Welcome to Sleep Number's first quarter 2026 earnings conference call. At this time, all participants are in a listen only mode. As a reminder, this call is being recorded today, Tuesday, May 12, 2026. This conference call will be available on the company's website, ir.sleepnumber.com. Please refer to today's news release to access the replay. On today's call, we have Linda Findley, President and CEO, and Amy O'Keefe, Chief Financial Officer of Sleep Number. Before handing the call over to the company, we will review the safe harbor statement. The primary purpose of this call is to discuss the results of the fiscal period ending on April 4, 2026. This call, including commentary and responses to questions, may include certain forward-looking statements.
These forward-looking statements are subject to a number of risks and uncertainties outlined in the company's earnings news release and discussed in some detail in the annual report on form 10-K and other periodic filings with the SEC. The company's actual future results may vary materially. In addition, any forward-looking statements represent the company's views only as of today and should not be relied upon as representing its views as of any subsequent date. The company specifically disclaims any obligation to update these statements. Please also refer to the company's news release and SEC filings for a reconciliation of certain non-GAAP financial measures where applicable and for additional supplemental financial information included in the news release or that may be discussed on this call. I will now turn the call over to Linda Findley, Sleep Number's President and CEO.
Good morning, and thank you for joining us. I'll start with a brief update on our capital position. On April 27th, we reached an agreement with our existing lenders that provides near-term relief from certain financial covenants, adding $55 million of incremental liquidity, including a new $25 million term loan. This matters for two reasons. First, we believe it allows us to continue executing our turnaround plan for the business and actively market and sell our new products without disruption. Second, it gives us time to focus on a longer-term solution for our capital structure, including evaluating a range of strategic and financing options best for the business. Amy will walk through the details shortly. Turning to the quarter. As we said on our last call, we saw a significant impact on sales in early January and February based on weather and macro conditions.
However, demand improved as the quarter progressed. March demand increased approximately 6%, marking our first year-over-year demand growth on a comparable basis in two years. That improvement was driven by the launch of ComfortMode, updated marketing, and promotions to clear legacy inventory. We delivered net sales of $319 million in line with our expectations and adjusted EBITDA of $6 million ahead of our internal plan. While we just discussed the March demand metric, we recognize revenue when the bed is delivered. Since the majority of new product launched on March 23rd, most of the net sales will be reflected in Q2 rather than in Q1. Let me talk about the progress we're seeing across the business and why we're encouraged by the early results. Let's start with the product.
We completed a full product reset across all of our stores in less than four weeks. At the same time, our manufacturing and home delivery teams transitioned to the new lineup seamlessly and without disruption. The rollout also gave us an early read on product success. During the launch period, stores set with the new lineup saw 12% higher ARU than stores with previous product. Given the product rollout happened at the end of Q1, I'm gonna share some metrics we are seeing in Q2 that help us determine progress. First, we have the success of ComfortMode, the first best bed we launched in January. We are seeing 15 points of improvements in overall net promoter score, and when we compare to our prior entry-level mattresses, the C Series, net promoter score improves by 27 points.
With this improvement in NPS and with more than 100 days in market, we are seeing this flow through to our financials with 100 basis points reduction in return rate for ComfortMode versus historical return rates of the product it replaces. Second, across the full portfolio, we are seeing a strong attach in our premium ComfortNext line, which features our unique Tribrid technology. More specifically, ComfortNext Lux is now our top-selling bed at approximately $4,000 for a queen size at a healthy margin and representing an early shift into the planned product mix. To be clear, the new beds have a better average margin profile than the beds they replaced, and the plan to mix of the new line should return us to historic gross margin levels once we get past all one-time launch and clearance cost pressures.
We also conducted in-home user testing during the rollout and saw the direct and measurable impact of our beds. Compared to their original mattresses, nine in 10 people slept better, eight in 10 people got more sleep, and eight in 10 people experienced less pain on a Sleep Number bed. Shifting to marketing. We continue to drive improvements in our website experience. This has improved organic search visibility and simplified the purchase process. E-commerce demand grew year-over-year by approximately 5% in April, partly because of this work. In addition, our ongoing work in AI discoverability has improved AI citations by approximately 25% year-to-date. To support the product launch, we introduced a new integrated brand campaign To a Good Life's Sleep, which features brand spots along with products, product-specific creative.
These reinforce what differentiates Sleep Number, a personalized bed that adapts to your life and sleep needs as your life and sleep needs change. The early response is positive and is trending above benchmarks in the category. We launched our first Travis Kelce content last week, alongside expanded influencer activity, both designed to drive awareness and store traffic. We continue to see high engagement on our social content. For example, the Travis Kelce video garnered over 7 million views and high value engagement, especially in shares and saves. We continue to expand distribution in a disciplined way. A recent example is our test with Costco. We launched an exclusive online bed at costco.com, early indications are encouraging through both direct sales and increased visibility in our stores. We also remain focused on cost discipline.
Since the start of 2025, we've identified over $235 million of annualized savings, $200 million of which has already been executed. With the cost savings implemented, we expect to stay on track for our EBITDA plan. Looking ahead, we are measured in our outlook, consistent with what we said on our last earnings call. April demand was in line with our internal expectations and seasonal trends. We continue to plan conservatively, given ongoing consumer uncertainty and macro volatility. That said, we're encouraged by customer response to the new beds and the performance of our refreshed marketing, which reinforces confidence in our plans. As I reflect on my one-year anniversary as CEO, I want to step back for a moment. When I joined Sleep Number, I saw a powerful brand, a compelling mission, and a deeply committed team.
I also saw a cost structure, product offering, marketing approach, and balance sheet that limited long-term performance. Over the past year, we've taken meaningful steps to address those challenges, reducing costs, modernizing our marketing, and executing the most significant product reset we've had in years. We're confident in our marketing and product execution, and our capital structure is the final major piece of the turnaround that we're focused on solving. I want to thank our Sleep Number team members. None of this progress happens without your focus, dedication, and commitment to quality sleep. I'm grateful for your work and proud of the resilience you show every day. With that, I'll turn it over to Amy.
Thank you, Linda and g ood morning. We are pleased to have finalized negotiations with our lenders that resulted in approximately $55 million of near term incremental liquidity through covenant relief and $25 million of new capital. As we disclosed in the 10-K, our plan to alleviate the risk to continuing operations was threefold. Number one, e xecute on the turnaround strategy centered on product, marketing, and distribution while rightsizing the fixed cost base. Two, e ngage in negotiations with lenders with the goal of amending or waiving financial covenants. Three, engage financial advisors to identify and secure additional capital and other comprehensive solutions to address the capital structure for the creation of long-term value. We are progressing well against that plan. As Linda described, the turnaround strategy is well underway. As we head into Memorial Day, our new lineup of products has launched.
The stores were fully reset as of April 17th. New marketing creative is live, with significantly increased investment in Q2 compared to last year. We are executing against our $50 million annualized cost savings plan, having executed approximately 30% on a year-to-date basis. Related to the recently executed credit agreement amendment, we were able to alleviate the near term pressure on liquidity and covenants. The agreement provides for the following. One, a new senior secured term loan facility of $25 million due June 30th, 2026. Two, relief from the $30 million minimum liquidity covenant through June 30, 2026. Three, forbearance by the agent and lenders from exercising their rights under the credit agreement for specified covenant defaults as of April 4th.
With respect to a long-term solution to our capital structure, we have work to do over the next few months using the short-term relief we received from our lenders. Along with our advisors, we continue to progress plans to finalize the strategic transaction designed to maximize stakeholder value. Let's get into Q1 results, which were consistent with the expectations that we shared on our last earnings call. Net sales were $319 million in Q1, which was 19% below the same period in the prior year. Note that in Q1, consistent with our plan, investment in media was down 21%. In addition, as Linda mentioned, and as we discussed on our last call, demand performance in January and early February was soft.
However, we did see sequential improvement across the quarter, culminating with year-over-year demand growth in March, aided by discounting to move legacy SKUs in advance of the launch of new products on March 23rd. Gross profit margin was 57.9% in the quarter, which was ahead of plan, but 329 basis points below last year, primarily driven by a shift in mix to the new ComfortMode bed and discounting of legacy inventory. As the full line of products are now in the market and as supply of legacy inventory diminishes, we expect that gross margin will improve to at or above historical levels. Adjusted operating expenses before restructuring and other non-recurring costs were $195 million, down $42 million or 18% year-over-year.
The reduction was driven by ongoing cost savings initiatives to right size the fixed cost base and lower variable selling expenses. Adjusted EBITDA was $5.8 million, down $16 million versus the same period last year. Turning to the balance sheet and cash flow, total liquidity, including cash and revolver capacity, was $40 million at the end of Q1, above the $30 million covenant floor, which remained in place until the execution of the amendment to the credit agreement on April 27th. Free cash flow in the quarter was a use of $13.2 million, which was just over $20 million favorable to expectations. However, was unfavorable by $6 million compared to the prior year, primarily due to top line pressure, partially offset by favorable working capital. Capital expenditures in the quarter were $5.4 million.
Looking ahead to Q2 and the balance of fiscal year 2026. Starting with Q2, the demand improvement in March has translated to sequentially improved year-over-year performance and net sales for the month of April, despite a promotional comparability headwind versus prior year. I expect that our media investment in Q2 will be roughly flat to Q1, but up significantly versus the prior year, which was a trough. Consistent with the indications of performance expectations that we provided on our last earnings call for the quarter, we expect net sales to be down in the range of low single digits to flat versus the prior year. Given our previously announced engagement of Guggenheim Securities to evaluate strategic and financing options, we will not provide any further financial guidance at this time.
I will say that my expectations of performance are consistent with the indications that we provided on the last earnings call. With that, I will turn it back to the operator for Q&A.
Thank you. We will now begin the question and answer session. If you are dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via speaker on your device, please speak up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from the line of Peter Keith with Piper Sandler. Your line is now open.
Hi. Thanks. Good morning, everyone. I wanted to focus on the Q2 because I guess our view has been that there's kind of a lot riding on Q2 to show meaningful improvement as you've got the full product line rolled out and then the media spend sounds like it should at least be flat, if not up year-on-year. I guess you are guiding sales down slightly in Q2, but how do you feel about the whole plan coming together with the media and the new products and driving positive demand growth over time?
I'll start with that, and then I can turn it over to Amy. Nothing's changed about our media spend plan really for Q2 and beyond, based on what we previously said. We still anticipate, as we said on Q4, an improvement but down, you know, as Amy just sort of illustrated. There is obviously a little bit of bumpiness in the media spend as far as how it's planned. I mean, it would be fairly standard for us to back weight it given the Memorial Day holiday, which is what we've done. We are leaning in now that the products are fully set and in market, and that's where most of the media spend is coming together, which is in the coming weeks.
Okay. I guess with the new term loan, that's due on June 30th, should we think about it as some type of new sort of financial plan or recapitalization should happen by that date?
Yeah. That's the expectation here. The short maturities, I mean, as we've talked about, on the Q1 call and through this script, we've been working towards this goal, you know, for months and months. We hired advisors, and we've been working in parallel. I think that we're well-positioned to be able to, you know, continue to progress those transactions and, you know, our lenders are gonna hold us accountable for that.
Okay. Last question. A popular topic these days is higher input costs that was not mentioned in prepared remarks. Obviously, there's a lot of other things going on. How are you managing through that environment right now? Do you have some flexibility around pricing or other cost mitigation efforts?
I guess I would say that we have a bit of an advantage, and then I'll turn it over to Amy to talk about more detail. We have a bit of an advantage in that we just launched a new product line that was priced according to pretty current data when it came to either thinking about tariffs or other macro information. I think we're in pretty good shape from a consumer standpoint. We'll continue to evaluate how that comes together. We had actually anticipated a certain amount of pressure on inflation anyway, just because of the signals we were seeing earlier in the year. That is already built into the plan as far as price pressure.
I mean, we definitely expect to see some headwind. It hasn't changed our view of internal performance expectations. You were also executing cost savings initiatives against it. You know, we expect to be able to hold to our plan, despite the input costs. Yeah.
Okay. Very good. Thanks so much. I'll pass it along.
Thanks, Peter.
Your next question comes from the line of Dan Silverstein with UBS. Your line is now open.
Good morning, Linda and Amy. Thanks so much for taking our question.
Good morning.
Good morning
Amy, could you just provide detail around your liquidity position as of today? If Memorial Day kind of went to plan, which it sounds like April is trending in line with expectations, what would that mean for the cash flow dynamics in the second quarter?
Yeah. I'm not gonna comment on our liquidity position as of today. I will say that, you know, the support of our lenders, you know, we're in a trough liquidity. I mean, our business goes from, you know, President's Day through Memorial Day, and we're investing into new product launch, new creative, new sponsorships with Travis Kelce. We're definitely using cash. That should be no surprise. We got support from our lenders to manage through the liquidity to execute our plans for Memorial Day. What I will say is that, you know, we manage liquidity very tightly. As we expect, you know, collections to ramp over the Memorial Day holiday, which is consistent with our plan. We worked very closely with our lenders on our forecast.
Thus far we have been at or above the forecast that we provided. We expect to continue to manage liquidity tightly, through Memorial Day selling season.
Very helpful. Next, very encouraging start, you know, with the new product rollout. How many customers that are buying the ComfortMode products, just 'cause there's a little more data there, are new to file? How are they engaging-
Yeah
...with the brand, and how could you capitalize, you know, on that for Memorial Day and later out?
Yeah. As we've discussed before, part of the strategy behind the new product launch was to attract new buyers to the products, and we have seen that play out. We're not giving exact numbers on that, but we have seen new buyers coming into the product at a higher rate than previously. We love our smart sleepers and our existing customers, and we continue to nurture our existing customers as well as obviously upgrading and/or replacing, you know, old with new product is a behavior that we also want to encourage. We're happy with the progress that we've made with new customer acquisition during this time.
Thank you, and best of luck.
Thanks.
Thanks
Thanks. Your next question comes from the line of Bobby Griffin with Raymond James.
Good morning, everybody. Thanks for taking the questions, and congrats on some of the early improvements there in March. I guess, Linda, I first want to start, 'cause this is the first time you guys have some of the new products out for a big holiday, as well as your team in place. Maybe can you just elaborate a little on how you're approaching the Memorial Day weekend holiday versus historical standards of Sleep Number and, you know, anything there from a promotional aspect. You talked a little bit about marketing, but just anything more to kind of help us connect how you're going about this holiday season, maybe a little different than what we're used to.
Sure. I can give high level, as we go through, but obviously part of our role and part of our job is to continue to adapt to whatever we see in market. We will continue to be flexible as we get into the holiday on what's best for the business, and what's best for the product. It is very early with the new products. We are encouraged by what we're seeing from the simplified purchase process, both in discoverability, as well as people moving into other beds in the line beyond the ComfortMode launch, including our ComfortNext Lux, which we're very proud of.
We're seeing the patterns that we wanted to see when it comes to that, and we are also seeing, as I mentioned in our, in our script, good response to the new brand campaign that we've put out. It's early, it's trending in the right direction. It takes time for those things to really take hold. We are seeing good response. From a promotional standpoint, you know, when we priced these beds, when we were creating the new product line, we priced these beds very competitively compared to their predecessors. While they are all premium price points, they are all premium price points that are slightly better than the beds that they replaced, and also with more comfort materials and value sort of moved into those.
That's really what we're leaning into for our selling for the holiday season is comfort, value, durability as we noted before. The simplified selling process allows people to try the individual fit process on one of the new beds. They're trying it on ComfortMode Luxe. And that iFit process has been adapted for the simplified selling process of showing people the best bed for them. As far as promotions, honestly, what we're doing is we're really moving towards what I would call more industry standard promotional approach, which so far has worked well for us. As I mentioned, we will continue to be flexible on how we think about promotions going into the holiday based on what we see with consumer behavior and the macro environment.
That's helpful. Amy, maybe a follow-up on the gross margins for the quarter. How much of the decline year-over-year was the discounting of the legacy products? My apologies if I missed it in the script, are we largely done with that discounting, or will we be done by Q2? Just anything on the timing of clearing out the legacy products.
Yeah. Certainly supplies on the legacy products are diminishing. We continue to sell the I mean, we think it's really important, you know, to recover the component inventory costs, so we will continue to sell them until, you know, while the supplies last, so to speak. You know, in the quarter of the 330 basis point change, the discounting was under 100 basis points of that change. It was really the Q1 because we had launched the ComfortMode bed early in the quarter and had great success with that, you know, sort of outselling versus the prior year. Mix shifted in that direction. I would say closer to half of the basis point difference was as it relates to the mix shift.
As we launched the new products on March 23rd, we expect that mix to evolve and to balance out over time. As I noted in my comments, you know, gross margin, you know, was relatively flat on a sequential basis from Q4 to Q1 when you remove the impact of the inventory obsolescence charges that we've taken. We expect that to sequentially improve as mix balances out for the rest of the year.
Okay, that's helpful. I appreciate the details. Best of luck here in this period trying to get some more long-term financing and good luck over the holiday.
Thank you.
Thank you
Your next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Your line is now open.
Hey, good morning Linda and Amy. Thanks for the questions. I wanted to maybe follow up on one of Bobby's last questions. I know the company historically talks about ARU. Can you maybe share a little bit more detail on how ARU or maybe average ticket or the average transaction size has been trending of late and how you're thinking about that going forward?
Yeah. On a year-over-year basis in Q1, ARU for the quarter was about $6,021, which was up slightly versus the last versus prior year, as we planned. We have been, you know, we had planned these new product launches to expand ARU, we certainly expect continued expansion of ARU as the rest of the product line rolls out. We did see an improvement quarter-over-quarter versus last year.
Yeah. The only other thing I'll note is, you know, I mentioned in the script that when we did the rollout of the new bed starting March 23rd, stores that were set with the new bed did have a higher, 12% higher ARU than the stores that were set with legacy inventory. As I mentioned in our previous call, our new product design was really designed to create the right value at the right price point. Now with ComfortMode being our entry price point into the line and previously having had two beds that were priced below that obviously also is part of the ARU mix we plan going forward because we will no longer have those lower end beds. That's part of the improvement.
That's helpful. You know, on the sales guidance, this is of course with the store count being, you know, about 9% lower. If we try to back into like a same store sales metric, it looks like that might be up mid to high single digits for Q2. Is that the right way of thinking about things?
I mean, we're definitely expecting through the Memorial Day season, a return to demand growth like we saw in March. I think overall, as I mentioned, we'll be down low single digits to flat from a net revenue perspective in the quarter. Later in the quarter through Memorial Day, you might see, you know, a return to growth in same store sales. That's kinda how I think about it.
Yep. Just the last one for me on Q2, is there still a quantifiable amount of launch costs falling into Q2 just as we think about expense puts and takes here?
For, for the most part, I would say, you know, as I, as I think about launch costs, I think about inventory obsolescence, which I feel like is behind us. We took the biggest piece of that in Q4, which we talked about on the last call. We had a bit more, not to the magnitude that we took in Q4, a little bit more in Q1. You know, I would say that from a creative perspective, those costs have been borne already. I would say that it is. There are some in Q2, but not to the magnitude that they were in Q1.
That's really helpful. Thank you for all the questions and good luck during these important holidays and with your lender discussions.
Thank you.
As we have no further questions, ladies and gentlemen, this will conclude today's question and answer session. I'd like to turn the conference back over to Linda for any closing comments.
Thank you all for your time today. We remain focused on the work ahead, and I look forward to updating you on our continued progress in the coming months. As always, if you have questions, please contact us directly. Thank you.
This concludes today's call. Thank you all for joining. You may now disconnect.