Good afternoon and welcome to the Sleep Number Corporation Fourth Quarter 2020 Earnings Conference Call. Thank you for joining us. I am Dave Schwantes, Vice President of Finance and Investor Relations. With me today are Shelly Ibach, our President and CEO; and David Callen, our Chief Financial Officer. This telephone conference is being recorded and will be available on our website at sleepnumber.com. Please refer to the details in our news release to access the replay. Please also refer to our news release for a reconciliation of certain non-GAAP financial measures and supplemental financial information included in the news release or that may be discussed on this call. The primary purpose of this call is to discuss the results of the fiscal period just ended. However, our commentary and responses to your questions may include certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties outlined in our earnings news release and discussed in some detail in our annual report on Form 10-K and other periodic filings with the SEC. The company's actual future results may vary materially. I will now turn the call over to Shelly for her comments.

Good afternoon and welcome to our 2020 fourth quarter earnings call. My SleepIQ score was 86 last night. Quality sleep is vital to our health and wellness. It affects our physical, mental, and emotional well-being. It helps boost immunity, increases energy, and improves recovery. It is life-changing. Sleep Number 360 smart beds benefit our overall health and wellness by improving our restful time asleep. Sleep Number is a beloved brand. Our team's deep relationship with customers is grounded in our culture of individuality and well-being. The result is more than 13 million lives improved and sustainable profitable growth. We are delivering long-term strategic and financial performance because of our differentiated strategy and vertically integrated business model. Our current five-year total shareholder return is greater than 600%. Over the past five fiscal years, we delivered compound annual growth rates of 9% in sales, 15% in EBITDA, and 38% in earnings per share. Our 2020 ROIC was 25%, more than 14 points higher than five years ago. At the inception of our consumer innovation strategy in 2012, we positioned digital health at the core of our product and customer experience. This strategy combined with subsequent strategic investment is fueling our profitable growth. Our core business supports our purpose of improving the health and well-being of society through proven quality sleep. Consumer trends that we have long anticipated were accelerated by the global pandemic in the past year resulting in three structural shifts. First, consumers are prioritizing well-being, their own and that of their families. And they now better understand the strong link between sleep and overall health and wellness. Second, consumers are adapting digital products and services at a much higher rate and they are increasingly relying on digital health solutions. And third, consumers have a heightened preference for brands that are characterized by authentic purpose and human empathy. Each of these shifts is enduring, driving permanent changes in consumer purchase behavior. With our strategic investment in sleep science-based innovation, digital technologies, and brand accelerators, we are positioned to continue taking market share and delivering superior stakeholder value in this transformed environment. We significantly broadened our sleep leadership and brand relevance during the past year. Our record results are a testament to our mission-driven team, their ingenuity, agility, and courage amid an unprecedented health crisis, global economic shock, and civil unrest. They generated new ways to digitally connect with customers and operate in a more efficient manner, while in a constant state of hyper change. Our strategy and vertically integrated business model create a flywheel for sustainable growth, driving consumer demand and performance. Sales demand in the fourth quarter accelerated. It exceeded our Q4 net sales growth and contributed to double-digit demand growth for the full year. This momentum continues in the first quarter. Full year net sales of $1.9 billion grew 9%. Net operating profit increased 65% to 10% of net sales. Earnings per share were $4.90, 81% stronger than our $2.70 record EPS in 2019, and we generated record cash from operations of $280 million, up 48%. Our breakthrough performance is being driven by our revolutionary 360 smart beds and investments, which sustainably leverage our competitive advantages. As consumers increasingly prioritize their health and well-being and recognize its link to quality sleep, demand for our revolutionary 360 smart beds has accelerated. Since transitioning to all smart beds in Q3 2018, 10 quarters ago, demand for our beds has grown an average of 12%. Our new i and m series smart beds with their temperature balancing features are increasing consumer interest. We will introduce the p and c series smart beds in the coming months with a new digitally led marketing campaign focused on their health and wellness benefits. SleepIQ technology optimizes the smart benefits of the bed, continually improving restful time asleep through Sense & Do technologies, and individualized sleep data. This high-impact content is amplified by our advocates and NFL partnerships. In the fourth quarter, digital traffic to our brands was up 50%, consideration and conversion are at record levels. Our health-related advancements, including circadian rhythm insights and nighttime heart rate variability directly link an individual's sleep quality to daytime productivity and overall well-being. Our next SleepIQ progression will link sleep quality to daytime alertness. These highly relevant personal metrics increase engagement and retention of our smart sleepers, which in turn provides the foundation for scaling innovation. Now with more than one billion sleep sessions and nine billion hours of longitudinal data, we are extending our sleep leadership into connected health. Our work is informed by our Sleep Number Scientific Advisory Board and our collaboration with Mayo Clinic and other partners such as Oxford PharmaGenesis, an award-winning independent global health science consultancy. We will publish new research using our proprietary data and insights eliminating the impact of sleep on health in the coming months. In keeping with increased consumer adoption of digital products and services, our digital ecosystem is also enabling Sleep Number to efficiently acquire new customers and build lifelong relationships. We continue to benefit from internal digital capabilities. Through automation, machine learning, and proprietary data we are more quickly identifying the highest potential consumers. This real-time intelligence and relevant content led to a 29% unit increase in Q4, while maintaining strong average revenue per unit and leveraging our media investment. By deepening customer engagement and scaling our smart sleeper community, we are amplifying their advocacy of our connected, life-changing sleep experience. Our digital capabilities also enable us to adapt cost structures and help manage inventory to support a more customer-focused supply chain. These ongoing advancements in our digital ecosystems continue to widen our competitive advantages and provide a compelling source of future growth. Our agile go-to-market approach leverages our sleep professional skills in building customer relationships and aligns with how our customer wants to shop, whether in-store, online, or by phone. Our approach seamlessly integrates promotions, financing, selling process, media, and proprietary innovations. Our online and phone sales grew 93% in the fourth quarter and increased 104% for the full year, a strong contribution to our 6% comparable sales gain for the year despite the sales decline in Q2 from the onset of the pandemic. We continue to strengthen our online customer journey and expect it to be an important source of future growth. Our well-honed market development strategy is continuing to deliver higher profitability and market share gains. We surpassed our long-term target of $3 million per store in 2020. Ten Sleep Number stores exceeded $6 million each and one store eclipsed $7 million in annual sales. As we continue to take market share by advancing our integrated initiatives, we expect revenue growth from all touch points in 2021, including new store growth, which will be a greater driver in the second half. We also expect growth in both units and average revenue per unit for the full year. Finally, with heightened focus on corporate responsibility, stakeholders are engaging with our mission-driven team, culture of individuality, company purpose, and long-term orientation. Improving the health and well-being of society through higher quality sleep remains our guiding light. Throughout 2020, our purpose has inspired us and informed our business decisions and actions, including gifting a smart bed to all of our team members, partnering with Make-A-Wish to support critically ill children with life-changing sleep, and joining the United Nations Global Compact. As we look to the future, we will continue to strengthen our corporate stewardship by making this a better world through higher quality sleep. In our second annual corporate responsibility and sustainability report, we will provide details of our ongoing social, environmental, and governance efforts. With continued exceptional consumer demand in the first quarter and strong growth initiatives in place, we are driving toward another year of breakthrough performance. For the full year of 2021, we expect to deliver at least $6 of EPS compared to $4.90 in 2020 and more than double our 2019 EPS of $2.70. Our results are propelled by the convergence of our growing sleep innovation leadership and brand relevance, revolutionary new 360 smart beds, digitally connected ecosystem, exclusive direct-to-consumer distribution, and lifelong customer relationships. In a year of challenge and change, Sleep Number delivered exceptional results by leveraging the power of vertical integration, digitization, and a mission-driven team. Our unwavering focus on doing what is right for our customers, team, communities, and partners has made a difference in this challenging time. We have continued to lean into the competitive advantages inherent in our differentiated strategy. As a result, our brand reputation, customer and team member engagement, and our financial performance are all high. We remain positioned to generate sustainable profitable growth in 2021 and beyond. Our Sleep Number team is grounded in our resolute belief in individuality and the life-changing impact of quality sleep, which translates to superior shareholder value. Thank you team for your devotion to our stakeholders. You inspire me every day. Now, David will provide additional financial details on our fourth quarter performance and outlook for 2021.

Thank you, Shelly. Exceptional execution in the pandemic year was an outcome of the innovation philosophy that pervades our business. Faced with the most serious of threats from COVID-19, followed quickly by explosive demand resurgence, our team streamlined processes and embraced digital capabilities across the company. We are truly working differently. The result efficiencies were achieved in 2020 that we had not expected for another year or two. 2020 was, as the saying goes, an overnight success 10 years in the making, made possible by the culture of problem-solving and innovation embraced at Sleep Number. Despite the more than 100% increase in our share price for the last year, we believe execution of our sleep science and technology-enabled strategies and digitally advantaged business will deliver significant upside for all stakeholders. The groundwork for our 2020 performance began years ago with an understanding that proven quality sleep is highly correlated with health and well-being. This strategic clarity reinforced by disciplined investment in growth enablers and growth drivers produced average top line expansion of 9% in 2017 through 2019 with average three-year EPS increases of 35%, nearly four times the top line growth. In 2020, our teams added to this multiyear top decile performance with another year of 9% top line growth and an explosive 81% growth in EPS, a multiple of nine times the rate of top line expansion. We have been creating superior value for years and continue to drive for breakthrough performance in 2021 and beyond. Before talking more about the future, let's review our 2020 results. Net sales grew 9% to nearly $1.86 billion. Excluding $41 million from the extra week, net sales grew 7% for the year despite the 20% year-over-year decline in the COVID-19 affected second quarter. Net sales growth in Q4 accelerated to 29% or 20% without the extra week, up from 12% growth in Q3. Demand accelerated throughout the back half, resulting in 12% average growth for the past 10 quarters. That's 2.5 years of double-digit average growth, despite three months this year of material COVID pressure. Our 2020 sales metrics reflect a healthy and growing business. Comps grew 6%. New stores contributed 1.5 points with an additional 2.5 points from the 53rd week. Our breakthrough marketing and selling initiatives delivered 10% unit growth in 2020, while still generating a strong ARU of nearly $4,900, notwithstanding the 104% increase in sales through online and phone touch points. In this year when the agility of our teams, technology and partnerships made all the difference, non-store sales drove 14.5% of our net sales compared to about 7.5% historically. A differentiating advantage of our strategy is our ability to grow from both units and ARU over time. The result has been more than 4.5% average annual growth from each driver over the last four years. Another source of long-term growth is our national retail presence with integrated online and selling from anywhere capabilities in all 50 states. We ended the year with 602 highly productive stores and eclipsed our long-time milestone with more than $3 million average sales per store, including online and sales made digitally, outside closed stores due to COVID. We expanded our 2020 gross margin rate by 40 basis points to 62.3% on top of the 130 basis point lift in 2019. Volume leverage and efficiency initiatives more than offset labor inflation, mix pressure, and the Q2 380 basis point COVID-driven gross margin rate decline. While explosive demand has certainly stressed our supply chain, we are benefiting from strong relationships with our global suppliers and are expediting components as needed to fulfill customers' desire for our proven quality sleep solutions. Despite our supply chain constraints and significant demand growth, customer delivery times are within six days of average, as we employ enhanced digital inventory forecasting, inventory tracking and the ingenuity of our teams and suppliers. The flexibility and resilience we built into our global supply chain is also enabling rapid expansion of our fulfillment capacity, including the addition of two new assembly distribution centres in Dallas and Tampa here in the first quarter of 2021. Operating efficiency gains in selling and marketing contributed 370 basis points of leverage as reported in 2020 or 340 basis points excluding the extra week benefit. Our rapid response to COVID-19 including cost cuts and acceleration of initiatives that embraced working differently, digital investments in marketing are delivering focused targeting and efficient customer acquisition. Selling from anywhere is driving safe, efficient and effective engagement with customers. Digital workforce management tools are helping us navigate COVID closure-related staffing challenges, digital inventory monitoring and customer text communications are leading to improved customer experience and reduced waste across our vertically integrated business. Synergies and digital solutions across our advantaged business are helping us thrive through this pandemic while delivering significant leverage of our structure. We continue to take actions and make decisions for the long term. We accelerated investments in R&D by 32% in Q4 over the prior year bringing our full year increase to 17%. We have clear sight lines for exciting innovation that will create significant value for customers and shareholders for years to come. Our G&A costs for the year were up 15%, as we lean into digital capabilities and absorb performance-based incentive compensation and the gift of proven quality sleep for all 4,700 of our Sleep Number team members. 2020 income taxes were a 230 basis point headwind offset by nearly 7% fewer weighted average shares outstanding for the year. As noted earlier, we drove an 81% increase in our diluted earnings per share to $4.90, while absorbing a $0.45 loss in COVID-19-affected Q2. Adjusted earnings per share excluding the $0.30 benefit from the 53rd week increased 70% over our previous record earnings one year ago. We generated $280 million in cash from operations, up 48% versus record 2019 cash flows. About $15 million to $20 million of our planned 2020 capital projects, especially for new stores, were delayed by COVID. We completed projects totaling $37 million and are carrying forward the others into 2021. We invested $228 million in Sleep Number shares in 2020, including $190 million in Q4 at an average price of $71 per share. Our 25% ROIC reflects the efficiency of our capital deployment actions over time and our 2.2 times EBITDAR ending leverage compares to our targeted operating range of 2.5 times to 3 times. We ended the year with $247 million remaining under the current authorization from our Board and continue to see significant value in Sleep Number stock. Turning now to our 2021 guidance and assumptions. We expect to deliver at least $6 of diluted EPS in 2021, which implies one year growth of at least 30% over our record 2020 EPS excluding the 53rd week. To date, we've illustrated the strength of our results over various time horizons. With the noise in 2020 from the 53rd week and the disruption from COVID-19, we find using two-year growth trajectories versus 2019 provides the clearest view of the performance we are driving. Our 2021 EPS guidance more than doubled earnings in just two years. It assumes more than 300 basis points of operating profit margin expansion versus 2019 on two-year organic net sales escalation of 25% to 30%. For perspective on the scale of this performance, remember that we delivered 9% average net sales growth the previous four years. We expect to grow top and bottom-line each quarter in 2021 versus 2019 with more of the growth coming in the first half of the year. We expect 2021 cash generated from operations to be similar to 2020, while deploying $70 million to $75 million in highly productive capital projects. Our capital deployment priorities emphasize performance accelerators, maintaining capital for opportunistic investments and investments in Sleep Number shares, while moving toward our operating leverage target of 2.5 times to 3 times EBITDA. Our team's rapid response and resourcefulness delivered exceptional financial performance in 2020, while setting the stage for tremendous opportunities still ahead. The lasting engagement we create with customers through our proprietary SleepIQ technology and our sleep science-based innovations will continue to deliver breakthrough value creation for Sleep Number stakeholders. Thank you, Sleep Number team and business partners. Your passion to improve lives is driving exceptional performance.

Absolutely. Your first question will come from Peter Keith of Piper Sandler. Please go ahead.

Hey. Good afternoon. Great results, everyone. You had mentioned a couple of times on the call your use of marketing dollars and the ability to have automation and machine learning to target specific customers. And I was hoping you could unpack that a little bit with some more detail. Is that a new capability that perhaps has emerged here in the back half of 2020? Could you give us a more granular example? And furthermore, does this marketing allow you to expand the demographic of your customer base versus where it's trended historically?

Great. Thank you, Peter. I'll start with the latter part of your question first. Yes, absolutely. It has helped us expand and broaden our target customer and who we're bringing into the brand and who's purchasing, so that has definitely widened with the advancement of our digital capabilities. As you probably recall, we brought in-house our digital capabilities a few years ago. So this is one of those examples of us progressing our strategic initiatives each and every quarter and seeing the year-over-year double-digit demand increases as a result of that behavior. And this is just a great example because it all stemmed off the internal digital capabilities. And as we've been advancing them each quarter, we've incorporated this ecosystem and built on an ecosystem that connects with the highest potential consumer, brings her into the funnel, holds her all the way through, however she wants to engage and shop with us. We convert, then we have ongoing engagement with our SleepIQ technology. Then that customer becomes part of our insider group and becomes an advocate for the brand. The engagement continues to deepen as we advance the health and wellness benefits like our circadian rhythm or nighttime HRV, and that will amplify. And it's a bit of what we call the flywheel or building on the digital ecosystem. And every time we add data, the algorithm continues to strengthen and get smarter and to be more and more effective. And this is what gives us confidence as we look out over the horizon and build off the consumer shift that has happened and the trends, but how our innovations and our product and our strategy, all continue to build in the future. So looking at our road map and how all of this builds value over time is what gives us great confidence in delivering superior value to our stakeholders.

Okay. If I could ask a quick follow-up on that. You talked about the expanding or broadening customer base, are there specific examples? Maybe is it geographic or even various ages that are new to you?

Yes. Well, first of all, you can see it in the 29% unit growth in the fourth quarter. But we've added a younger demographic. Some great growth in that adding another five to eight years on the younger part of the curve.

Okay, great. If I could pivot to maybe a financial question for David, two-fold. It looks like you're probably still running with a backlog going into Q1. I was hoping you could quantify that for us. And then secondly, as you know, a lot of your peers in the industry have been raising prices rather prolifically. You guys have not. So kind of wondering how you feel about your pricing position right now? And are there any planned price increases embedded within that guidance?

Yes. Peter, you're right. We do have higher demand in the fourth quarter, which resulted in some of our deliveries that are going to move into 2021. That probably is about 4% to 5% of the growth highlighted for 2021. As far as pricing, we have pricing in select models built into our 2021 plans and continue to have pricing power across the line based on our innovations. You know that historically, we've taken an average of about a 3% benefit driven pricing per year. It's been a little lighter than that recently, maybe half of that, but we certainly have that power within our business model.

Okay, sounds great. Thanks a lot and good luck.

Thank you.

Your next question will come from the line of Bobby Griffin of Raymond James. Please go ahead.

Good afternoon, everybody. Thank you for taking my questions. And congrats to you and the rest of the team on managing an unprecedented and challenging year. Shelly, first I want to circle back to your comments about the additional kind of partnerships with SleepIQ and maybe hopefully you can expand on a little bit of that a little. And where do you kind of see over the five-year timeframe or a long-term timeframe the potential for SleepIQ? Is there any monetization potential or subscription-type potential or any type of different partnerships that we, on the sell-side or the buy-side might not be thinking from, because your data does stand out as pretty unique in the industry and the amount of sleep nights you're registering with more and more customers each day?

Bobby, thanks for the question. You're absolutely right. And we're sharing how significant this data is with our position right now on sleep sessions and our sleep fleet. This is such an important area where we're extending our leadership into connected health. So if you think about the past number of years, as we brought the smart bed to the marketplace and introduced the market of sleep and helped people understand the link between sleep and their overall health and wellness, now we'll be extending that to connected health. And I think some of the good indications would be the circadian rhythm and the nighttime HRV. These are measurements that really help you now optimize your day, and then our upcoming release will be around daytime alertness. So that's the beginning. We're investing significantly in this area scaling and investing in multi-sensory capabilities as we broaden our competitive moat. So yes to all of the above. There's great potential in the future. And we consider smart beds as our baseline and everything will evolve and build off that smart bed as a platform.

Thank you. And David for the quarter, can you offer a little bit more detail on the sales and marketing leverage? Was that media-driven or the non-media portion of that line item? And then as a second follow-up to that, when we look at 2021, understanding that there's a lot of moving parts in predicting this with this environment is very difficult. But what have you assumed in terms of the mix of the business that comes back marketing levels or the non-marketing portions? And anything to help us kind of get a little bit of flavor around the drivers in the P&L to get to that $6 number you're targeting.

Yes, Bobby. It's an important dynamic for sure. And that's why we're advising that we use a two-year growth off of our 2019 performance for your modelling purposes. I'm pretty excited about delivering again in 2021, at least 300 basis points of NOP margin expansion versus 2019. A significant portion of that did come from sales and marketing. As I highlighted, we expect to hold onto a lot of those gains because we learned how to work differently. We are going to lean into our growth drivers in any event. We're going to be building out 40 to 50 stores, for example, in 2021 and yet still delivering that kind of operating profit margin expansion on a two-year basis. And included in that not only our near-term growth drivers like marketing and our stores, but we're going to be leaning in again in 2021 with our R&D spending.

Okay. That was helpful. I’ll jump back in the queue. Thank you again and best of luck to you in the first quarter.

Thanks a lot, Bobby.

Your next question will come from the line of Curtis Nagle of Bank of America. Please go ahead.

Good evening. Thanks very much. Just wanted to follow up on Bobby's point there, in terms of the sales and marketing. Yes, just kind of wondering if something I don't know has permanently changed in terms of the structure or the amount of sales and marketing you've run through as a percent of revenue. Basically, at least as far back as my model goes, it's been running at about a 45% rate on average, dropped to 41.5% I think in 2020. Clearly, there's been terrific volume growth put through and some efficiencies. But kind of thinking about when demand in the industry and perhaps for you guys normalizes a little bit, how should we think about S&M and where that could go? Would it go up? Or what's the structure?

Great. Curtis, I'll start, and David can add some additional color. I think we could hear your question. It was a little bit muffled. But it does all start with demand. And I spoke about the digital ecosystem and being able to target high-value consumers more efficiently and to pull these customers through all the way to conversion. So the strengthening of our digital ecosystem is very important for that efficiency and that is a big source of leverage on this line. If you think about it holistically, all the way from acquisition to how we have ongoing engagement with the customer, the advocacy, and also the conversion through our sleep professionals and our new capabilities of selling from anywhere. So it's all integrated. It is a big advantage of our vertically integrated business model and our consumer innovation strategy because it starts with the consumer, and all of our initiatives are integrated. And so the leverage pulls through, as we advance and continue to invest in our digitization.

Okay. Got it. Just as a follow-up, maybe just talk through at least theoretically, some of the assumptions for higher tickets for 2021. Just kind of thinking through at least what I think are the puts and takes, launching the mid entry-level beds. Looking at the past couple of quarters, it's sort of been flattish. Maybe there's some offset, I guess to the positive, but be running less online business and more in stores, which David should help. But if you could just kind of walk us through kind of how you're thinking about that and if there any other components that are important.

Well, for sure, Curtis. It starts with our in-store experience, frankly. While we have new coming out with the new C series and the new P series and yes those are further down the line and would impact ARU in a vacuum. That's not how things actually work. We create excitement over the brand. And then, the in-store experience and online experience now moves the customer to the product that best suits their needs. And in fact, that generally drives a fairly strong ARU, like you've seen here in 2020. We do, as I said, intend to have some pricing in there as well. That will contribute to the ARU that we're expecting to grow in 2021.

All right. Thanks very much.

Thank you.

Our next question will come from the line of Atul Maheswari from UBS. Please go ahead.

Good evening. Thanks a lot for taking my question. I also had a question on the sales and marketing line. And given that this metric now is so much better than what it used to be in the past. So, could you highlight some of the efficiencies that you've unlocked that's driving these gains? And do you think that your S&M margin could trend even lower in the next few years? And if so, what will drive that?

Well, we've learned how to work a lot differently across the business. First and foremost, we've embraced a lot of digital capabilities. We've talked about the selling from anywhere, and some of the workforce management tools that we've put in place. Also, we've found ways to be more efficient on the marketing side. And we grew marketing 4% in 2020. So compared to our top line growth of 9% for the year, of course, we've got a lot of leverage out of that line. And Shelly highlighted how the digital capabilities on that front are really contributing to efficient, attract and capture of new customers. So, yes, we believe that there's opportunity going forward. However, media and marketing capabilities are fuel for this company. We're going to lean into them.

One other add would be the productivity of the stores. We've talked about now surpassing over $3 million per store inclusive of our online sales. We had over a 100% increase in online. We expect to continue to benefit from growing our online sales in addition to growing our store sales. And I'm super excited about having 10 stores over $6 million and one store over $7 million. I mean, that's a significant productivity and leverage point. And we continue to see growth in our markets, across the country in stores.

Great. Thank you.

Thanks, Atul.

There are no further questions at this time. I'll now turn the call back over to the presenters for closing remarks.

Thank you for joining us today. We look forward to discussing our first quarter 2020 performance with you in April. Sleep well. And dream big.

This concludes today's conference call. Thanks for joining. You may now disconnect.