developments, which are highly uncertain and cannot be predicted. Therefore, our historical results of operations may not be indicative of the results that may be achieved for any future period.

Highlights

Financial highlights for the three months ended ~~July 3,~~October 2, 2021 were as follows:

•Net sales for the three months ended ~~July 3,~~October 2, 2021 increased ~~70%~~21% to ~~$484~~$640 million, compared with ~~$285~~$531 million for the ~~COVID-19 affected period in~~three months ended September 26, 2020. Net sales for the current quarter increased ~~36%~~35% compared with ~~$356~~$475 million for the three months ended ~~June 29,~~September 28, 2019. ~~Supply~~Global supply constraints ~~late in the second quarter limited 2021~~continued to impact our delivered net sales for the three months ended October 2, 2021, but to a lesser extent as compared to the three months ended July 3, 2021.

•The ~~70%~~21% net sales increase consisted of a ~~65%~~16% comparable sales increase in Total Retail and sales from 2336 net new stores opened in the past 12 months that added 5 percentage points (ppt.) of growth. For additional details, see the components of total net sales change on page 15.

•Sales per store (sales for stores open at least one year, Total Retail, including online, phone and chat) on a trailing ~~twelve-months~~twelve-month basis for the period ended ~~July 3,~~October 2, 2021 totaled ~~$3.5~~$3.7 million, ~~25%~~26% higher than the same period last year.

•Operating income for the three months ended ~~July 3,~~October 2, 2021 was ~~$30~~$73 million, an increase of ~~$42~~$3 million, compared with ~~the $12~~$70 million ~~operating loss~~ in the prior-year period. The ~~$42~~$3 million increase in operating income was driven by the ~~70%~~21% increase in net sales, a ~~3.3 ppt. improvement in the gross profit rate and a 7.2~~0.4 ppt. reduction in our operating expenses rate, partially offset by a 2.1 ppt. decrease in our gross profit rate. Operating income for the current quarter increased ~~310%~~86% compared with $7$39 million for the same period of 2019.

•The ~~3.3~~2.1 ppt. gross profit rate ~~improvement~~decrease was primarily ~~resulted~~due to incremental costs from labor and material inflation, and expediting costs resulting from current-period supply-chain shortages, partially offset by the leveraging impact of the ~~70%~~21% net sales increase and a more favorable sales mix of higher-margin ~~products, partially offset by $13 million of incremental costs from labor and material inflation, and expediting costs.~~products. See the Gross profit discussion on page 17 for additional details.

•The ~~7.2~~0.4 ppt. reduction in our operating expenses rate was mainly due to the leveraging impact of the ~~70%~~21% net sales increase and digitally-led operating efficiencies. During the three months ended ~~July 3,~~October 2, 2021, we continued to prioritize investments in near- and long-term growth drivers, including ~~$16~~$14 million of R&D expenses, ~~93%~~50% more than the same period one year ago.

•Net income for the three months ended ~~July 3,~~October 2, 2021 increased to ~~$22~~$54 million, compared with ~~a net loss of $13~~$51 million for the same period one year ago. Net income per diluted share was ~~$0.88,~~$2.22, compared with ~~a net loss per diluted share of $0.45~~$1.79 last ~~year.~~year and $0.94 for the three months ended September 28, 2019.

•We achieved a return on invested capital (ROIC) of ~~33%~~35% on a trailing twelve-month basis for the period ended ~~July 3,~~October 2, 2021, compared with ~~17%~~21% for the comparable period one year ago.

•Cash provided by operating activities for the ~~six~~nine months ended ~~July 3,~~October 2, 2021 increased ~~by $74 million, or 86%,~~ to ~~$161~~$293 million, compared with ~~$87~~$287 million for the same period one year ago.

•~~At July 3,~~As of October 2, 2021, we had ~~$382~~$359 million of borrowings under our revolving credit ~~facility.~~ facility and available n~~Net~~et liquidity ~~available under our revolving credit facility was $214 million at~~ ~~July 3, 2021~~.of $237 million.

•On April 21, 2021, we amended our revolving credit facility to expand the aggregate availability from $450 million to $600 million. We also replenished our outstanding share repurchase authorization to $600 million effective at the beginning of the fiscal second quarter, April 4, 2021. We remain committed to our capital deployment priorities focused on performance drivers.

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


		Three Months Ended								Six Months Ended									Three Months Ended								Nine Months Ended
		July 3, 2021				June 27, 2020				July 3, 2021				June 27, 2020					October 2, 2021				September 26, 2020				October 2, 2021				September 26, 2020
Net sales	Net sales	$	484.3	100.0	%	$	284.9	100.0	%	$	1,052.6	100.0	%	$	757.5	100.0	%	Net sales	$	640.4	100.0	%	$	531.2	100.0	%	$	1,693.0	100.0	%	$	1,288.7	100.0	%
Cost of sales	Cost of sales	191.5		39.5	%	121.9		42.8	%	403.8		38.4	%	292.4		38.6	%	Cost of sales	250.0		39.0	%	196.2		36.9	%	653.8		38.6	%	488.6		37.9	%
Gross profit	Gross profit	292.9		60.5	%	163.0		57.2	%	648.8		61.6	%	465.1		61.4	%	Gross profit	390.4		61.0	%	335.0		63.1	%	1,039.1		61.4	%	800.1		62.1	%
Operating expenses:	Operating expenses:																	Operating expenses:
Sales and marketing	Sales and marketing	206.0		42.5	%	130.2		45.7	%	429.6		40.8	%	337.9		44.6	%	Sales and marketing	255.5		39.9	%	211.6		39.8	%	685.1		40.5	%	549.5		42.6	%
General and administrative	General and administrative	41.2		8.5	%	36.7		12.9	%	83.8		8.0	%	67.8		8.9	%	General and administrative	47.7		7.4	%	44.1		8.3	%	131.5		7.8	%	111.9		8.7	%
Research and development	Research and development	15.9		3.3	%	8.3		2.9	%	29.2		2.8	%	18.8		2.5	%	Research and development	14.4		2.3	%	9.6		1.8	%	43.6		2.6	%	28.4		2.2	%
Total operating expenses	Total operating expenses	263.1		54.3	%	175.1		61.5	%	542.6		51.6	%	424.5		56.0	%	Total operating expenses	317.6		49.6	%	265.3		50.0	%	860.2		50.8	%	689.8		53.5	%
Operating income (loss)		29.7		6.1	%	(12.1)		(4.3	%)	106.1		10.1	%	40.7		5.4	%
Operating income																		Operating income	72.7		11.4	%	69.6		13.1	%	178.9		10.6	%	110.3		8.6	%
Interest expense, net	Interest expense, net	1.6		0.3	%	3.9		1.4	%	2.6		0.2	%	6.3		0.8	%	Interest expense, net	1.8		0.3	%	1.8		0.3	%	4.4		0.3	%	8.1		0.6	%
Income (loss) before income taxes		28.1		5.8	%	(16.1)		(5.6	%)	103.6		9.8	%	34.4		4.5	%
Income tax expense (benefit)		5.9		1.2	%	(3.4)		(1.2	%)	14.7		1.4	%	7.9		1.0	%
Net income (loss)		$	22.3	4.6	%	$	(12.6)	(4.4	%)	$	88.9	8.4	%	$	26.5	3.5	%
Income before income taxes																		Income before income taxes	70.9		11.1	%	67.8		12.8	%	174.5		10.3	%	102.2		7.9	%
Income tax expense																		Income tax expense	17.2		2.7	%	16.5		3.1	%	31.9		1.9	%	24.4		1.9	%
Net income																		Net income	$	53.7	8.4	%	$	51.3	9.7	%	$	142.6	8.4	%	$	77.8	6.0	%

Net income (loss) per share:
Net income per share:																		Net income per share:
Basic	Basic	$	0.91			$	(0.45)			$	3.57			$	0.95			Basic	$	2.29			$	1.83			$	5.84			$	2.79
Diluted	Diluted	$	0.88			$	(0.45)			$	3.44			$	0.93			Diluted	$	2.22			$	1.79			$	5.63			$	2.73

Weighted-average number of common shares:	Weighted-average number of common shares:																	Weighted-average number of common shares:
Basic	Basic	24.4				27.9				24.9				27.9				Basic	23.5				28.0				24.4				27.9
Diluted	Diluted	25.2				27.9				25.9				28.5				Diluted	24.2				28.6				25.3				28.6

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


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020			October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Retail stores	Retail stores	88.1	%	72.2	%	87.0	%	84.6	%	Retail stores	88.4	%	86.0	%	87.5	%	85.2	%
Online, phone, chat and other	Online, phone, chat and other	11.9	%	27.8	%	13.0	%	15.4	%	Online, phone, chat and other	11.6	%	14.0	%	12.5	%	14.8	%
Total Company	Total Company	100.0	%	100.0	%	100.0	%	100.0	%	Total Company	100.0	%	100.0	%	100.0	%	100.0	%

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


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020			October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Sales change rates:	Sales change rates:									Sales change rates:
Retail comparable-store sales (1)	Retail comparable-store sales (1)	102	%	(40	%)	41	%	(14	%)	Retail comparable-store sales (1)	19	%	2	%	32	%	(8	%)
Online, phone and chat	Online, phone and chat	(28	%)	209	%	17	%	107	%	Online, phone and chat	0	%	111	%	11	%	109	%
Total Retail comparable sales change (1)	Total Retail comparable sales change (1)	65	%	(21	%)	37	%	(5	%)	Total Retail comparable sales change (1)	16	%	11	%	28	%	1	%
Net opened/closed stores and other	Net opened/closed stores and other	5	%	1	%	2	%	2	%	Net opened/closed stores and other	5	%	1	%	3	%	2	%
Total Company	Total Company	70	%	(20	%)	39	%	(3	%)	Total Company	21	%	12	%	31	%	3	%

___________________________

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

Other sales metrics were as follows:


		Three Months Ended						Six Months Ended					Three Months Ended						Nine Months Ended
		July 3, 2021			June 27, 2020			July 3, 2021		June 27, 2020			October 2, 2021			September 26, 2020			October 2, 2021		September 26, 2020
Average sales per store (1)(4) ($ in thousands)	Average sales per store (1)(4) ($ in thousands)	$	3,542		$	2,830						Average sales per store (1)(4) ($ in thousands)	$	3,689		$	2,920
Average sales per square foot (1)(4)	Average sales per square foot (1)(4)	$	1,203		$	988						Average sales per square foot (1)(4)	$	1,249		$	1,012
Stores > $2 million in net sales (2)(4)	Stores > $2 million in net sales (2)(4)	82		%	63		%					Stores > $2 million in net sales (2)(4)	85		%	64		%
Stores > $3 million in net sales (2)(4)	Stores > $3 million in net sales (2)(4)	47		%	25		%					Stores > $3 million in net sales (2)(4)	50		%	26		%
Average revenue per mattress unit (3)	Average revenue per mattress unit (3)	$	5,094		$	4,767		$	5,059	$	4,839	Average revenue per mattress unit (3)	$	5,021		$	4,802		$	5,045	$	4,824

___________________________

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

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

(3)Represents Total Retail (stores, online, phone and chat) net sales divided by Total Retail mattress units.

(4)Fiscal 2020 included 53 weeks, as compared to 52 weeks in fiscal 2021 and 2019. The additional week in 2020 was in the fiscal fourth quarter. Total Retail comparable sales have been adjusted to remove the estimated impact of the additional week on those metrics.

The number of retail stores operating was as follows:


		Three Months Ended		Six Months Ended			Three Months Ended		Nine Months Ended
		July 3, 2021	June 27, 2020	July 3, 2021	June 27, 2020		October 2, 2021	September 26, 2020	October 2, 2021	September 26, 2020
Beginning of period	Beginning of period	607	611	602	611	Beginning of period	621	598	602	611
Opened	Opened	26	6	37	14	Opened	18	6	55	20
Closed	Closed	(12)	(19)	(18)	(27)	Closed	(7)	(8)	(25)	(35)
End of period	End of period	621	598	621	598	End of period	632	596	632	596

Comparison of Three Months Ended ~~July 3,~~October 2, 2021 with Three Months Ended ~~June 27,~~September 26, 2020

Net sales

Net sales for the three months ended ~~July 3,~~October 2, 2021 increased by ~~$199~~$109 million, or ~~70%~~21%, to ~~$484~~$640 million, compared with ~~$285~~$531 million for the same period one year ~~ago, which was impacted by the COVID-19 pandemic, ensuing government restrictions and temporary closure of 47% of our retail stores on average.~~ago. Net sales for the current quarter increased ~~36%~~35% compared with ~~$356~~$475 million for the three months ended ~~June 29,~~September 28, 2019. ~~Supply~~Global supply constraints ~~late in the second quarter limited 2021~~continued to impact our delivered net sales for the three months ended October 2, 2021, but to a lesser extent as compared to the three months ended July 3, 2021.

The ~~70%~~21% net sales increase consisted primarily of a ~~65%~~16% comparable sales increase in Total Retail and sales from 2336 net new stores opened in the past 12 months that added 5 percentage points (ppt.) of growth. For additional details, see the components of total net sales change on page 15.

The ~~$199~~$109 million net sales increase compared with the same period one year ago was comprised of the following: (i) ~~a $178~~an $81 million increase in our Total Retail comparable net sales; and (ii) a ~~$21~~$28 million increase from net store openings. Total Retail mattress unit sales increased ~~59%~~15% compared with the prior year. Total Retail average revenue per mattress unit increased by 7%5% to ~~$5,094,~~$5,021, compared with ~~$4,767~~$4,802 in the prior-year period.

Gross profit

Gross profit of ~~$293~~$390 million for the three months ended October 2, 2021 increased by ~~$130~~$55 million, or ~~80%~~17%, compared with ~~$163~~$335 million for the same period one year ago. The gross profit rate ~~improved~~declined to ~~60.5%~~61.0% of net sales for the three months ended ~~July 3,~~October 2, 2021, compared with ~~57.2%~~63.1% for the prior-year comparable period.

The current-year gross profit rate ~~improvement~~decrease of ~~3.3~~2.1 ppt. was mainly due to: (i) incremental costs from labor and material inflation, and expediting costs resulting from current-period supply-chain shortages (3.9 ppt.); partially offset by (ii) the leverage from the ~~70%~~21% net sales increase, combined with a more favorable sales mix of higher-margin products (3.8 ppt.), partially offset by $13 million of incremental costs from labor and material inflation, and expediting costs. The prior-year's gross profit rate was impacted by COVID-19 related inefficiencies, including the lower sales volumes. Our prior-year's sales mix was negatively impacted by temporary store closures due to the pandemic; partially offset by (ii) inflationary cost pressures and higher supply chain costs associated with current-year temporary supply constraints (0.7 ppt.).products. In addition, our gross profit rate will fluctuate from quarter to quarter due to a variety of other factors, including return and exchange costs, and changes in performance-based incentive compensation.

Sales and marketing expenses

Sales and marketing expenses for the three months ended ~~July 3,~~October 2, 2021 were ~~$206~~$256 million, or ~~42.5%~~39.9% of net sales, compared with ~~$130~~$212 million, or ~~45.7%~~39.8% of net sales, for the same period one year ago. The current-year sales and marketing expenses rate ~~decrease~~increase of ~~3.2~~0.1 ppt. was primarily due to: (i) restored marketing expenses which were temporarily reduced last year when we implemented appropriate expense management actions in response to the COVID-19 pandemic; partially offset by (ii) the leveraging impact of the ~~70%~~21% net sales increase; and ~~(ii)~~(iii) efficiency gains through our digital ecosystem and operating initiatives. Efficiency gains and operating initiatives included improved store operating productivity.

General and administrative expenses

General and administrative (G&A) expenses totaled ~~$41~~$48 million, or ~~8.5%~~7.4% of net sales, for the three months ended ~~July 3,~~October 2, 2021, compared with ~~$37~~$44 million, or ~~12.9%~~8.3% of net sales, in the prior-year period. The ~~$4.5~~$3.5 million increase in G&A expenses consisted ~~primarily~~mainly of: (i) a ~~$2.2~~$1.2 million increase in employee compensation primarily resulting from the growth of our business (prior year included the temporary and permanent elimination of certain roles due to changing business needs based on the COVID-19 pandemic); (ii) a ~~$1.8~~$1.5 million increase in professional and consulting expenses; and (iii) a ~~$0.5~~$0.8 million net increase in other miscellaneous expenses. The G&A expenses rate decreased by ~~4.4~~0.9 ppt. in the current-year period, compared with the same period one year ago due to leveraging impact of the ~~70%~~21% net sales increase, partially offset by the items discussed above.

Research and development expenses

Research and development (R&D) expenses increased by ~~93%~~50% to ~~$16~~$14 million for the three months ended ~~July 3,~~October 2, 2021, compared with $8$10 million for the same period last year as we continued to prioritize our long-term innovation initiatives.

~~Interest expense, net~~

Interest expense, net decreased to $1.6 million for the three months ended July 3, 2021, compared with $3.9 million for the same period one year ago. The $2.3 million decrease was mainly driven by a reduction in the weighted-average interest rate on borrowings and a lower level of outstanding borrowings during the three months ended July 3, 2021, compared with the same period one year ago. In March 2020, we fully drew down our credit line and secured a $75 million term loan to increase liquidity and preserve financial flexibility during the COVID-19 disruption.

Income tax expense

Income tax expense totaled ~~$5.9~~$17.2 million for the three months ended ~~July 3,~~October 2, 2021, compared with ~~a $3.4~~$16.5 million ~~tax benefit~~ last year. The effective income tax rate for the three months ended ~~July 3,~~October 2, 2021 ~~decreased to 20.9%~~was 24.3%, ~~compared~~consistent with ~~21.4% for~~ the comparable period last ~~year, reflecting greater stock-based compensation excess tax benefits in the current-year three-month period.~~year.

Comparison of ~~Six~~Nine Months Ended ~~July 3,~~October 2, 2021 with ~~Six~~Nine Months Ended ~~June 27,~~September 26, 2020

Net sales

Net sales for the ~~six~~nine months ended ~~July 3,~~October 2, 2021 increased by ~~$295~~$404 million, or ~~39%~~31%, to ~~$1.1~~$1.7 billion, compared with ~~$758 million~~$1.3 billion for the same period one year ago ~~which~~and increased 35% compared with $1.3 billion for the same period of 2019. 2020 year-to-date net sales were impacted by the COVID-19 pandemic, ensuing government restrictions and temporary closure of 47% of our retail stores on ~~average. Net sales for~~average during the ~~current year-to-date period increased 35% compared with $782 million for the same period~~second quarter of ~~2019. Supply~~2020. Global supply constraints, which began late in the second quarter ~~limited~~of 2021, continued to impact our delivered third-quarter 2021 net sales, ~~for~~but to a lesser extent as compared to the ~~six~~three months ended July 3, 2021.

The ~~39%~~31% net sales increase consisted of a ~~37%~~28% comparable sales increase in Total Retail in addition to 23 percentage points (ppt.) of sales growth from net new stores opened in the past 12 months. For additional details, see the components of total net sales change on page 15.

The ~~$295~~$404 million net sales increase compared with the same period one year ago was comprised of the following: (i) a ~~$249~~$330 million increase in our Total Retail comparable net sales; (ii) a ~~$26~~$54 million increase resulting from net store openings; and (iii) a $20 million increase in phone, online, chat and other sales. Total Retail mattress unit sales increased ~~33%,~~26% compared with the prior year. Average revenue per mattress unit in Total Retail increased by 5% to ~~$5,059,~~$5,045, compared with ~~$4,839~~$4,824 in the prior-year period.

Gross profit

Gross profit of ~~$649 million~~$1.0 billion increased by ~~$184~~$239 million, or ~~39%~~30%, compared with ~~$465~~$800 million for the same period one year ago. The gross profit rate ~~improved~~decreased to ~~61.6%~~61.4% of net sales for the ~~six~~nine months ended ~~July 3,~~October 2, 2021, compared with ~~61.4%~~62.1% for the prior-year comparable period.

The current-year gross profit rate ~~improvement~~decrease of ~~0.2~~0.7 ppt. was mainly due to: (i) incremental costs from labor and material inflation, and expediting costs resulting from current-year supply-chain shortages (1.9 ppt.); partially offset by (ii) leverage from the ~~39%~~31% net sales increase combined with a more favorable sales mix of higher-margin products ~~(1.1~~(1.2 ppt.)~~, partially offset by $13 million of incremental costs from labor and material inflation, and expediting costs in the second quarter.~~. Our prior-year's sales mix was negatively impacted by temporary store closures due to the ~~pandemic; partially offset by (ii) inflationary cost pressures and higher supply chain costs associated with current-year temporary supply constraints (0.7 ppt.).~~pandemic. In addition, our gross profit rate will fluctuate from quarter to quarter due to a variety of other factors, including return and exchange costs, and changes in performance-based incentive compensation.

Sales and marketing expenses

Sales and marketing expenses for the ~~six~~nine months ended ~~July 3,~~October 2, 2021 were ~~$430~~$685 million, or ~~40.8%~~40.5% of net sales, compared with ~~$338~~$549 million, or ~~44.6%~~42.6% of net sales, for the same period one year ago. The current-year sales and marketing expenses rate decrease of ~~3.8~~2.1 ppt. was primarily due to: (i) the leveraging impact of the ~~39%~~31% net sales increase; and (ii) efficiency gains through our digital ecosystem and operating initiatives. Efficiency gains and operating initiatives included improved store operating productivity.

General and administrative expenses

General and administrative (G&A) expenses totaled ~~$84~~$131 million, or ~~8.0%~~7.8% of net sales, for the ~~six~~nine months ended ~~July 3,~~October 2, 2021, compared with ~~$68~~$112 million, or ~~8.9%~~8.7% of net sales, in the prior-year period. The ~~$16~~$20 million increase in G&A expenses consisted of: (i) a ~~$9 million year-over-year increase in company-wide performance-based incentive compensation; (ii) a $7~~$13 million increase in employee compensation resulting from the growth of our business (prior year included the temporary and permanent elimination of certain roles due to changing business needs based on the COVID-19 pandemic); (ii) a $4 million year-over-year increase in company-wide performance-based incentive compensation; and (iii) $2$3 million of ~~higher~~additional professional and consulting ~~fees; partially offset by (iv) a $2 million reduction in travel expenses and other miscellaneous expenses.~~fees. The G&A expenses

rate decreased by 0.9 ppt. in the current-year period, compared with the same period one year ago due to the leveraging impact of the ~~39%~~31% net sales increase, partially offset by the items discussed above.

Research and development expenses

Research and development (R&D) expenses increased by ~~56%~~54% to ~~$29~~$44 million for the ~~six~~nine months ended ~~July 3,~~October 2, 2021, compared with ~~$19~~$28 million for the same period one year ago. The R&D expense rate for the ~~six~~nine months ended ~~July 3,~~October 2, 2021 increased to ~~2.8%~~2.6% of net sales, compared with ~~2.5%~~2.2% of net sales for the prior year. The spending level increase supports our ongoing consumer innovation strategy.

Interest expense, net

Interest expense, net decreased to ~~$2.6~~$4.4 million for the ~~six~~nine months ended ~~July 3,~~October 2, 2021, compared with ~~$6.3~~$8.1 million for the same period one year ago. The $3.7 million decrease was mainly driven by a reduction in the weighted-average interest rate on borrowings and a lower level of outstanding borrowings during the ~~six~~nine months ended ~~July 3,~~October 2, 2021, compared with the same period one year

ago. In March 2020, we fully drew down our credit line and secured a $75 million term loan to increase liquidity and preserve financial flexibility during the COVID-19 disruption. We repaid the $75 million term loan in September 2020.

Income tax expense

Income tax expense totaled ~~$15~~$32 million for the ~~six~~nine months ended ~~July 3,~~October 2, 2021, compared with $8$24 million last year. The effective income tax rate for the ~~six~~nine months ended ~~July 3,~~October 2, 2021 decreased to ~~14.2%~~18.3%, compared with ~~22.9%~~23.8% for the comparable period last year, reflecting higher stock-based compensation excess tax benefits in the current-year ~~six-month~~nine-month period.

Liquidity and Capital Resources

Managing our liquidity and capital resources is an important part of our commitment to deliver superior shareholder value over time. Our primary sources of liquidity are cash flows provided by operating activities and cash available under our $600 million revolving credit facility (increased from $450 million to $600 million as of April 21, 2021). The cash generated from ongoing operations and cash available under our revolving credit facility are expected to be adequate to maintain operations, and fund anticipated expansion and strategic initiatives for the foreseeable future.

Changes in cash and cash equivalents during the ~~six~~nine months ended ~~July 3,~~October 2, 2021 primarily consisted of ~~$161~~$293 million of cash provided by operating activities and a ~~$146~~$132 million net increase in short-term borrowings, offset by ~~$32~~$49 million of cash used to purchase property and equipment, and ~~$281~~$381 million of cash used to repurchase our common stock (based on settlement, ~~$264~~$364 million under our Board-approved share repurchase program and ~~$17~~$18 million in connection with the vesting of employee restricted stock grants).

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


		Six Months Ended					Nine Months Ended
		July 3, 2021		June 27, 2020			October 2, 2021		September 26, 2020
Total cash provided by (used in):	Total cash provided by (used in):					Total cash provided by (used in):
Operating activities	Operating activities	$	161.4	$	87.0	Operating activities	$	292.7	$	287.3
Investing activities	Investing activities	(32.0)		(22.6)		Investing activities	(49.1)		(29.0)
Financing activities	Financing activities	(131.5)		(64.3)		Financing activities	(246.0)		(258.5)
Net (decrease) increase in cash and cash equivalents		$	(2.1)	$	0.1
Net decrease in cash and cash equivalents						Net decrease in cash and cash equivalents	$	(2.4)	$	(0.2)

Cash provided by operating activities for the ~~six~~nine months ended ~~July 3,~~October 2, 2021 was ~~$161~~$293 million, compared with ~~$87~~$287 million for the ~~six~~nine months ended ~~June 27,~~September 26, 2020. Significant components of the year-over-year change in cash provided by operating activities included: (i) a ~~$62~~$65 million increase in net income for the ~~six~~nine months ended ~~July 3,~~October 2, 2021, compared with the same period one year ago; (ii) a ~~$38~~$34 million ~~change in accounts payable due to higher business activity~~fluctuation in the ~~current-year period~~amount of compensation and benefits accrued and timing of ~~vendor payments;~~the related payments resulting from year-over-year changes in Company-wide performance-based incentive compensation; (iii) ~~a $30 million fluctuation in customer prepayments due to strong customer demand and temporary supply constraints which extended customer delivery timelines during the current-year period; (iv) a $20~~an $18 million fluctuation in prepaid expenses and other assets due to both periods being impacted by the timing of rent payments and prior-year's reduction in business activities due to the pandemic; and ~~(v) a $15~~(iv) an $11 million ~~fluctuation~~change in ~~the amount of compensation and benefits accrued and~~accounts receivable due to timing of ~~the related payments resulting from~~ year-over-year changes in ~~Company-wide performance-based incentive compensation.~~sales orders and customer deliveries.

Net cash used in investing activities to purchase property and equipment was ~~$32~~$49 million for the ~~six~~nine months ended ~~July 3,~~October 2, 2021, compared with ~~$22~~$28 million for the same period one year ago. The year-over-year increase was due to higher property and equipment purchases for new and remodeled stores. Prior-year property and equipment purchases reflect actions taken to temporarily reduce capital spending based on the economic uncertainties associated with the pandemic.

Net cash used in financing activities was ~~$131~~$246 million for the ~~six~~nine months ended ~~July 3,~~October 2, 2021, compared with ~~$64~~$259 million for the same period last year. During the ~~six~~nine months ended ~~July 3,~~October 2, 2021, we repurchased ~~$281~~$381 million of our stock (based on settlement dates, ~~$264~~$364 million under our Board-approved share repurchase program and ~~$17~~$18 million in connection with the vesting of employee restricted stock awards), compared with $42 million during the same period one year ago. Based on the uncertainty surrounding the impact of COVID-19, in March 2020 we temporarily suspended share repurchases. Short-term borrowings increased by ~~$146~~$132 million during the current-year period due to a ~~$138~~$115 million increase in borrowings under our revolving credit facility to ~~$382~~$359 million and a $8$17 million increase in book overdrafts which are included in the net change in short-term borrowings. Short-term borrowings decreased by ~~$26~~$221 million during the prior-year period due to a $4$198 million decrease in borrowings under our credit facility to ~~$227~~$34 million and a $23 million decrease in book overdrafts which are included in the net change in short-term borrowings.

Under our Board-approved share repurchase program, we repurchased ~~2.1~~3.1 million shares at a cost of ~~$267~~$364 million (based on trade dates, an average of ~~$125.86~~$116.79 per share) during the ~~six~~nine months ended ~~July 3,~~October 2, 2021. During the ~~six~~nine months ended ~~June 27,~~September 26, 2020, we repurchased 0.8 million shares at a cost of $38 million (based on trade dates, an average of $49.42 per share). There is no expiration date governing the period over which we can repurchase shares. Effective as of April 4, 2021, our Board approved an increase in our total remaining share repurchase authorization to $600 million. There is $403 million remaining authorization under our share repurchase program at October 2, 2021.

As of ~~July 3,~~October 2, 2021, we had ~~$382~~$359 million of borrowings under our revolving credit facility. We also had $4 million in outstanding letters of credit. Net liquidity available under our credit facility was ~~$214~~$237 million at ~~July 3,~~October 2, 2021. The credit agreement provides the lenders with a collateral security interest in substantially all of our assets and those of our subsidiaries and requires us to comply with, among other things, a maximum leverage ratio (4.5x) and a minimum interest coverage ratio (3.0x). Our leverage ratio as defined in our credit agreement was 2.2x as of ~~July 3,~~October 2, 2021. Under the terms of the credit agreement, we pay a variable rate of interest and a commitment fee based on our leverage ratio. The credit agreement is for general corporate purposes, to meet our seasonal working capital requirements and to repurchase our stock. As of ~~July 3,~~October 2, 2021, the weighted-average interest rate on borrowings under the credit facility was 1.6% and we were in compliance with all financial covenants.

On April 21, 2021, we amended our revolving credit facility to increase our net aggregate availability from $450 million to $600 million. We maintain the accordion feature which allows us to increase the amount of the credit facility from $600 million to $800 million, subject to lenders’ approval. The amended credit facility matures in February 2024. There were no other significant changes to the credit facility’s terms and conditions.

We have an agreement with Synchrony Bank to offer qualified customers revolving credit arrangements to finance their purchases from us (Synchrony Agreement). The Synchrony Agreement contains financial covenants consistent with our credit facility, including a maximum leverage ratio and a minimum interest coverage ~~ratio consistent with our credit agreement.~~ratio. As of ~~July 3,~~October 2, 2021, we were in compliance with all financial covenants.

Under the terms of the Synchrony Agreement, Synchrony Bank sets the minimum acceptable credit ratings, the interest rates, fees and all other terms and conditions of the customer accounts, including collection policies and procedures, and is the owner of the accounts. As the accounts are owned by Synchrony Bank, at no time are the accounts purchased or acquired from us. We are not liable to Synchrony Bank for our customers’ credit defaults.

Index

Non-GAAP Data Reconciliations

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

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

Our Adjusted EBITDA calculations are as follows (in thousands):


		Three Months Ended				Fifty-Three Weeks Ended		Fifty-Two Weeks Ended			Three Months Ended				Fifty-Three Weeks Ended		Fifty-Two Weeks Ended
		July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020			October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Net income (loss)		$	22,250	$	(12,630)	$	201,563	$	78,657
Income tax expense (benefit)		5,864		(3,435)		43,564		22,141
Net income										Net income	$	53,721	$	51,320	$	203,964	$	101,923
Income tax expense										Income tax expense	17,198		16,468		44,294		30,642
Interest expense	Interest expense	1,607		4,022		5,227		12,131		Interest expense	1,816		1,829		5,214		10,829
Depreciation and amortization	Depreciation and amortization	15,006		15,253		59,802		60,951		Depreciation and amortization	14,820		15,083		59,539		61,071
Stock-based compensation	Stock-based compensation	5,968		5,033		27,114		15,853		Stock-based compensation	7,317		8,470		25,961		20,177
Asset impairments	Asset impairments	—		246		142		294		Asset impairments	23		11		154		276
Adjusted EBITDA	Adjusted EBITDA	$	50,695	$	8,489	$	337,412	$	190,027	Adjusted EBITDA	$	94,895	$	93,181	$	339,126	$	224,918

Free Cash Flow

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

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


		Six Months Ended				Fifty-Three Weeks Ended		Fifty-Two Weeks Ended			Nine Months Ended				Fifty-Three Weeks Ended		Fifty-Two Weeks Ended
		July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020			October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Net cash provided by operating activities	Net cash provided by operating activities	$	161,420	$	87,001	$	354,080	$	205,814	Net cash provided by operating activities	$	292,684	$	287,282	$	285,063	$	286,610
Subtract: Purchases of property and equipment	Subtract: Purchases of property and equipment	32,012		21,695		47,417		47,038		Subtract: Purchases of property and equipment	49,370		28,074		58,396		40,556
Free cash flow	Free cash flow	$	129,408	$	65,306	$	306,663	$	158,776	Free cash flow	$	243,314	$	259,208	$	226,667	$	246,054

Index

Non-GAAP Data Reconciliations (continued)

Return on Invested Capital (ROIC)

(dollars in thousands)

ROIC is a financial measure we use to determine how efficiently we deploy our capital. It quantifies the return we earn on our invested capital. Management believes ROIC is also a useful metric for investors and financial analysts. We compute ROIC as outlined below. Our definition and calculation of ROIC may not be comparable to similarly titled definitions and calculations used by other companies. The tables below reconcile net operating profit after taxes (NOPAT) and total invested capital, which are non-GAAP financial measures, to the comparable GAAP financial measures:


		Fifty-Three Weeks Ended			Fifty-Two Weeks Ended				Fifty-Three Weeks Ended			Fifty-Two Weeks Ended
		July 3, 2021			June 27, 2020				October 2, 2021			September 26, 2020
Net operating profit after taxes (NOPAT)	Net operating profit after taxes (NOPAT)							Net operating profit after taxes (NOPAT)
Operating income	Operating income	$	250,352		$	112,831		Operating income	$	253,472		$	143,295
Add: Rent expense (1)	Add: Rent expense (1)	95,226			90,349			Add: Rent expense (1)	98,839			91,142
Add: Interest income	Add: Interest income	2			97			Add: Interest income	—			97
Less: Depreciation on capitalized operating leases (2)	Less: Depreciation on capitalized operating leases (2)	(24,577)			(23,331)			Less: Depreciation on capitalized operating leases (2)	(25,030)			(23,700)
Less: Income taxes (3)	Less: Income taxes (3)	(76,939)			(42,735)			Less: Income taxes (3)	(78,975)			(50,584)
NOPAT	NOPAT	$	244,064		$	137,211		NOPAT	$	248,306		$	160,250
Average invested capital	Average invested capital							Average invested capital
Total deficit	Total deficit	$	(403,658)		$	(163,018)		Total deficit	$	(440,066)		$	(102,827)

Add: Long-term debt (4)	Add: Long-term debt (4)	382,794			227,944			Add: Long-term debt (4)	359,666			34,177
Add: Capitalized operating lease obligations (5)	Add: Capitalized operating lease obligations (5)	761,808			722,792			Add: Capitalized operating lease obligations (5)	790,712			729,136
Total invested capital at end of period	Total invested capital at end of period	$	740,944		$	787,718		Total invested capital at end of period	$	710,312		$	660,486
Average invested capital (6)	Average invested capital (6)	$	733,151		$	797,862		Average invested capital (6)	$	717,670		$	770,197
Return on invested capital (ROIC) (7)	Return on invested capital (ROIC) (7)	33.3		%	17.2		%	Return on invested capital (ROIC) (7)	34.6		%	20.8		%

___________________________

(1)Rent expense is added back to operating income to show the impact of owning versus leasing the related assets.

(2)Depreciation is based on the average of the last five fiscal quarters' ending capitalized operating lease obligations (see note 5) for the respective reporting periods with an assumed thirty-year useful life. This life assumption is based on our long-term participation in given markets though specific retail location lease commitments are generally 5 to 10 years at inception. This is subtracted from operating income to illustrate the impact of owning versus leasing the related assets.

(3)Reflects annual effective income tax rates, before discrete adjustments, of ~~24.0%~~24.1% and ~~23.7%~~24.0% for 2021 and 2020, respectively.

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

(5)A multiple of eight times annual rent expense is used as an estimate for capitalizing our operating lease obligations. The methodology utilized aligns with the methodology of a nationally recognized credit rating agency.

(6)Average invested capital represents the average of the last five fiscal quarters' ending invested capital balances.

(7)ROIC equals NOPAT divided by average invested capital.

Note - Our ROIC calculation and data are considered non-GAAP financial measures and are not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts.

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

Index

Off-Balance-Sheet Arrangements and Contractual Obligations

As of ~~July 3,~~October 2, 2021, we were not involved in any unconsolidated special purpose entity transactions. Other than our $4 million in outstanding letters of credit, we do not have any off-balance-sheet financing.

There have been no material changes in our contractual obligations, other than the amendments to our credit agreement, since the end of fiscal 2020. See Note 5, Credit Agreement, of the Notes to our Condensed Consolidated Financial Statements for information regarding our credit agreement. See our Annual Report on Form 10-K for the fiscal year ended January 2, 2021 for additional information regarding our other contractual obligations.

Critical Accounting Policies

We discuss our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021. There were no significant changes in our critical accounting policies since the end of fiscal 2020.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to changes in market-based short-term interest rates that will impact our net interest expense. If overall interest rates were one percentage point higher than current rates, our annual net income would decrease by ~~$2.9~~$2.7 million based on the ~~$382~~$359 million of borrowings under our credit facility at ~~July 3,~~October 2, 2021. We do not manage the interest-rate volatility risk of borrowings under our credit facility through the use of derivative instruments.

ITEM 4. CONTROLS AND PROCEDURES

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

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

Changes in Internal Control

There were no changes in our internal control over financial reporting during the fiscal quarter ended ~~July 3,~~October 2, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Index

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

(a) – (b) Not applicable.

(c) Issuer Purchases of Equity Securities
Period
Total Number
of Shares
Purchased(1)(2)
Average Price
Paid per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(1)
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs(3)
April 4, 2021 through May 1, 2021 182,833 $ 118.52 181,923 $ 578,438,000
May 2, 2021 through May 29, 2021 329,735 $ 108.23 329,468 $ 542,779,000
May 30, 2021 through July 3, 2021 386,128 $ 111.20 384,840 $ 499,985,000
Total 898,696 $ 111.59 896,231 $ 499,985,000


Period	Total Number of Shares Purchased(1)(2)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(3)
July 4, 2021 through July 31, 2021	186,186	$	100.40	185,715	$	481,344,000
August 1, 2021 through August 28, 2021	377,513	$	98.02	377,250	$	444,366,000
August 29, 2021 through October 2, 2021	439,815	$	95.63	433,022	$	402,939,000
Total	1,003,514	$	97.42	995,987	$	402,939,000

___________________________

(1)Under our Board-approved $600 million share repurchase program (effective April 4, 2021), we repurchased ~~0.9~~1.0 million shares of our common stock at a cost of ~~$100~~$97 million (based on trade dates) during the three months ended ~~July 3,~~October 2, 2021.

(2)In connection with the vesting of employee restricted stock grants, we repurchased ~~2,465~~7,527 shares of our common stock at a cost of ~~$0.3~~$0.7 million during the three months ended ~~July 3,~~October 2, 2021.

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

Index

ITEM 6. EXHIBITS


Exhibit Number						Description
31.1*						Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*						Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*						Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
32.2*						Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
101.INS*						Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH*						Inline XBRL Taxonomy Extension Schema Document
101.CAL*						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*						Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

* Filed Herewith

Index

SIGNATURES

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


		SLEEP NUMBER CORPORATION
		(Registrant)

Dated:	~~July 30,~~November 8, 2021	By:	/s/ Shelly R. Ibach
			Shelly R. Ibach
			Chief Executive Officer
			(principal executive officer)

		By:	/s/ Robert J. Poirier
			Robert J. Poirier
			Chief Accounting Officer
			(principal accounting officer)


		Page

PART I: FINANCIAL INFORMATION		1

Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Shareholders' Deficit	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23

PART II: OTHER INFORMATION		24

Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	25
SIGNATURES		26