Sleep Number CEO on Growth and Innovation

Bloomberg

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00:00I want to pull a line from your most recent earnings call. That was at the beginning of

00:04November. You said that your third quarter operating results were disappointing. Quote,

00:08I am not pleased, but we're on top of the reasons and we're moving quickly to stabilize all

00:12elements of the company. With that in mind, what is top of your priority list right now?

00:18Really, we're focused on three key things to turn this business around. One is making sure that we're

00:23refining the product set to meet customers' needs and the value points of where they are right now.

00:27Two is completely resetting our marketing infrastructure to make sure that we can

00:32really measure and drive ROI with marketing. And then three is looking at new distribution

00:36channels kind of going forward in the business. That's all built on a foundation of cost savings,

00:40and that's been a big part of what we've been doing since I joined the business.

00:44Do you have your team in place? I noticed that last week you named a permanent CFO,

00:49Amy O'Keefe, effective Monday. So do you have the bench that you need to execute those different

00:55elements? You know, we've really made a lot of changes with the executive team and people are

01:00either in new roles or we have new people in seat. So some people moved around and I think that's the

01:06right approach for where we are as a business because the needs of the business going forward

01:10are slightly different than where they were in the past. And I do think that we have the right team

01:13going forward to execute on this turnaround. I am curious just about the overall retail strategy

01:18for something like mattresses and sleep stuff. Obviously not the kind of product that people buy

01:22routinely, at least for mattresses. For most people it's once every few years. Maybe for pillows

01:27a little bit shorter than that. How do you sort of increase business? Or I guess I should say,

01:33how do you get more money out of your current client base? Is there a way to increase business

01:37without necessarily having to increase the number of people in your store? Well, a big part of what

01:41we've been doing over the last several years is creating value in the product that has really driven

01:45our average retail per unit up over several years. But a big part of what we're doing going forward

01:52is looking at how do we expand into new TAM to drive new customers into the business.

01:57So sheets, pillows, a lot of those things should be replaced pretty regularly and so that is

02:02definitely a part of it. But we see a lot of our loyal customers actually upgrading their beds to

02:07some of our newer beds that provide heating, cooling, other sort of technologies that allow you to

02:13actually get 52 minutes more sleep per night because of the technologies we put into place.

02:19And they might move their older bed into their kid's room or something like that. And so that's

02:24where we see a lot of our sort of opportunity with our customers.

02:27Okay. You intrigue me at 52 minutes. Not that I have an extra 52 minutes to spare, but that's very

02:31precise. It's not an extra 52 minutes of sleep that you have to extend. It's actually just making 52

02:36minutes of your sleep better.

02:37I got you. On that point though, I bring that up and kind of ingest, but also just this idea,

02:42obviously every company, every consumer product company, you have to find ways to innovate,

02:46take whatever the old product is and find a way to sort of make it fresh. How much effort and more

02:52importantly, how much money goes into that type of research and development of new products or

02:57of a way to refresh old products?

02:59We've historically had a fairly strong research and development group and we've actually recently

03:04pared back a bit to take advantage of some of the research and development we've already done

03:08to create new products and really make those connections with clinical data that matters for

03:14our customers. And at the same time, focus our energies on more near-term improvements into

03:20the product that customers want now. And that's a big part of what we're excited about in 2026.

03:25And I am curious, I mean, you mentioned a little bit when it comes to the marketing strategy,

03:30how much of your budget is devoted to marketing as you think about bringing in that new customer

03:35and actually expanding that to him?

03:38So we focus a lot on thinking about the different types of marketing we can put into place.

03:44So we focus around anywhere from 11 to 13, 14% of our revenue on media to bring in new customers

03:52and also engage our existing customers. And that's really important from a return standpoint,

03:56because we need to keep explaining the benefits to customers going forward.

04:00But a big part of our strategy right now is making every marketing dollar more efficient.

04:05So we've actually pulled back on marketing dollars in comparison to the past. And each one of those

04:10dollars is getting us more in return going forward. We're planning that into 2026 as well.

04:15And you think about the landscape and some of your rivals. I know that Mattress Firm and

04:20Temper Sealy, for example, actually joined forces earlier this year. They now operate as

04:25Somni Group International. I mean, have you considered any of those strategies, perhaps

04:30combining with a peer or potentially selling yourself?

04:34For our focus right now, it's really about right-sizing the business and getting it on the

04:38right track going forward. We have 60% gross margins in our business. We are a negative working

04:43capital business. So we have a really big advantage when we start to bend the curve on the growth.

04:48So we're focused right now on our strategy for 2026 and actually driving growth within this business.

04:53I'm curious, with regards to your business model, obviously most of your sales are originating from

04:58the actual physical retail store itself. I assume because people want to obviously test out what

05:02they're going to be spending a third of their life on. But it gets to this idea as well as to how you

05:07can increase online sales if that is a priority at all. So our online presence actually both feeds

05:14online sales as well as our store leads. And so the store experience is incredible. Our salespeople are

05:20incredible. They really walk you through how you actually use the bed to help improve your sleep,

05:25how to make sure you're finding the solution that's most comfortable for you. We also have

05:29the advantage, though, of we are the only fully adjustable bed out there. We adjust firmness by

05:34side. We adjust temperature. We adjust a lot of different parts of the bed. So in some ways,

05:39it's also the ideal purchase online because you know you can adjust it to your needs every night.

05:44And so it's less important that you actually worry about how it feels in one moment in the store.

05:48It's more about how you can actually adapt it to your everyday life.

05:52Where does growth come from long term?

05:54I think growth long term comes from expanding our TAM into the highest growth segments now,

05:59which really focus on the millennial markets. That's the fastest growing part of the business,

06:06and that's the fastest growing audience. And how do we create that premium experience that brings

06:10value to consumers during a time where they're feeling pressured about every dollar they spend?

06:15Yet, as you mentioned, this is where they spend a third of their life. So it's an extremely important

06:19I'm just curious, though, but on the adjustable side, I mean, I've seen other brands with adjustable

06:23beds. You're saying they're not the same fully. So there's a difference. The core DNA of sleep number

06:29is really about the adjustable firmness, which is fairly rare. And you combine that with the

06:33adjustability of head and foot. And then you combine that with more than 900 patents across

06:38different temperature technologies, etc. It's rare to find all of this in one package. And

06:44that's what we do.

06:45And final question, what is your sleep number?

06:47Oh, my sleep number is 35.

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