2021 Form 10K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark one)

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

For the fiscal year ended January 1, 2022

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

For the transition period from _________ to _________

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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ☒No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐No ☒

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 ☒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 ☒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 has filed a report on and attestation to its management’s assessment of the effectiveness of its

internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting

firm that prepared or issued its audit report. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes☐ No ☒

The aggregate market value of the common stock held by non-affiliates of the registrant as of July3, 2021, was $1,734,376,000 (based on the

last reported sale price of the registrant’s common stock on that date as reported by Nasdaq).

As of January29, 2022, there were 22,685,000 shares of the registrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement to be furnished to shareholders in connection with its 2022 Annual Meeting of Shareholders are

incorporated by reference in Part III, Items 10-14 of this Annual Report on Form 10-K.

TABLE OF CONTENTS

PART I 3

  

Item 1. Business 3

Item 1A. Risk Factors 16

Item 1B. Unresolved Staff Comments 25

Item 2. Properties 26

Item 3. Legal Proceedings 26

Item 4. Mine Safety Disclosures 26

  

PART II 27

  

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

Equity Securities

Item 6. Selected Financial Data 29

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 33

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 42

Item 8. Financial Statements and Supplementary Data 43

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 68

Item 9A. Controls and Procedures 68

Item 9B. Other Information 68

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 69

  

PART III 69

  

Item 10. Directors, Executive Officers and Corporate Governance 69

Item 11. Executive Compensation 69

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence 69

Item 14. Principal Accounting Fees and Services 69

  

PART IV 70

  

Item 15. Exhibit and Financial Statement Schedules 70

Item 16. Form 10-K Summary 75

Signatures 76

i | 2021 FORM 10-K

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Sleep Number

, SleepIQ

, Sleep Number 360

, 360

, SleepIQ Kids

, the Double Arrow logo, Select Comfort

, AirFit

BAM Labs

, the “B” logo, Comfortaire

, ComfortFit

, Comfort.Individualized.

, Does Your Bed Do That?

, the

DualTemp logo, the DualAir Technology Inside logo, FlexTop

, IndividualFit

, It

, Know Better Sleep

, Pillow[ology]

PillowFit

, Probably the Best Bed in the World

, Responsive Air

, Sleep Is Training

, Sleep Number Inner Circle

Sleep30

, Smart Bed For Smart Kids

, Tech-e

, The Only Bed That Grows With Them

, This Is Not A Bed

, Tonight

Bedtime. Tomorrow The World

, We Make Beds Smart

, What’s Your Sleep Number?

, Auto Snore™, Climate360™,

EnviroIQ™, HealthIQ™, HeartIQ™, Individualized Sleep Experiences™, RespiratoryIQ™, Retail Flow™, Sleep Number

Labs logo, Sleep Number Labs, Sleep For The Future logo, WellnessIQ™, ActiveComfort™, Comfortable. Adjustable.

Affordable.™, CoolFit™, DualAir™, DualTemp™, Firmness Control™, FlexFit™, In Balance™, Partner Snore™, The Bed

Reborn™, The Bed That Moves You™, The Best Bed For Couples™, our bed model names, and our other marks and

stylized logos are trademarks and/or service marks of Sleep Number. This Form 10-K may also contain trademarks, trade

names and service marks that are owned by other persons or entities.

Our fiscal year ends on the Saturday closest to December 31, and, unless the context otherwise requires, all references

to years in this Form 10-K refer to our fiscal years. Our fiscal year is based on a 52- or 53-week year. All years presented

in this Form 10-K are 52 weeks, except for the 2020 fiscal year ended January 2, 2021, which is a 53-week year.

Forward-Looking Statements

This Annual Report on Form 10-K contains or incorporates by reference certain forward-looking statements within the

meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in or

incorporated by reference into this Annual Report on Form 10-K that are not statements of historical fact may be

deemed to be forward-looking statements, including but not limited to projections of revenues, results of operations,

financial condition or other financial items; any statements of plans, strategies and objectives of management for future

operations; any statements regarding proposed new products, services or developments, including potential features of

our products that may be developed in the future; any statements regarding future economic conditions, prospects or

performance; statements of belief and any statement or assumptions underlying any of the foregoing. In addition, we or

others on our behalf may make forward-looking statements from time to time in oral presentations, including telephone

conferences and/or Webcasts open to the public, in press releases or reports, on our website or otherwise. We try to

identify forward-looking statements in this report and elsewhere by using words such as “may,” “will,” “should,”

“could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “predict,” “intend,” “potential,” “continue”

or the negative of these or similar terms.

Our forward-looking statements speak only as of the date made and by their nature involve substantial risks and

uncertainties. Our actual results may differ materially depending on a variety of factors, including the items discussed in

greater detail below under the caption “Risk Factors.” These risks and uncertainties are not exclusive and further

information concerning the Company and our business, including factors that potentially could materially affect our

financial results or condition, may emerge from time to time, including factors that we may consider immaterial or do not

anticipate at this time.

We wish to caution readers not to place undue reliance on any forward-looking statement and to recognize that forward-

looking statements are predictions of future results, which may not occur as anticipated. We assume no obligation to

update forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-

looking statements. We advise you, however, to review and consider any further disclosures we make on related subjects

in our quarterly reports on Form 10-Q and current reports on Form 8-K that we file with or furnish to the Securities and

Exchange Commission.

2 | 2021 FORM 10-K FORWARD-LOOKING STATEMENTS

PART I

ITEM 1. BUSINESS

Overview

At Sleep Number, our purpose is to improve the health and wellbeing of society through higher quality sleep. We are

committed to leveraging the power of sleep and sleep science to improve lives and create a healthier, kinder and more

inclusive world. We deliver on our mission of improving lives by individualizing sleep experiences through the superior

execution of our differentiated consumer innovation strategy, the talents of our dedicated teams and the operating

efficiencies of our vertically integrated business model. With our revolutionary Sleep Number 360

smart beds and

SleepIQ

technology, we have improved nearly 14 million lives.

Financial Highlights

Our 2021 fiscal year included 52 weeks, compared with 53 weeks in fiscal 2020. Adjusting to exclude the estimated

impact from this additional week in 2020, we increased annual 2021 net sales by 20% to $2.2 billion, grew 2021 earnings

per diluted share (EPS) by 34% to $6.16 and generated cash from operations of $300 million. Return on invested capital

(ROIC) was 27.6%, a 260 basis point improvement from 2020. Our net sales in the fourth quarter of 2021 were

constrained by delayed receipt of critical semiconductor components, preventing deliveries and shifting more than $125

million of net sales to future periods. 2021 costs were also significantly impacted by inflation and inefficiencies arising

from supply disruption and other global COVID challenges.

Breakthrough financial performance in 2021, despite significant headwinds, reflects the alignment of our sleep

innovation strategy with consumers’ prioritization of their health and wellness, its connection to quality sleep and their

increased adoption of digital products and services – all of which drive continued growth in demand for our life-changing

360 smart beds. In addition, in an environment characterized by ongoing and shifting pandemic impacts, including

global supply chain disruption, labor shortages and inflationary cost pressures, our vertically-integrated business model

and mission-focused team enabled Sleep Number to accelerate our operating efficiency, increase our organizational

agility and advance sleep innovation, science and research while maintaining our focus on delivering an exceptional

customer experience.

As we navigate the current complexities of this global-business environment, we are unwavering in retaining our long-

term perspective. For the five-year period ending with fiscal 2021, our compound annual growth rate (CAGR) for EPS was

41 percent and our net sales CAGR was 11 percent. With our strategic, enterprise-wide investments in innovation,

technology, logistics, marketing and customer service, we have created a competitively-advantaged business and a

highly-relevant brand – which together, are delivering superior shareholder value.

Proprietary Sleep Innovations

Delivering life-changing innovations, sleep health, sleep science and research, Sleep Number’s innovation roadmap is

driven by proprietary data and research from its millions of Smart Sleepers, with a purpose to improve the health and

wellbeing of society through higher-quality sleep. Our award-winning 360

smart bed started as the foundation of the

global sleep tech category and has continued to propel its growth as consumers increasingly connect the impact of

quality sleep to their overall health. Today, by leveraging 13 billion hours of sleep data gathered nightly from 1.6 billion,

real-world sleep sessions, Sleep Number has significantly advanced the 360 smart bed, creating a superior sleep

experience with every detail tailored to each individual sleeper. Developed with leading technologists, sleep scientists

and data, our 360 smart beds are also a highly-innovative tool for sleep health, science and research, which helps our

Company drive our innovation flywheel.

The 360 smart bed’s proprietary “sense and do” technology digitally responds to each sleeper’s movements and

automatically adjusts to relieve pressure points, effortlessly adjusting firmness, comfort and support throughout the

night, keeping both sleepers comfortable at their individual Sleep Number

settings. It enables data quantification and

delivers individualized sleep health evaluations and outcomes, responding to the needs of sleepers. SleepIQ technology,

the bed’s operating system, is embedded into every Sleep Number 360 smart bed and its proprietary, dynamic

algorithm measures sleep time, restful and restless sleep, average heart rate and average respiratory rate. Advancements

to the smart bed platform enable new groundbreaking innovations: At CES 2022, we unveiled a new Sleep Number 360

3 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

smart bed technology platform that may be capable of providing advanced monitoring of personalized insights and

health-risk evaluations – all from home. Coming in late 2022, the new Sleep Number Climate360

smart bed will also

capture skin and microclimate temperature monitoring to facilitate temperature adjustments during the night.

Artificial intelligence (AI) and data science enable the automatic adjustments to improve sleep and provide actionable

insights for our Smart Sleeper℠ community, connecting quality sleep to sleep health through highly accurate,

comprehensive, longitudinal biometric data collected during each sleep session. Ongoing advancements to the 360

smart bed platform via over-the-air updates enable real-time, effortless data collection and the delivery of sleep and

wellness insights including Sleep Circadian Analytics, Sleep Wellness Reports, Heart Rate Variability, My Daytime

Alertness and My Sleep Health.

Sleep Number offers a full line of exclusive FlexFit™ smart adjustable bases that allow customers to raise the head or

foot of the bed. These industry-leading bases seamlessly integrate with the 360 smart bed to deliver features like our

Partner Snore™ technology, which allows a sleeping partner to temporarily relieve mild snoring by raising the

companion’s head at the touch of a button.

Our exclusive Sleep Number bedding collection and smart furniture (coming in 2023) feature a full line of sleep products

designed to improve sleep comfort and quality, including a pillow collection designed to fit each individual’s sleeping

position. Our new smart furniture is designed to complement and enhance the features and health and wellness benefits

of the 360 smart bed and FlexFit smart adjustable bases. The furniture creates an ideal environment to support sleep

health and provides an integrated sleep experience with a modifiable form factor for aging and recovery, providing

comfort, aiding in mobility and helping maintain independence at home. The new furniture also eliminates clutter,

conveniently combining popular sleep accessories into a single solution for customers to have the perfect individualized

sleep environment to fall asleep and stay asleep.

Our smart bed technology is being used to capture data on natural sleep for research on disease prediction, diagnosis

and treatment in a noninvasive, ecologically-valid manner. The 360 smart bed – along with partnerships and

collaborations with the world’s leading physicians, researchers and institutions – is helping to advance the development

of meaningful sleep health solutions, bringing significant benefits to real-world sleepers.

Data, Research and Collaborations

Sleep Number is redefining the standards for monitoring sleep for research and health, and our 360 smart bed offers a

non-invasive, real-world and accurate method to conduct sleep research. Based on ballistocardiographic readings and

leveraging high-resolution, full-body, continuous sensor recordings, as well as signal processing and machine-learning

methods, SleepIQ technology automatically collects and analyzes billions of data points nightly, conducting one of the

largest sample sizes of sleep studies every night.

To date, we have leveraged and learned from over 13 billion hours of sleep data gathered from over 1.6 billion real-

world sleep sessions, generating comprehensive longitudinal and ecologically-valid data to improve sleep quality.

Ongoing sleep science research is enabled by the more than 200,000 sleepers in the 360 smart bed Smart Sleeper

community that have opted in to participate and advance the science of sleep and health. These sleepers have enabled

rapid enrollment in Institutional Review Board (IRB)-approved studies, which combine the power of our broad sleep

database with subjective understanding of sleeper behaviors to understand real-world outcomes.

The 360 smart beds stand out because of their continuous, longitudinal, ecologically-valid biosignal collection and they

are effortless to use – with no need to wear or charge anything. They are the first and only smart bed with integrated and

validated data collection and feedback that requires no action by the user to deliver proven quality sleep. The 360 smart

bed is helping to advance the linkage of quality sleep to health, bringing significant benefits to real-world sleepers.

4 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Sleep Number Scientific Advisory Board

We collaborate with renowned physicians and clinicians as part of our Scientific Advisory Board, an interdisciplinary

group of physicians, clinicians and researchers with expertise in sleep science, research and health.

Eve Van Cauter, PhD: Frederick H. Rawson Professor and Director of the Sleep, Metabolism and Health Center at the

University of Chicago

Daniel Buysse, MD: Professor of Sleep Medicine and Psychiatry and Clinical and Translational Science at University of

Pittsburgh School of Medicine

Judith Owens, MD, MPH: Professor of Neurology at Harvard Medical School and Director of the Center for Pediatric

Sleep Disorders at Boston Children’s Hospital

Virend Somers, MD, PhD: Professor of Medicine at Mayo Clinic College of Medicine and Science, Director of the

Cardiovascular Facility and the Sleep Facility Center for Clinical and Translational Science at Mayo Clinic

Mayo Clinic Collaboration

In 2020, we announced a collaboration with Mayo Clinic. Our collective goal is to further sleep science and improve

health care quality and clinical outcomes. We established foundational data sharing capabilities, which are being utilized

by Mayo Clinic. The scalable data sharing infrastructure will allow us to expand data sharing to other research

communities this year.

American Cancer Society

In 2022, we formed a landmark partnership with the American Cancer Society to study the connection between cancer

and quality sleep, with the goal of developing the first-ever sleep strategies and guidance for cancer patients and

survivors. Over six years, American Cancer Society will conduct research with contributions from Sleep Number’s

proprietary sleep data, leading to improved sleep outcomes for cancer patients and survivors. Our partnership will

advance not only the fundamental understanding of the science of sleep but also the translation of that knowledge into

practical actions that provide meaningful outcomes.

Research and Development

Our Minneapolis, MN-based R&D team leads the innovation of our smart bed, adjustable base design and bedding

solutions and is comprised of experts in mechanical engineering, comfort, adjustability, temperature, anthropometrics

and test systems. Our Sleep Number Labs team in San Jose, CA supports the evolution of SleepIQ technology with

leading experts in sleep research, data science, analytics and full-stack Internet of Things platform development.

We have accelerated our investments in R&D to enhance our competitive advantage. We continue to enhance our

expertise and capabilities specific to the healthcare industry, forming an internal SleepIQ health team, advancing Sleep

Number’s leadership in connected sleep health and further underscoring the commitment to innovation in health and

wellness. As a result of our R&D and strategic efforts, we have continued to grow our patent portfolio, with a particular

focus on smart features that improve sleep quality, and thermal solutions to solve temperature disruptions to sleep. Our

world-wide patent portfolio now contains more than 380 patents, which enhances our protection of our exclusive and

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

$35 million in 2019.

5 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Exclusive Direct-to-Consumer Distribution

Our exclusive, direct-to-consumer distribution model supports lifelong relationships with our customers. Across our

customer touchpoints which include Stores, Online, Phone and Chat, we deliver a value-added retail experience that

seamlessly integrates our digital and physical experiences to meet customer needs. We offer an engaging and dynamic

online experience to educate consumers and advance their purchase path, driving highly-qualified traffic to all our retail

touchpoints. Our mission-driven, highly-trained sleep experts use digital technology and our best-in-class relationship-

based selling process, which is continually tested and refined, to find the right sleep solutions for our customers —

wherever and whenever they want to shop. This “sell-from-anywhere” model supports our customers’ shopping

preferences and results in new customer acquisition, sustained repeat and referral, high conversion and strong revenue

per smart bed unit — all of which drive continued sales and profitable growth.

As the exclusive distributor of Sleep Number

products, we target high-quality, convenient and visible store locations

based on several factors, including each market’s overall sales potential and store geography, demographics and

proximity to other brand experiences. Since 2010, we have invested to reposition a large percentage of our mall stores

to stronger, optimally-sized, non-mall locations, adding stores in both existing and new markets. As of January 1, 2022,

we operated 648 Sleep Number

stores, with locations in all 50 states. More than 39% of our stores (including remodels)

are less than five years old and more than 56% are less than seven years old.

Our Stores accounted for 87% of net sales in 2021. Average annual net sales per store in 2021, based on Total Retail

(which includes Stores, Online, Phone and Chat), were $3.6 million, a new record. In 2021, 84% of our Stores open for a

full year generated net sales of greater than $2 million, and 48% of our Stores open for a full year generated more than

$3 million in net sales. In 2021, our Online, Phone, Chat and Other sales accounted for 13% of our net sales.

Brand Communications

Sleep Number has become a beloved brand, which was built on a foundation of individuality and wellbeing. Our

relevant, engaging and individualized communications help to drive sustained demand and market share gains for our

award-winning 360 smart beds. Our consumer innovation strategy — which has guided us since 2012 — enables a deep

understanding of, and insights about, our target customers. These insights give us the perceptual acuity to see ahead of

structural consumer-behavior shifts and helps us pivot when necessary, such as during the recent global pandemic.

Our brand communications strategies are designed to emotionally connect consumers with high-quality content about

the benefits of life-changing sleep and the value of our 360 smart beds. We leverage and amplify our brand through

highly-visible strategic partnerships; engage consumers seamlessly across multiple touchpoints with an emphasis on

digital; and create lifelong customer relationships and brand advocacy by delivering an unparalleled sleep experience.

Together, these actions result in driving strong brand health, increased brand interest, heightened consumer

consideration, customer engagement and authentic advocacy for Sleep Number’s brand, innovations and services.

Strategic partnerships amplify the effectiveness, impact and scale of our brand and marketing efforts:

• We are in the fourth year of our strategic partnership as the Official Sleep and Wellness Partner of the National

Football League (NFL) — one of the world’s largest marketing and fan-engagement platforms. Our partnership with

the NFL broadens our brand reach, deepens our brand relevance and magnifies the benefits of our proprietary

innovations. Additional partnerships with four clubs — Super Bowl LVI Champion Los Angeles Rams, Dallas

Cowboys, Kansas City Chiefs and Minnesota Vikings — add to our national and community-activation efforts. Over

75% of active NFL players now have a Sleep Number 360 smart bed, which helps with the optimization of their

performance and recovery through quality sleep; and

• Our multi-year partnerships with content and media companies like CNN, Yahoo!, Thrive Global, YouTube, NFL

Media and more also provide opportunities to influence and educate consumers about the benefits of proven quality

sleep on a regular basis.

We leverage a sophisticated media mix to drive our performance marketing and advertising, with emphasis on digital

and aligned with consumer consumption, contributing to improved media return on investment (ROI). High-profile video,

including television and online streaming, is our most efficient media, followed by digital and social platforms. Our

world-class, in-house digital capabilities, content marketing, online user experience and data-driven tools give us the

6 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

flexibility to pivot quickly and optimize media investment, messages and audience by platform in real-time. Our

promotional strategy focuses on simplicity and relevance, driving consumers to the brand at the time when they are

seeking a smart bed. In 2021, media expense represented 14.8% of net sales.

We continue to strengthen our digital interactions with a new “sell-from-anywhere” model which makes it easy for our

customers to select the best Sleep Number solution for their needs, however they want to interact with us. And by

delivering a superior, personalized customer connection with our highly-knowledgeable sleep professionals, we are

building lifelong relationships. Overall, 2021 represented our fourth straight year of double-digit, digital-traffic growth.

We focus on lifelong relationships with our customers, whom we refer to as our Insiders, part of our Smart Sleeper

community. The more deeply engaged our Insiders are with the brand, the greater their advocacy. Our Smart Sleeper

community, now 2.1 million strong, regularly interacts with our brand through their 360 smart bed and SleepIQ

technology. Our award-winning InnerCircle Rewards program amplifies this engagement and drives acquisition of new

customers through referral, and greater retention with repeat purchases. That brand loyalty and advocacy has grown

significantly in recent years — representing approximately 50% of our business — and we expect that the incremental

health and wellbeing features introduced through their 360 smart beds will continue to drive Insider loyalty. Our Smart

Sleeper community is our most efficient, and most valuable, source of new customers to the brand.

We continue to invest in our demand drivers for the near- and long-term success of our brand, delivering a simpler and

even more engaging experience for our customers. Our newly launched enterprise customer identity platform creates a

seamless connection for deeper customer engagement. This enables efficient customer acquisition and increased

revenue, and empowers our customers to participate more deeply in the brand. By making it easier for our Smart

Sleeper community to share their personal sleep health success stories from our 360 smart beds, we are driving lifetime

value, richer customer relationships and lean into our purpose of improving the health and wellbeing of society through

higher quality sleep.

Operations

Integrated Sourcing and Logistics

Our commitments to innovation and continuous improvement are employed to leverage our vertical business model by

optimizing culture, processes and technology. In addition to a network of global suppliers, we currently operate two

component manufacturing plants (Irmo, SC and Salt Lake City, UT) and five assembly distribution centers (Irmo, SC; Salt

Lake City, UT; Ontario, CA; Baltimore, MD; and Tampa, FL) with three additional assembly distribution centers (Dallas,

TX; Cincinnati, OH; and Minneapolis, MN) opening in 2022. Primary operations at the manufacturing sites, which have

consistently won awards for safety and manufacturing excellence, include cutting and sewing of the fabric covers for our

beds. In our Utah plant, we also assemble our electrical Firmness Control™ systems. Teams at our assembly distribution

centers fulfill customer orders that are made-to-order daily and assemble final mattress and order kitting with bases and

accessories for shipment. We also operate a national bedding-fulfillment center.

We source the raw materials and components used in our products from third parties. Throughout 2021, we encountered

temporary disruptions in our supply of various materials and components due to well-documented shortages and

constraints in the global supply chain. We have taken, and continue to take, various measures to mitigate the potential

impact of supply disruptions, including strengthening relationships with primary suppliers, identifying new alternate

suppliers, redesigning products, exploring alternative components and maintaining safety stocks. While we expect some

supply constraints to persist through 2022, we are leveraging the flexibility, visibility and resilience of our vertically-

integrated model to respond nimbly as conditions change and communicate clearly with customers regarding their

delivery experience.

At the end of 2021, approximately 60% of our smart beds were pre-assembled in our assembly distribution centers prior

to delivery versus being assembled in customers’ homes by Sleep Number technicians. We expect to complete a multi-

year evolution of our supply chain distribution network to pre-assemble 100% of our smart beds by the end of 2022.

Additionally in 2022, we will move our bedding fulfillment center from Minnesota to Ohio to be closer to our customers.

We are advancing our outbound logistics network by adding full truckload carriers and dedicated cross docks to reduce

product handling, hand-offs, damage and costs while in transit to customers’ homes. This new network design enables

scale and agility to support volume spikes and disruptions, providing a superior and reliable experience for customers

with lower costs for the business.

7 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Home Delivery Service

Our home delivery teams are another direct touchpoint with our customers. Since 2018, 100% of our 360 smart beds

sold are delivered and installed by our home delivery technicians or by our third-party service providers.

Our home delivery teams across the nation overcame the challenges of the COVID-19 pandemic throughout 2021,

adopting measures to safeguard customer and team member health while ensuring that customers were still able to

receive the quality sleep they needed.

Customer Service

Serving our customers remains a strong focus. Through our U.S.-based, in-house customer service team based in

Minneapolis, MN and New Orleans, LA, we provide direct post-purchase support that improves the customer experience

and drives our business. Through frequent service and support interactions with customers via phone, email, live chat

and social media, these team members also provide a unique opportunity to gather insights that help us continuously

improve our products, strengthen our service quality and advance our innovation. This integration enables operational

synergies and drives organizational efficiencies.

Information Systems

We use information technology systems to operate, analyze and manage our business, to reduce operating costs and to

enhance our customers’ experience. Our major systems include an in-store order entry system, a retail portal system, a

payment processing system, in-bound and out-bound telecommunications systems for direct marketing, delivery

scheduling and customer service systems, e-commerce systems, a data warehouse system and an enterprise resource

planning (ERP) system. These systems are primarily comprised of packaged applications licensed from various software

vendors plus a limited number of internally developed programs and digital solutions.

Intellectual Property

We hold various U.S. and foreign patents and patent applications regarding certain elements of the design and function

of our products, including air control systems, remote control systems, air chamber features, mattress construction,

foundation systems, sensing systems, automated adjustments, in-bed temperature control, as well as other technology.

We have numerous U.S. patents, expiring at various dates between January 2022 and August 2045, and numerous U.S.

patent applications pending. We also have numerous foreign patents and patent applications pending. Notwithstanding

these patents and patent applications, we cannot ensure that these patent rights will provide substantial protection or

that others will not be able to develop products that are similar to, or competitive with, our products.

We have a number of trademarks and service marks registered with the U.S. Patent and Trademark Office, including

Sleep Number

, SleepIQ

, Sleep Number 360

, 360

, SleepIQ Kids

, the Double Arrow logo, Select Comfort

, AirFit

the “B” logo, Comfortaire

, Does Your Bed Do That?

, the DualTemp logo, the DualAir Technology Inside logo,

FlexTop

, HealthIQ

, IndividualFit

, It

, Know Better Sleep

, Pillow[ology]

, PillowFit

, Probably the Best Bed in the

World

, Responsive Air

, Sleep Is Training

, Sleep Number Inner Circle

, Sleep30

, Smart Bed For Smart Kids

, Tech-e

The Only Bed That Grows With Them

, This Is Not A Bed

, Tonight Bedtime. Tomorrow The World

, We Make Beds

Smart

and What’s Your Sleep Number?

. We have several trademarks that are the subject of pending applications,

including Auto Snore™, Climate360™, EnviroIQ™, HeartIQ™, Individualized Sleep Experiences™, RespiratoryIQ™,

Retail Flow™, Sleep Number Labs logo, Sleep Number Labs Sleep For The Future logo, Smart Sleeper

, and

WellnessIQ™.Each registered mark is renewable indefinitely as long as the mark remains in use and/or is not deemed to

be invalid or canceled. We also have a number of common law trademarks, including ActiveComfort™, Comfortable.

Adjustable. Affordable.™, CoolFit™, DualAir™, DualTemp™, Firmness Control™, FlexFit™, In Balance™, Partner

Snore™, The Bed Reborn™, The Bed That Moves You™, The Best Bed For Couples™ and our bed model names.

8 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Several of our trademarks have been registered, or are the subject of pending applications for registration, in various

foreign countries. We also have other intellectual property rights related to our products, processes and technologies,

including trade secrets, trade dress and copyrights. We protect and enforce our intellectual property rights, including

through litigation as necessary.

Industry and Competition

Sleep disorders have been declared a public health epidemic by the U.S. Center for Disease Control. One in three adults

suffer from a lack of adequate sleep. Sleep Number is focused on producing products to address this growing problem.

The total U.S. sleep-health economy was estimated to be $30 billion to $40 billion in a 2017 report published by

McKinsey & Company. This reflects the traditional view of the bedding industry which includes the sales of mattresses

and foundations, as well as emerging solutions for insufficient sleep such as routine modification and therapeutic

treatment. We believe the sleep economy will continue to evolve and grow as consumers look for products and reliable

data sources to address sleep deprivation challenges.

The traditional view of the U.S. bedding industry, including mattresses and foundations (static and adjustable), is

measured through data provided by the International Sleep Products Association (ISPA). According to ISPA, the industry

has grown by approximately 5% annually over the last 20 years, including 6% annually, on average, over the past five

years. According to ISPA and our estimates, industry wholesale shipments of mattresses and foundations (including

imported products and adjustable bases) were approximately $13 billion in 2021 (approximately $26 billion at retail).

The retail bedding industry is commoditized and highly competitive. Sleep Number competes against regional and local

specialty bedding retailers, home furnishing stores, mass merchants, national discount stores and online marketers.

Furniture Today, a furniture industry trade publication, has ranked Sleep Number as the 5th largest mattress

manufacturer and 2nd largest U.S. bedding retailer for 2020, with an estimated 8% market share of industry retail

revenue. Our consumer innovation strategy with proprietary sleep innovations and exclusive direct-to-consumer

distribution is highly differentiated, resulting in lifelong customer relationships and contributing to our continued

profitable growth.

Manufacturers in the bedding industry compete through retail partners on price, quality, brand name recognition,

product availability and product performance, including the perceived levels of comfort and support provided by a

mattress. There is a high degree of concentration among manufacturers, who produce innerspring, memory foam and

hybrid beds, under nationally recognized brand names, including Tempur Sealy, Stearns & Foster, Serta and Simmons. In

recent years, numerous direct-to-consumer companies and low-cost importers have entered the market, offering “bed-

in-a-box” products to consumers, primarily through online distribution though many now partner with traditional

mattress retailers. Their products are generally foam-based and undifferentiated in terms of sleep benefits.

9 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Governmental Regulation and Compliance

As a vertically integrated manufacturer and retailer, we are subject to extensive federal, state and local laws and

regulations affecting all aspects of our business.

As a manufacturer, we are committed to product quality and safety, including adherence to all applicable laws and

regulations affecting our products and services. Compliance with health, safety and environmental laws and regulations,

including the federal fire retardant standards developed by the U.S. Consumer Product Safety Commission, which

requires rigorous and costly testing, has increased the cost and complexity of manufacturing our products and may

adversely impact the speed and cost of product development efforts. Further, our manufacturing, distribution, delivery

and other business operations and facilities are subject to additional federal, state or local laws or regulations including

supply chain transparency, conflict minerals sourcing and disclosure, end-of-life disposal and recycling requirements,

transportation and other laws or regulations relating to environmental protection and health and safety requirements,

including COVID-19 safety and prevention.

As a retailer, we are subject to additional laws and regulations that apply to retailers generally and govern the marketing

and sale of our products and the operation of both our retail stores and our e-commerce activities. Many of the statutory

and regulatory requirements that impact our retail and e-commerce operations are consumer-focused and pertain to

activities such as our promotions, advertising claims, pricing, credit-based promotional offers, truth-in-advertising,

privacy, “do not call/mail” requirements, text messaging requirements, warranty disclosure, delivery timing

requirements, accessibility and similar requirements.

Our operations are subject to federal, state and local labor laws including, but not limited to, those relating to

occupational health and safety, employee privacy, wage and hour, overtime pay, harassment and discrimination, equal

opportunity and employee leaves and benefits. We are also subject to existing and emerging federal and state laws

relating to data security and privacy.

It is our policy and practice to comply with all legal and regulatory requirements. Our procedures and internal controls

are designed to promote such compliance.

Seasonality

Our business is modestly impacted by seasonal influences inherent in the U.S. bedding industry and general retail

shopping patterns. The U.S. bedding industry generally experiences lower sales demand in the second quarter of the

calendar year and increased sales demand during selected holiday or promotional periods.

Working Capital

We are able to operate with minimal working capital requirements because we sell directly to customers, utilize both

“make-to-order” and “make-to-stock” production processes and operate retail stores that serve mainly as showrooms.

We have historically generated sufficient cash flows to self-fund operations through an accelerated cash-conversion

cycle. Our Credit Agreement provides a revolving credit facility for general corporate purposes with net aggregate

availability of $825 million. The Credit Agreement contains an accordion feature that allows us to increase the amount of

the credit facility from $825 million up to $1.2 billion in total availability, subject to Lenders’ approval. The Credit

Agreement matures in December 2026.

Qualified customers are offered revolving credit to finance purchases through a private-label consumer credit facility

provided by Synchrony Bank. Approximately 50% of our net sales in 2021 were financed by Synchrony Bank. Our current

agreement with Synchrony Bank expires December31, 2023, subject to earlier termination upon certain events. We pay

Synchrony Bank a fee for extended credit promotional financing offers. Under the terms of our agreement, Synchrony

Bank sets the minimum acceptable credit ratings, interest rates, fees and all other terms and conditions of the customers’

accounts, including collection policies and procedures. As the receivables are owned by Synchrony Bank, at no time are

the receivables purchased or acquired from us. We are not liable to Synchrony Bank for our customers’ credit defaults. In

connection with all purchases financed under these arrangements, Synchrony Bank pays us an amount equal to the total

amount of such purchases, net of promotional related discounts, upon delivery to the customer. Customers that do not

qualify for credit under our agreement with Synchrony Bank may apply for credit under a secondary program that we

offer through another provider.

10 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Human Capital

Grounded in our shared values of passion, integrity, innovation, courage and teamwork, and guided by our purpose to

improve society’s health and wellbeing through higher quality sleep, our team members are highly engaged and make a

difference in the world every day. With sleep at the center, our culture supports the wellbeing of our team members

across the pillars of physical, emotional, financial, career and community, and connects their work to the Sleep Number

mission and goals. We celebrate individuality in each other, in our own lives and in our customers’ lives. We embrace

every individual’s unique talents, perspectives and experiences, and strive to create an environment where we can each

be our best selves. Valuing diversity, equity and inclusion makes us stronger, smarter and fuels our innovation and

teamwork.

At January1, 2022, we employed a total of 5,515 team members, of which 145 were classified as part-time and 110 were

employed on a temporary basis. The breakdown of team members by area was as follows: 2,487 in retail sales and

support, 1,054 in field services, 415 in customer service, 642 in manufacturing and logistics, and 917 in technology,

corporate, management and administrative positions.

Our holistic approach to talent management, designed to attract, motivate, develop, reward and retain the right talent is

critical to the execution of our consumer innovation strategy. We sustain our inclusive culture built on individuality and

wellbeing by providing an exceptional team member experience, offering ample opportunities for professional learning

and advancement. Our leaders are deeply committed to the success of our talent management approach and we hold

ourselves accountable by routinely measuring our progress on a variety of elements and metrics including:

• Retention: To advance brand awareness, increase overall candidate traffic and diverse hiring, and improve retention

strategies, we track numerous talent recruitment, retention and turnover metrics, including new hires on a monthly,

quarterly and rolling 12-month basis;

• Diversity, Equity and Inclusion (DEI): We maintain a dashboard that tracks race/ethnicity and gender by job grade,

tenure and generation to provide increased visibility to leaders across our Company on progress toward key goals.

We also measure and report a team member inclusion and belonging index, and conduct a self-identification

survey to learn how our team members identify and how they want to be appreciated as individuals;

• Engagement: We have a continuous listening strategy to ensure we stay connected to the voice of our team

members at critical times of the team member experience. The key survey touchpoints are at new hire, pulse

check-in, annual engagement and exit, enabling leaders to monitor team member sentiment and course-correct in

real time as appropriate;

• Performance Management: We utilize our human capital management (HCM) system to track and follow team

member performance assessments and development plans. We use our HCM system to monitor the completion of

learning courses for our team members. Our enterprise learning management system provides all team members

access to an equitable learning and training curriculum that is dynamic and mobile-accessible;

• Safety: We have a commitment to maintain a safety-first mindset at Sleep Number. We have policies and practices

that create clear expectations for how each team member contributes to a safe and healthy workplace. We collect

and monitor workplace injury and accident information across all our locations and take appropriate steps to

reduce incident rates, number of workers’ compensation claims and lost workdays. We also evolved our health and

safety policies during the year to ensure the safety of our team members and customers by reducing the risk of

contracting or spreading the coronavirus; and

• Total Rewards: We benchmark and review, at least annually, all aspects of our total rewards program for team

members. Our rewards offering is unique because all team members participate in some type of variable pay

program (e.g., bonus, commissions) in addition to base pay. Recognizing the increasingly competitive environment

for talent, we continue to enhance our benefits and wellbeing resources to maintain a strong team member value

proposition.

11 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Social Impact Commitment

We are committed to leveraging the power of sleep, and sleep science, to improve lives and create a healthier, kinder,

more inclusive world. To further support this commitment and amplify our positive community impact, we are honored to

partner with several national organizations to fulfill our purpose of improving the health and wellbeing of society through

higher quality sleep. The strength of our purpose meets the needs of military personnel, children and adults facing

health challenges and families in transition, including:

• MAKE-A-WISH, with its mission to create life-changing wishes for children with critical illnesses, is one of the nation’s

most beloved nonprofit organizations. During the past year, Sleep Number partnered with Make-A-Wish, granting

bedroom makeover wishes – complete with Sleep Number 360 smart beds – for immunocompromised children,

helping them find comfort and sanctuary in the benefits of quality sleep while at home. In addition, Sleep Number

customers – our Smart Sleeper℠ community members – were given the opportunity to donate their InnerCircle℠

Rewards to purchase additional product for “Wish kids.”

• BLUE STAR FAMILIES is a nonprofit devoted to strengthening military families by connecting them with supportive

individuals and organizations within their communities. Sleep Number has partnered with Blue Star Families for

seven years, providing monetary support for the organization and the gift of quality sleep to the families of those

who serve and sacrifice for our country.

• GENYOUth, an organization whose programming reaches 38 million students annually in 73,000 U.S. schools, is

devoted to helping students live healthfully and raise their academic achievement. In 2021, Sleep Number partnered

with GENYOUth to educate at-risk middle schoolers about the importance of quality sleep.

• My Very Own Bed is a Minnesota-based non-profit that provides new beds and bedding to children of families who

have recently transitioned into more stable housing, helping their new house feel more like a home and supporting

their health and wellbeing through improved sleep.

• Bridging, a nonprofit organization primarily serving the Twin Cities area that provides donated furniture and

household goods to families and individuals transitioning out of homelessness and poverty, by providing sheets,

pillows and blankets.

• Let’s Sleep! Webinars, championed by the nonprofit Start School Later - a nonprofit that aims to help communities

ensure safe, healthy school hours and provide sleep education programs for students and school communities - by

sponsoring a monthly webinar for educators and school administrators about the importance of sleep and sharing

360 smart bed data to reinforce the information. Sleep Number also sponsored the creation of an online resource for

parents of teens to help them access videos, articles and lectures featuring sleep experts to help their family achieve

better sleep.

• Dream Foundation, a national organization serving terminally-ill adults and their families by providing end-of-life

dreams that offer inspiration, comfort and closure, by providing smart beds and once-in-a-lifetime NFL experiences

to terminal patients.

Our social impact extends beyond philanthropic partnerships. We announced a long-term partnership with the

AMERICAN CANCER SOCIETY to enable cancer research and prevention tied explicitly to quality sleep, as well as to

provide support for patients and caregivers who need sleep to bolster their physical, mental and emotional resilience.

And through our collaboration with MAYO CLINIC, Sleep Number continues to advance sleep science research and

enhance our understanding of sleep's impact on cardiovascular health. In 2021, we provided funding for Mayo Clinic to

conduct several multi-year studies, two of which particularly demonstrated our societal impact:

• A study that will investigate the prevalence of obstructive sleep apnea and determine the presence of comorbid

cardiovascular diseases in U.S. patients of Somali descent, a large and growing population in Minnesota, which is

also home to both Sleep Number and Mayo Clinic headquarters; and

• A study that will explore the relationship between disrupted sleep and markers of aging to test the hypotheses that

disrupted or inadequate sleep and sleepiness are indicative of older biological age and may contribute to the

acceleration of the aging process.

As part of our commitment to team member wellbeing and the health of our communities, Sleep Number also

encourages team members to become involved in their local communities by volunteering their time and talents in

support of causes or organizations that inspire them. Our leaders who participate on the board of directors of a qualified

nonprofit are eligible to apply for a grant of up to $1,500 per calendar year that benefits the organization.

12 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Through strategic partnerships, team member involvement and support for sleep science research, combined with the

continued advancement of our proprietary innovations, Sleep Number is fulfilling our purpose to improve the health and

wellbeing of society through higher quality sleep.

Our Corporate Responsibility and Sustainability Report, posted within the Investor Relations section of our Company

website, provides additional information about our commitment to talent management and human rights at Sleep

Number, including strategy details, performance metrics and our engagement. The report highlights our commitments:

• Purpose driven Company committed to improving the health and wellbeing of society through higher quality sleep;

• Enterprise-wide commitment to measure, advance and report on ESG initiatives, informed by and integrated into our

business strategy;

• Became signatory to the United Nations Global Compact, pledging intent to incorporate their Ten Principles into our

strategy, culture and operations;

• Focused on accountable goal setting as we track performance on waste and energy management; and

• Effectively collaborate with our diverse, independent board to sustain our long-standing, highly-admired strength in

corporate governance.

This report may be accessed at www.sleepnumber.com by clicking on the “INVESTORS” link, then click on the “ESG”

link and “Sustainability Reports.” The information contained on our website or connected to our website is not

incorporated by reference into this Form 10-K and should not be considered part of this report.

Information about our Executive Officers

SHELLY R. IBACH, 62

President and Chief Executive Officer (Joined the Company in April 2007 and was promoted to President and CEO in

June 2012)

Shelly R. Ibach, Sleep Number

setting 40, serves as the President and Chief Executive Officer (CEO) for Sleep Number

(Nasdaq: SNBR). From June 2011 to June 2012, Ms. Ibach served as the Company’s Executive Vice President and Chief

Operating Officer and from October 2008 to June 2011, she served as Executive Vice President, Sales & Merchandising.

Ms. Ibach joined the Company in April 2007 as Senior Vice President of U.S. sales for Company-owned channels. Before

joining the Company, Ms. Ibach was Senior Vice President and General Merchandise Manager for Macy’s home division.

From 1982 to 2005, Ms. Ibach held various leadership and executive positions within Target Corporation.

DAVID R. CALLEN, 55

Executive Vice President and Chief Financial Officer (Joined the Company in 2014 and was promoted to current role in

December 2020)

David R. Callen, Sleep Number

setting 50, serves as the Executive Vice President and Chief Financial Officer for Sleep

Number. Prior to joining Sleep Number in April 2014, Mr. Callen served as the Principal Financial Officer for Ethan Allen

Interiors, Inc., from 2007 to 2014. Mr. Callen has served for more than 30 years in several high-performing companies in

increasingly responsible international financial management positions. His breadth of experience has emphasized global

business, capital and financial strategy, all aspects of mergers and acquisitions, global brand support and operational

excellence across multiple industries, including automotive, high-tech, dental, outdoor recreational products and public

accounting.

MELISSA BARRA, 50

Executive Vice President and Chief Sales and Services Officer (Joined the Company in 2013 and was promoted to

current role in December 2020)

Melissa Barra, Sleep Number

setting 30, serves as the Executive Vice President and Chief Sales and Services Officer.

From June 2019 to December 2020, Ms. Barra was Senior Vice President, Chief Sales, Services and Strategy Officer. Ms.

Barra was Senior Vice President and Chief Strategy and Customer Relationship Officer from January 2015 to June 2019

and Vice President, Consumer Insights and Strategy from February 2013 to January 2015. Her breadth of experience

covers finance, mergers and acquisitions, strategy, sales, services, real estate, PR and communications. Prior to joining

Sleep Number in February 2013, Ms. Barra held leadership positions in the U.S. and internationally in process

reengineering, finance, strategic alliances and corporate development for Best Buy, Grupo Futuro S.A., Citibank and GE

Capital.

13 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

ANDREA L. BLOOMQUIST, 52

Executive Vice President and Chief Innovation Officer (Joined the Company in 2008 and was promoted to current role in

December 2020)

Annie L. Bloomquist, Sleep Number

setting 25, serves as Executive Vice President and Chief Innovation Officer. Ms.

Bloomquist leads innovation, including sleep science research and development, strategic development of the SleepIQ

technology platform, 360

smart bed strategy, and partnerships to further sleep science, health and wellbeing. Ms.

Bloomquist was the Senior Vice President and Chief Product Officer from June 2012 to December 2020 and Chief

Merchandising Officer from June 2011 to June 2012. Ms. Bloomquist joined Sleep Number in May 2008 as Vice

President and General Merchandise Manager. Prior to Sleep Number, Ms. Bloomquist held leadership positions in

product development and merchandising at Macy’s and The Department Stores for Target Corporation.

KEVIN K. BROWN, 53

Executive Vice President and Chief Marketing Officer (Joined the Company in 2014 and was promoted to current role in

December 2020)

Kevin K. Brown, Sleep Number

setting 40, serves as Executive Vice President and Chief Marketing Officer and is

responsible for building the Sleep Number brand through stories that set the Company apart, communicating Sleep

Number’s innovation and driving brand advocacy across all customer touchpoints. Before joining Sleep Number in 2014,

Mr. Brown served in executive leadership roles at Meijer, Inc., Sears Holdings Corporation, Jo-Ann Stores, Inc. and

Accenture.

SAMUEL R. HELLFELD, 43

Senior Vice President and Chief Legal and Risk Officer and Secretary (Joined the Company in 2013 and was promoted to

current role in September 2018)

Samuel R. Hellfeld, Sleep Number

setting 65, serves as the Senior Vice President and Chief Legal and Risk Officer and

Secretary and leads legal, internal audit, corporate security and asset protection. From October 2015 to September

2018, Mr. Hellfeld served as Vice President, Associate General Counsel. Mr. Hellfeld joined Sleep Number in March 2013

as Corporate Counsel. Prior to joining Sleep Number, Mr. Hellfeld was a Partner in the law firm of Fox Rothschild LLP (fka

Oppenheimer Wolff & Donnelly LLP) practicing in the areas of intellectual property and litigation. Prior to 2010, Mr.

Hellfeld was an Associate at several law firms and also served as Law Clerk in the United States Court of Appeals for the

Ninth Circuit and the United States District Court, Southern District of California.

CHRISTOPHER D. KRUSMARK, 42

Senior Vice President and Chief Human Resources Officer (Joined the Company in 2005 and was promoted to current

role in July 2020)

Christopher Krusmark, Sleep Number

setting 55, serves as the Senior Vice President and Chief Human Resources

Officer, where he leads all human resources, training and learning functions. Prior to being promoted to his new role in

July 2020, Mr. Krusmark served as Sleep Number’s Vice President of Sales Operations, Field Services and Training where

he led retail operations, sales promotions and incentives, home delivery operations, the Company’s customer sales

center and wholesale business development. From June 2005 to October 2015, Mr. Krusmark held a variety of

leadership roles in finance at Sleep Number supporting sales, real estate, marketing and product. Prior to joining Sleep

Number, Mr. Krusmark worked on the financial audit staff of EY and Arthur Andersen.

J. HUNTER SAKLAD, 52

Executive Vice President and Chief Supply Chain Officer (Joined the Company in 2004 and was promoted to current role

in January 2021)

Hunter Saklad, Sleep Number

setting 65, serves as the Executive Vice President and Chief Supply Chain Officer at

Sleep Number. From December 2012 to December 2020, Mr. Saklad served as Senior Vice President and Chief

Information Officer. From June 2011 to December 2012, Mr. Saklad served as the Vice President, Consumer Insight and

Strategy at Sleep Number. From March 2006 to June 2011 he was Vice President of Finance and held a variety of

positions across Finance serving business partners in marketing, sales, supply chain, FP&A, investor relations and

treasury. Mr. Saklad joined Sleep Number in October 2004 as Sr. Director of Finance. Prior to joining Sleep Number, Mr.

Saklad held finance leadership roles at Ford Motor Company and Visteon.

14 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Available Information

We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act

requires us to file reports, proxy statements and other information with the Securities and Exchange Commission (SEC).

Our corporate website is www.SleepNumber.com. Through a link to a third-party content provider, our corporate

website provides free access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on

Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities

Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the

SEC. These documents are posted on our website at www.SleepNumber.com — select the “Investors” link, the

“Financials” link, and then the “SEC Filings” link. The information contained on our website or connected to our website

is not incorporated by reference into this Form 10-K and should not be considered part of this report.

We also make available, free of charge on our website, the charters of the Audit Committee, Management Development

and Compensation Committee and Corporate Governance and Nominating Committee, as well as our Code of Business

Conduct (including any amendment to, or waiver from, a provision of our Code of Business Conduct) adopted by our

Board. These documents are posted on our website — select the “Investors” link, the “Governance” link and then the

“Governance Documents” link. The information contained on our website or connected to our website is not

incorporated by reference into this Form 10-K and should not be considered part of this report.

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

Sleep Number Corporation

Investor Relations Department

1001 Third Avenue South

Minneapolis, MN 55404

15 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

ITEM 1A. RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the specific risks set

forth below and other matters described in this Annual Report on Form 10-K before making an investment decision. The

risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties, including risks

and uncertainties that impact the business environment generally, those not presently known to us, or those that we

currently see as immaterial, may also harm our business. If any of these risks occur, our business, results of operations,

cash flows and financial condition could be materially and adversely affected.

Risks Related to COVID-19, Economic Conditions, Consumer Sentiment and the Availability of Credit

The COVID-19 pandemic has had, and may continue to have, an adverse effect on our business and our financial

results.

The COVID-19 pandemic has created significant volatility, uncertainty and economic, consumer, supply chain and

workforce disruption, which have adversely affected, and may continue to adversely affect, our business operations and

financial results. Specifically, the COVID-19 pandemic and related governmental restrictions and guidelines, including

business closures, stay at home orders, and isolation and quarantine recommendations and requirements, adversely

affected, and may continue to adversely affect, our business, operations, supply chain, workforce, demand for our

product, traffic to our stores, and macroeconomic factors that affect us, such as consumer confidence and spending. In

2020, the COVID-19 pandemic and related restrictions resulted in the temporary closure of most of our retail stores

nationwide, with 47% of our stores closed on average during the second quarter of 2020. For the second half of 2020

and all of 2021, the COVID-19 pandemic continued to impact our financial performance, but we were able to keep our

stores open. As the pandemic continues, COVID-19, new variants, infection rates, related governmental restrictions and

recommendations, and individual concerns of becoming infected may again adversely impact our stores and other

business operations, including product development, manufacturing, supply, distribution, home delivery operations and

staffing, which could have an adverse impact on our sales and profits. As vaccines and other treatments for COVID-19

become available and the pandemic evolves, consumer behavior may continue to evolve or change, including spending

more time away from home, and discretionary consumer spending on home goods such as our smart beds and related

products may decrease.

Since the beginning of the COVID-19 pandemic, we scaled our digital and “sell-from-anywhere” capabilities including:

remote retail selling, customer service, private appointments, flexible work schedules, solutions for contactless delivery,

and remote access for team members across the country. This shift to our team members working remotely has amplified

certain risks to our business, including increased demand on our information technology resources and systems and

increased risk of cybersecurity breaches and IT outages. In addition, as recommendations and/or mandates have been

modified, eased, lifted, and in some cases re-implemented across the country, we have implemented and evolved our

health and safety policies for our operations, facilities and teams across the country, which are intended to ensure the

safety of our team members and customers and reduce the risk of contracting or spreading the coronavirus for team

members, contractors, and customers. As the coronavirus variants have changed and presented different risks, it is

possible that our health and safety policies may not adequately protect our team members, contractors, and customers

from contracting or spreading the coronavirus, which may have an adverse effect on our business operations or financial

results.

In response to the COVID-19 pandemic, including the changes in customer purchasing patterns, supply chain constraints

and workforce considerations we did, and in some situations continue to, take decisive actions to strengthen liquidity

and reduce costs. It is possible that our cost reduction efforts may be insufficient to maintain adequate liquidity if our

operations are further restricted or disrupted due to the COVID-19 pandemic or governmental recommendations or

mandates, including vaccination or testing mandates that may be imposed in jurisdictions in which we operate, that may

result in material impact on our sales and profits.

Additionally, if we do not respond appropriately to the pandemic, or if customers do not perceive our response to be

adequate for a particular region or our Company as a whole, we could suffer damage to our reputation and our brand,

which could adversely affect our business and financial results in the future.

We are highly dependent on the effectiveness of our marketing messages and the efficiency of our advertising

expenditures in generating consumer awareness and sales of our products. In light of COVID-19 and the overall fluid

16 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

nature of the pandemic and the consumer environment, we may not be as successful in developing effective messages

and achieving efficiency in our advertising expenditures.

Our business depends heavily on the uninterrupted operation of our manufacturing plants, our assembly distribution

centers, bedding fulfillment center, and home delivery teams across the country. Our business also depends on the

successful function of our customer service operations and headquarters. The operation of all of our facilities and

operations, including those of our suppliers and vendors, is critically dependent on adequate staffing by our team

members or contractors, and COVID-19 could directly threaten or impact their health, ability to work, and/or willingness

to work, and, therefore, adversely affect our operations and facilities. In addition, COVID-19 and governmental

restrictions or recommendations, including vaccination or testing mandates, could require closures of our facilities,

restrict our facilities and operations, and otherwise limit or adversely impact our ability to continue these operations and

staff our facilities. COVID-19 has also adversely impacted, and may continue to adversely impact, the global supply chain

and our logistics, lead times, and delivery timeframes, including availability of raw materials, components, and products

we or our suppliers source from third parties as well as our sole source of supply for certain components and products,

such as adjustable foundations and certain electronic components, due to COVID-19 infection rates, new variants,

workforce impacts, governmental restrictions or recommendations and spikes in demand or shortages in supply with

respect to certain raw materials and components driven by other industries. This has adversely affected, and we expect

will continue to adversely affect, our business operations and financial results in 2022.

The inability or limitations of certain suppliers, both domestic and foreign, to ramp production to meet growing or

surging global demand or to operate due to the COVID-19 pandemic, governmental restrictions or recommendations,

staffing or supply shortages, or a reluctant workforce has delayed and may continue to delay the introduction of new

innovations and product lines.

The situation surrounding COVID-19 remains fluid, and the potential for an adverse effect on our business and our

financial results increases the longer the virus and new variants impact activity levels in the United States and globally.

For this reason, we cannot reasonably estimate with any degree of certainty the extent of the impact COVID-19 will have

on our business. The extent and duration of the impact of COVID-19 on our business, operations, and financial results

will depend on future developments, including the duration and spread of the pandemic, new variants, the availability,

administration, and efficacy of vaccines, governmental mandates and recommendations, business and workforce

disruptions, and the related impact on global and domestic supply chain and consumer confidence and spending, all of

which are highly uncertain and unpredictable.

Current and future economic conditions could materially adversely affect our sales, profitability, cash flows and

financial condition.

Our success depends significantly upon discretionary consumer spending, which is influenced by a number of general

economic factors, including without limitation economic growth, consumer confidence, the housing market, employment

and income levels, interest rates, inflation, taxation, consumer shopping trends and the level of customer traffic in malls

and shopping centers, civil unrest, as well as the COVID-19 pandemic. Adverse trends in any of these economic factors

may adversely affect our sales, profitability, cash flows and financial condition.

Inflationary pressures stemming from supply chain disruptions, increased demand or other economic factors have

resulted in increased fuel, shipping, raw material, labor and other costs, which have adversely affected, and may

continue to adversely affect, our business operations and financial results, especially if continued for a prolonged period.

If our costs rise due to continuing supply chain disruptions or inflationary pressures, we may not be able to fully offset

such higher costs through price increases.

A reduction in the availability of credit to consumers generally or under our existing consumer credit programs

could harm our sales, profitability, cash flows and financial condition.

A significant percentage of our sales are made under consumer credit programs through third parties. The amount of

credit available to consumers may be adversely impacted by macroeconomic factors, including those related to or

resulting from the COVID-19 pandemic, that affect the financial position of consumers, and as suppliers of credit adjust

their lending criteria.

17 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Synchrony Bank provides credit to our customers through a private label credit card agreement that is currently

scheduled to expire on December 31, 2023, subject to earlier termination upon certain events. Synchrony Bank has

discretion to control the content of financing offers to our customers and to set minimum credit standards under which

credit is extended to customers.

Reduction of credit availability due to changing economic conditions, including rising inflation, increased interest rates,

changes in credit standards under our private label credit card program or changes in regulatory requirements, or the

termination of our agreement with Synchrony Bank, could harm our sales, profitability, cash flows and financial condition.

Risks Related to Our Reliance on Third Parties and Reliance on a Global Supply Chain

We could be vulnerable to shortages in supply of components necessary to manufacture our products due to our

manufacturing processes which operate with minimal levels of inventory or due to global shortages of supply of

electronic componentry or other materials, which may harm our ability to satisfy consumer demand and may

adversely impact our sales and profitability.

A significant percentage of our products are assembled after we receive orders from customers utilizing manufacturing

processes with minimal levels of raw materials, work-in-process and finished goods inventories. Lead times for ordered

components may vary significantly, and some components used to manufacture our products are provided on a sole

source basis. We have experienced lengthened lead times throughout our supply chain as a result of supply chain

constraints and material shortages that occurred in 2021 and may continue in 2022. Our efforts to mitigate supply chain

weaknesses may not be successful or may have unfavorable effects. For example, efforts to purchase raw materials in

advance for product manufacturing may result in increased storage costs or excess supply. In addition, with the

increasing prevalence of and consumer demand for electronic products, along with COVID-19’s impact on the global

supply chain, the global supply of electronic componentry is increasingly strained, which has led to shortages in supply

and increased prices, and has adversely affected, and we expect may continue to adversely affect, our operations, costs,

production capacity, delivery timeframe, product development, sales, profitability, and financial results. Any shortage of

materials caused by any disruption or unavailability of supply or an increase in the demand for our products, has harmed

and could continue to harm our ability to satisfy customer demand, delay deliveries of our products to customers, lead to

customer cancellations and returns, delay the development and launch of new products, or increase our costs. Any such

impacts or delays could adversely affect our sales, customer satisfaction, profitability, cash flows and financial condition.

We rely upon several key suppliers and third parties that are, in some instances, the only source of supply or

services currently used by us for particular materials, components, products or services. A disruption in the

supply or substantial increase in cost of any of these products or services could harm our sales, profitability, cash

flows and financial condition.

We currently obtain all the materials and components used to produce our smart beds from outside sources including

some that are located outside the United States. In several cases, including our air chambers, integrated non-adjustable

foundations, adjustable foundations, various components for our Firmness Control systems, certain electronic

componentry, certain foam formulations, as well as our fabrics and zippers, we obtain these materials, components and

products from suppliers who serve as the only source of supply, or who supply the vast majority of our needs of the

particular material, component or product. While we believe that some of these materials, components and products, or

suitable replacements, could be obtained from other sources in the event of a disruption or loss of supply, we may not

be able to find alternative sources of supply or alternative sources of supply on comparable terms, quantities and

timelines. If our relationship with the primary supplier of our air chambers, adjustable foundations, or electronic

components is terminated or significantly disrupted, we could have difficulty in replacing these sources since there are

relatively few other suppliers presently capable of manufacturing these components and products. Constraints on the

ability of certain of our suppliers to timely meet commitments in an environment of increased demand for consumer

products and reduced labor during the COVID-19 pandemic, which has, and may continue to, adversely impact our

ability to meet our product demand, result in additional costs, or may otherwise adversely impact our business,

operations and financial results.

Similarly, we rely on third parties to deliver some of our products to our facilities and customers on a timely and cost-

effective basis. These third-party providers could be vulnerable to labor shortages, liquidity concerns, the impacts of

COVID-19 or other pandemics, or other factors that may result in delays in deliveries or increased costs of deliveries. Any

significant delay in deliveries to our customers could lead to increased cancellations or returns and cause us to lose sales

18 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

or incur increased costs. Any increase in freight charges or other costs of deliveries could harm our sales, profitability,

cash flows and financial condition.

Fluctuations in commodity prices or availability or third-party logistics costs could result in an increase in

component costs and/or delivery costs.

Our business is subject to significant increases or volatility in the prices of certain commodities, including but not limited

to electronic componentry, fuel, oil, natural gas, rubber, cotton, plastic resin, corrugate, steel and chemical ingredients

used to produce foam, as well as third-party logistic costs. Increases in prices of these commodities or logistics costs or

other inflationary pressures may result in significant cost increases for our raw materials and product components, as well

as increases in the cost of delivering our products to our customers. To the extent we are unable to offset any such

increased costs through value engineering and similar initiatives, or through price increases, our profitability, cash flows

and financial condition may be adversely impacted. If we choose to increase prices to offset the increased costs, our

sales volumes could be adversely impacted.

Our business is subject to risks inherent in global sourcing activities.

Our air chambers, certain electronic components, and some of our other components are manufactured outside the

United States, and therefore are subject to risks associated with foreign sourcing of materials, including but not limited

to:

• Existing or potential duties, tariffs or quotas on certain types of goods that may be imported into the United States;

• Political instability, unrest, geo-political turmoil, acts of terrorism, global conflicts or war (such as the current conflict

in Ukraine), outbreaks of pandemics or contagious diseases (such as the COVID-19 pandemic), shipping delays,

foreign or domestic strikes, customs inspections, or other factors resulting in disruption in supply, transportation,

trade, labor, or the availability of global contractors utilized in our business operations;

• Foreign currency fluctuations; and

• Economic uncertainties, including inflation.

We cannot predict whether the countries in which some of our components are manufactured, or may be manufactured

in the future, or where we contract for labor will be subject to new or additional trade restrictions imposed by the United

States or other foreign governments, including the likelihood, type, or effect of any such restrictions. The United States

government has implemented certain trade policies, including imposing tariffs on certain goods imported from China

and other countries, and may take further actions with respect to these policies in the future. These factors could

increase our costs of doing business with foreign suppliers, lead to inadequate inventory levels or delays in shipping

beds to our customers, which could harm our sales, customer satisfaction, profitability, cash flows and financial condition.

Our operations and those of our suppliers are located in various regions of the U.S. and across the globe, which

subjects us to regional risks, such as adverse weather conditions and other natural or man-made disasters.

The locations where we and our suppliers and global contractors operate have experienced, and may experience in the

future, adverse regional events such as extreme weather conditions and other natural and man-made disasters, which

could have a material adverse effect on us, our ability to source necessary materials, components and products, and our

ability to develop, launch, sell and deliver our products to customers. Climate change may increase the frequency and

severity of adverse weather conditions and other natural disasters. All regions of the U.S. and warmer climates globally

may be particularly impacted by extreme weather, such as hurricanes, natural disasters, droughts, wildfires and rising sea

levels. These events may disrupt our operations and ability to source components and products.

Risks Related to Our Marketing Strategy and Execution of Total Retail Distribution Strategy

Our future growth and profitability depend upon the effectiveness and efficiency of our marketing programs.

We are highly dependent on the effectiveness of our marketing messages and the efficiency of our advertising

expenditures in generating consumer awareness, consideration and conversation leading to sales of our products. We

continue to evolve our marketing strategies, adjust our messages, and review the amount we spend on advertising and

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where we spend it. We may not always be successful in developing effective messages, as the consumer and

competition change, or in achieving efficiency in our advertising expenditures.

We rely in part upon third parties, such as social media influencers and athletes, to market our brand, and we are unable

to fully control their efforts. Influencers and athletes with whom we maintain a relationship could engage in behavior or

use their platforms to communicate directly with our customers in a manner that reflects poorly on our brand, and these

communications may be attributed to us or otherwise adversely affect us. It is not possible to prevent such behavior, and

the precautions we take to prevent or detect this activity may not be effective.

Consumers are increasingly having digital experiences and interactions as a part of their shopping experience. As a

result, our future growth and profitability will depend in part on (i)the effectiveness and efficiency of our online

experience, including without limitation advertising and search marketing and optimization programs, in generating

consumer awareness and sales of our products; (ii)our ability to prevent confusion among consumers that can result from

search engines that allow competitors to use our trademarks to direct consumers to competitors’ websites through

confusing or misleading advertisements; (iii) our ability to prevent Internet publication of false or misleading information

regarding our products or our competitors’ products; (iv) reviews of our products; (v) the nature and tone of consumer

sentiment, including those published online or elsewhere; and (vi) the stability of our website. In recent periods,

competitor spending on digital marketing programs has increased, including without limitation from a number of direct-

to-consumer, digital retailers and omnichannel retailers, which has and may continue to increase the cost of basic search

terms and the cost of our digital marketing programs.

If our marketing messages are ineffective or our advertising expenditures and other marketing programs, including

digital programs, are inefficient in creating awareness and consideration of our products and brand name, and in driving

consumer traffic to our website, call centers, or stores, our sales, profitability, cash flows and financial condition may be

adversely impacted. In addition, if we are not effective in preventing the publication of confusing, false or misleading

information regarding our brand or our products, or if there is publication online or elsewhere of significant negative

consumer sentiment regarding our Company, brand or our products, our sales, profitability, cash flows and financial

condition may be adversely impacted.

Our future growth and profitability depend on our ability to execute our Total Retail distribution strategy.

The vast majority of our sales occur through Total Retail, including our retail stores and our website. Total Retail

represents our largest opportunity for growth in sales and improvement in profitability. Our retail stores carry significant

fixed costs. We also make significant capital expenditures as we open new stores and remodel or reposition existing

stores. We are highly dependent on our ability to maintain and increase sales per store to cover these fixed expenses,

provide a return on our capital investments and improve our operating margins.

Some of our stores are mall-based. We depend on the continued popularity of malls as shopping destinations and the

ability of mall anchor tenants and other attractions to generate customer traffic for our mall-based retail stores. Any

decrease in mall traffic, including due to governmental recommendation or mandates related to COVID-19, could

adversely affect our sales, profitability, cash flows and financial condition.

Our Total Retail distribution strategy results in relatively few points of distribution, including 648 retail stores in 50 U.S.

states as of the end of 2021, Online, Phone and Chat. Several of the mattress manufacturers and retailers with which we

compete have significantly more brick-and-mortar points of distribution than we do, which makes us highly dependent

on our ability to drive consumers to our points of distribution to gain market share.

Our longer-term Total Retail distribution strategy is also dependent on our ability to renew existing store leases and to

secure suitable locations for new store openings, in each case on a cost-effective basis. We may encounter higher than

anticipated rents and other costs in connection with managing our retail store base. We may also be unable to find or

obtain suitable new locations.

Failure to achieve and maintain a high level of product quality could negatively impact our sales, profitability,

cash flows and financial condition.

Our products are highly differentiated from traditional innerspring mattresses and from viscoelastic and other foam

mattresses, which have little or no technology and do not rely on electronics and air control systems. As a result, our

20 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

beds may be susceptible to failures that do not exist with traditional or foam mattresses. Failure to achieve and maintain

acceptable quality standards could impact consumer acceptance of our products or result in negative media and Internet

reports or owner dissatisfaction that could negatively impact our brand image and sales levels.

In addition, a decline in product quality could result in an increase in return rates and a corresponding decrease in sales,

or an increase in product warranty claims in excess of our warranty reserves. An unexpected increase in return rates or

warranty claims could harm our sales, profitability, cash flows and financial condition.

As a consumer innovation Company with differentiated products, we face an inherent risk of exposure to product liability

claims or regulatory actions if the use of our products is alleged to have resulted in personal injury or property damage.

If any of our products proves to be defective or non-compliant with applicable regulations such as the federal Consumer

Product Safety Commission flammability standards, we may be required to recall or redesign such products. We have at

times experienced increased returns and adverse impacts on sales, as well as product liability litigation, as a result of

media reports related to the alleged propensity of our products to develop mold. We may experience additional adverse

impacts on sales and additional litigation if any similar media reports were to occur in the future. We maintain insurance

against some forms of product liability claims, but such coverage may not be applicable to, or adequate for, liabilities

actually incurred. A successful claim brought against us outside of, or in excess of, available insurance coverage, or any

claim or product recall that results in significant adverse publicity about us, may have a material adverse effect on our

sales, profitability, cash flows and financial condition.

Our future growth and profitability depend in part on our ability to continue to improve and expand our product

line and to successfully execute new product introductions.

As described in greater detail below, the bedding industry, as well as the market for sleep monitoring products, are both

highly competitive, and our ability to compete effectively and to profitably grow our market share depend in part on our

ability to continue to improve and expand our product line of adjustable firmness air beds, SleepIQ technology and

related accessory products. We incur significant research and development and other expenditures in the pursuit of

improvements and additions to our product line. If these efforts do not result in meaningful product improvements or

new product introductions, if we are not able to gain widespread consumer acceptance of product improvements or new

product introductions, or there are delays or production limitations with respect to our product improvements or new

product introductions, our sales, profitability, cash flows and financial condition may be adversely affected. In addition, if

any significant product improvements or new product introductions are not successful, delayed, or constrained our

reputation and brand image may be adversely affected.

Our intellectual property rights may not prevent others from using our technology or trademarks in connection

with the sale of competitive products. We are from time to time subject to claims that our products, processes or

trademarks infringe intellectual property rights of others.

We own various U.S. and foreign patents and patent applications related to certain elements of the design and function

of our beds and related products. We own numerous registered and unregistered trademarks and trademark

applications, including in particular our Sleep Number, Sleep Number 360, 360, and SleepIQ trademarks, as well as

other intellectual property rights, including trade secrets, trade dress and copyrights, which we believe have significant

value and are important to the development, function, and marketing of our products. These intellectual property rights

may not provide adequate protection against infringement or piracy, may not prevent competitors from developing and

marketing products that are similar to or competitive with our beds or other products, and may be costly and time-

consuming to protect and enforce. Our patents are also subject to varying expiration dates. In addition, the laws of some

foreign countries may not protect our intellectual property rights and confidential information to the same extent as the

laws of the United States. If we are unable to protect and enforce our intellectual property, we may be unable to prevent

other companies from using our technology or trademarks in connection with competitive products, which could

adversely affect our sales, profitability, cash flows and financial condition.

We are from time to time subject to claims that our products, processes, advertising, or trademarks infringe the

intellectual property rights of others. The defense of these claims, even if we are ultimately successful, may result in

costly litigation, and if we are not successful in our defense, we could be subject to injunctions and liability for damages

or royalty obligations, and our sales, profitability, cash flows and financial condition could be adversely affected.

21 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Risks Related to Our Vertically Integrated Business

Significant competition could adversely affect our business.

Because of the vertical integration of our business model, our products and distribution face significant competition from

both manufacturers of different types of mattresses and a variety of retailers. Our SleepIQ technology also faces

significant competition from various manufacturers and retailers of sleep tracking and monitoring products.

The mattress industry is characterized by a high degree of concentration among the largest manufacturers of innerspring

mattresses and foam mattresses and one dominant national mattress retailer. In recent years, numerous direct-to-

consumer companies and low-cost importers have entered the market, offering “bed-in-a-box” or similar products

primarily through online distribution directly to consumers though many now also partner with traditional mattress

retailers. The emergence of these new competitors has increased the costs of search terms and digital advertising.

A variety of sleep tracking and monitoring products that compete with our SleepIQ technology have been introduced by

various manufacturers and retailers, both within and outside of the traditional mattress industry.

Some of our competitors have substantially greater financial, marketing and manufacturing resources and greater brand

name recognition than we do and sell products through broader and more established distribution touchpoints. Our

national, exclusive distribution competes with other retailers who generally provide a wider selection of mattress

alternatives than we offer. A number of these retailers also have more points of distribution, greater marketing resources,

and greater brand name recognition than we do.

These manufacturing and retailing competitors, or new entrants into the market, may compete aggressively and gain

market share with existing or new products, and may pursue or expand their presence in the adjustable firmness air bed

segment of the market as well as in the market for sleep tracking and monitoring products. We have limited ability to

anticipate the timing and scale of new product introductions, advertising campaigns or new pricing strategies by our

competitors, which could inhibit our ability to retain or increase market share, or to maintain our profit margins.

If we are unable to effectively compete with other manufacturers and retailers of mattress and sleep tracking and

monitoring products, our sales, profitability, cash flows and financial condition may be adversely impacted.

Disruption to of our manufacturing, distribution, logistics, home delivery, product development, and customer

service operations could increase our costs of doing business or harm our ability to satisfy customer demand,

develop and launch new products, and service our products and customers.

We have two main manufacturing plants, which are located in Irmo, South Carolina and Salt Lake City, Utah, and a

network of several assembly distribution centers across the county. A significant percentage of our products are

assembled to fulfill orders rather than stocking finished goods inventory in our plants, assembly distribution centers, or

stores. We have home delivery operations and contractors that deliver our products to customers across the country as

well as a bedding fulfillment center that ships bedding products to consumers via third-party services. Our product

development and testing operations primarily occur in our corporate headquarters in Minneapolis, Minnesota and Sleep

Number Labs facility in San Jose, California. Our customer service operations are located in New Orleans, Louisiana and

Minneapolis, Minnesota and we have retail stores across the country. Disruption to any of these operations, facilities,

workforce, or our nationwide logistics network could harm or delay our ability to satisfy customer demand, develop, test

and launch new products, service our products and customers, and increase our costs. Such impacts and delays could

adversely affect our sales, customer satisfaction, profitability, cash flows and financial results.

Risks Related to Legal Compliance and Legal Proceedings

Our business is subject to a wide variety of government laws and regulations. These laws and regulations, as well

as any new or changed laws or regulations, could disrupt our operations or increase our compliance costs. Failure

to comply with such laws and regulations could have further adverse impacts on our operations.

We are subject to a wide variety of laws and regulations relating to the bedding industry or to various aspects of our

business. Laws and regulations at the federal, state and local levels frequently change and we cannot always reasonably

predict the impact from, or the ultimate cost of compliance with, future regulatory or administrative changes. Changes in

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law, the imposition of new or additional regulations or the enactment of any new or more stringent legislation that

impacts employment and labor, trade, advertising and marketing practices, pricing, consumer credit offerings, “do not

call/mail” requirements, text messaging requirements, product testing and safety, transportation and logistics, health

care, tax, accounting, privacy and data security, health and safety or environmental issues, warranty disclosures, delivery

timing requirements, accessibility requirements, among others, could require us to change the way we do business and

could have a material adverse impact on our sales, profitability, cash flows and financial condition. New or different laws

or regulations could increase direct compliance costs for us or may cause our vendors to raise the prices they charge us

because of increased compliance costs. Further, the adoption of a multi-layered regulatory approach to any one of the

state or federal laws or regulations to which we are currently subject, particularly where the layers are in conflict, could

require alteration of our manufacturing processes or operational parameters which may adversely impact our business.

Legislative or regulatory changes that impact our relationship with our workforce, such as minimum wage requirements

or health insurance or other employee benefits mandates, could increase our expenses and adversely affect our

operations. While it is our policy and practice to comply with legal and regulatory requirements and our procedures and

internal controls are designed to promote such compliance, we cannot assure that all of our operations will comply with

all such legal and regulatory requirements. Further, laws and regulations change over time and we may be required to

incur significant expenses and/or to modify our operations in order to ensure compliance. This could harm our

profitability or financial condition. If we are found to be in violation of any laws or regulations, we could become subject

to fines, penalties, damages or other sanctions as well as potential adverse publicity or litigation exposure. This could

adversely impact our business, reputation, sales, profitability, cash flows or financial condition.

Our ability to commercialize new products and innovations may be delayed or prevented by regulatory

requirements.

As we work to develop innovations with enhanced health capabilities, including possible capabilities of providing

advanced monitoring and health risk evaluations, depending on the features that ultimately become commercially

available, some features may require regulatory requirements or approvals beyond those that apply to our current

products or features. These additional regulatory requirements or approvals may be prohibitively expensive or otherwise

delay or prevent certain features, innovations, or product from being commercialized.

Pending or unforeseen litigation and the potential for adverse publicity associated with litigation could adversely

impact our business, reputation, financial results or financial condition.

We are involved from time to time in various legal proceedings arising in the ordinary course of our business, including

primarily commercial, product liability, employment and intellectual property claims. We currently do not expect the

outcome of any pending matters to have a material effect on our consolidated results of operations, financial position or

cash flows. Litigation, however, is inherently unpredictable, and it is possible that the ultimate outcome of one or more

pending claims asserted against us, or claims that may be asserted in the future that we are currently not aware of, or

adverse publicity resulting from any such litigation, could adversely impact our business, reputation, sales, profitability,

cash flows and financial condition.

Risks Related to Our Information Systems and Cybersecurity

Information systems that contain confidential Company data, consumers’ personal information, and team

members’ personal information may be subject to attacks by hackers or other cyber threats that could

compromise the confidentiality, integrity, and availability of the data, which could substantially disrupt our

business and could result in a breach of the data.

Our information systems and information systems of third-party vendors we use to assist in the storage and management

of information, including on-premise and cloud-based systems, contain personal information related to our customers

and team members collected and maintained in the ordinary course of our business, such as credit card and

demographic information of our customers, SleepIQ

data, including biometric data (e.g., sleep, physiological) from our

customer base and social security numbers, demographic information, and employment-related information of our team

members. These information systems also contain confidential Company data regarding our business and innovations.

Our use and dependence on our information systems has increased with amplified remote working during the COVID-19

pandemic and additional data storage in cloud-based systems. While we maintain and require our third-party vendors to

maintain security measures to protect this information, a breach of these security measures, such as through third-party

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action and attacks, team member error, access to our data and systems, malfeasance or otherwise, could compromise

the security of our data and customers’ and team members’ personal information. Like many other businesses, we have

and will likely continue to experience cyber-based attacks and incidents from time to time. As the techniques used to

breach such security measures change frequently and may not be recognized until launched against a target, we may be

unable to anticipate these techniques or to implement adequate preventive measures. Any failure of our systems and

processes or our third-party vendors’ systems and processes to adequately protect our data or customer or team

member personal information from exposure, theft or loss could adversely impact our business, reputation, sales,

profitability, cash flows and financial condition.

Any maintenance, improvements or upgrades to information systems that may be required to meet the evolving

needs of our business and cybersecurity needs as well as existing and emerging regulatory requirements may be

costly to implement and may take longer or require greater resources than anticipated, and may result in

disruptions to our systems or business.

We depend on our information systems for many aspects of our business. If our information systems are disrupted in any

material way, or maintenance, improvements or upgrades are required to meet the evolving needs of our business,

cybersecurity needs, and existing and emerging regulatory requirements, we may be required to incur significant capital

expenditures in the pursuit of improvements or upgrades to our information systems. These efforts may take longer and

may require greater financial and other resources than anticipated, may cause distraction of key personnel, and may

cause short-term disruptions or security vulnerabilities to our existing systems and our business. Any of these outcomes

could impair our ability to achieve critical strategic initiatives and could adversely impact our sales, profitability, cash

flows and financial condition.

Risks Related to Workforce

Our future growth and profitability depend in part upon our ability to attract, retain and motivate qualified

personnel.

As a vertically integrated manufacturer and retailer, our future growth and profitability will depend in part upon our

ability to attract, retain and motivate qualified personnel in a wide variety of areas to execute our growth strategy,

including qualified management and executive personnel, retail sales professionals and managers, and manufacturing,

home delivery and technical personnel. The current labor shortage, the world-wide trends of corporate resignations,

COVID-19 or other economic factors may prevent us, and our suppliers and vendors, from successfully hiring and

retaining qualified personnel. The failure to attract, retain and motivate qualified personnel may hinder our ability to

execute our business strategy and growth initiatives and may adversely impact our sales, profitability, cash flows and

financial condition.

Risks Related to Our Stock

A substantial amount of our stock is held by a small number of large investors and significant sales of our

common stock by one or more of these holders could cause our stock price to fall, which could cause investors to

lose all or a portion of their investment in our stock.

As of December 31, 2021, we believe the ten largest holders of common stock were institutional investors who held

approximately 58% of our outstanding shares of common stock in the aggregate, with BlackRock Fund Advisors being

our largest shareholder with approximately 14% of our outstanding shares of common stock. These investors may sell

their shares at any time for a variety of reasons, and such sales could depress the market price of our common stock,

which could cause investors to lose all or a portion of their investment in our stock. In addition, any such sales of our

common stock by these entities could also impair our ability to raise capital through the sale of additional equity

securities.

The stock price of our Company may fluctuate significantly in response to numerous factors such as: the overall

performance of the equity markets and the economy as a whole; changes in the financial projections we or third parties

may provide to the public or our failure to meet these projections; actual or anticipated changes in our growth rate

relative to that of our competitors; failure of securities analysts to maintain coverage of us, changes in financial estimates

by any securities analysts who follow our Company or our failure to meet these estimates or the expectations of

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investors; and sales of share of our common stock by us or our shareholders particularly sales by our directors, executive

officers and significant shareholders or the perception that these sales could occur.

General Risks

Increasing scrutiny and evolving expectations from consumers, regulators, investors and other stakeholders with

respect to our environmental, social and governance practices may impose additional costs on us or expose us to

new or additional risks.

Companies are facing increasing scrutiny from consumers, regulators, investors and other stakeholders related to their

environmental, social and governance (ESG) practices and disclosures. Investor advocacy groups, investment funds and

influential investors are also increasingly focused on these practices, especially as they relate to the environment, climate

change, health and safety, supply chain management, diversity, labor conditions and human rights, both in our own

operations and in our supply chain. Increased ESG-related compliance costs could result in material increases to our

overall operational costs. While we have taken steps to evolve our ESG strategy and related disclosures, including

through implementing enhanced data collection methods and reporting certain data under recognized ESG reporting

frameworks, our ESG practices may not meet the standards of all our stakeholders and advocacy groups may campaign

for further changes. A failure, or perceived failure, to adopt to or comply with regulatory requirements or to respond to

investor or stakeholder expectations and standards could negatively impact our business and reputation.

Climate change and legal or regulatory responses may adversely affect our business, operations and financial

condition.

Climate change presents various near and long-term risks that may adversely impact our business. The enactment of new

laws and regulations to address or limit the effects of climate change, or changes to existing laws and regulations, could

mandate more restrictive standards or require such changes on a more accelerated time frame. The consequences of

climate change and the ensuing governmental regulations could disrupt our operations or harm our ability to source

necessary materials and components and manufacture our products, which may adversely affect our financial condition. If

public perception of our compliance with laws and regulations related to climate change is negative, it could adversely

affect our business, reputation and shareholder perception. Adverse publicity or climate-related litigation that impacts us

could also have a negative impact on our business.

Extreme weather, natural disasters, power outages, or other unexpected events could result in physical damage to and

complete or partial closure of one or more of our manufacturing, distribution centers or other facilities or those of our

suppliers, temporary or long-term disruption in our supply chain, logistics, or workforce and/or disruption of our ability to

deliver products to customers. Current or future insurance arrangements may not provide protection for costs that may

arise from such events, particularly if such events are catastrophic in nature or if multiple such events occur. Climate

change may also subject our business to significant increases or volatility in the prices of certain commodities, including

but not limited to electronic componentry, fuel, oil, natural gas, rubber, cotton, plastic resin, corrugate, steel and

chemical ingredients used to produce foam, as well as third-party logistic costs. Further, the long-term effects of climate

change on general economic conditions and our industry in particular are unclear, and changes in the supply, demand,

or available sources of energy and the regulatory and other costs associated with energy production and delivery may

affect the availability or cost of goods and services, including natural resources, necessary to run our business. Any long-

term disruption in our ability to service our customers from one or more manufacturing, distribution centers or other

facilities could have an adverse effect on our operations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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ITEM 2. PROPERTIES

Retail Locations

We currently lease all of our existing retail store locations and expect that our policy of leasing stores, rather than owning

stores, will continue. We lease our retail stores 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. Our retail store leases generally provide for an initial lease term of five to 10 years. In addition, our mall-based

retail store leases may require payment of contingent rent based on net sales in excess of certain thresholds. Certain

retail store leases may contain options to extend the term of the original lease.

The following table summarizes the geographic locations of our 648 retail stores as of January1, 2022:



Retail

Stores 

Retail

Stores 

Retail

Stores

Alabama 11 Louisiana 11 Ohio 22

Alaska 1 Maine 3 Oklahoma 5

Arizona 13 Maryland 15 Oregon 8

Arkansas 7 Massachusetts 11 Pennsylvania 26

California 71 Michigan 19 Rhode Island 1

Colorado 15 Minnesota 17 South Carolina 10

Connecticut 7 Mississippi 6 South Dakota 2

Delaware 2 Missouri 12 Tennessee 17

Florida 45 Montana 4 Texas 61

Georgia 23 Nebraska 4 Utah 8

Hawaii 2 Nevada 6 Vermont 1

Idaho 3 New Hampshire 4 Virginia 19

Illinois 24 New Jersey 13 Washington 17

Indiana 12 New Mexico 4 West Virginia 4

Iowa 7 New York 24 Wisconsin 11

Kansas 7 North Carolina 21 Wyoming 2

Kentucky 8 North Dakota 2 Total 648

Manufacturing, Distribution and Headquarters

We lease our 238,000 square-foot corporate headquarters in Minneapolis, MN. The lease term commenced in

November 2017 and runs through October 2032. The lease includes three five-year renewal options.

We lease two manufacturing facilities in Irmo, SC and Salt Lake City, UT of approximately 151,000 square feet and

approximately 101,000 square feet, respectively. The Irmo facility lease runs through June 2026, with two five-year

renewal options. The Salt Lake City facility lease runs through July 2025, with one five-year renewal option.



We have five distribution centers and four other distribution-related facilities located in Brooklyn Park, MN; Redlands,

CA; Dallas, TX; Tampa, FL; Cincinnati, OH; Baltimore, MD; Salt Lake City, UT and Irmo, SC, with a total square footage of

approximately 1.0 million square feet and lease terms ending in July 2023 through July 2031.

ITEM 3. LEGAL PROCEEDINGS

Our legal proceedings are discussed in Note 12, Commitments and Contingencies, Legal Proceedings, in the Notes to

Consolidated Financial Statements in this Annual Report on Form 10-K.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

26 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER

PURCHASES OF EQUITY SECURITIES

Our common stock trades on The Nasdaq Stock Market LLC (Nasdaq Global Select Market) under the symbol “SNBR.”

As of January29, 2022, there were approximately 192 holders of record of our common stock.

We are not restricted from paying cash dividends under our Credit Agreement so long as we are not in default under the

Credit Agreement, our leverage ratio (as defined in our Credit Agreement) after giving effect to such restricted payments

(as defined in our Credit Agreement) would not exceed 3.75:1.00 and no default or event of default (as defined in our

Credit Agreement) would result therefrom. However, we have not historically paid, and have no current plans to pay,

cash dividends on our common stock.

Information concerning share repurchases completed during the fourth quarter of fiscal 2021 is set forth below:

Period

Total Number

of Shares

Purchased

(1)(2)

Average

Price

Paid per

Total Number

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)

October 3, 2021 through October 30, 2021

609 $ 86.60 — $ 402,939,000

October 31, 2021 through November 27, 2021

785 $ 81.41 — 402,939,000

November 28, 2021 through January 1, 2022

223 $ 77.47 — 402,939,000

Total

1,617 $ 82.82 — $ 402,939,000

____________________

(1)

We did not repurchase any shares during the three months ended January1, 2022 under our Board-approved $600 million share repurchase

program (effective April4, 2021).

(2)

In connection with the vesting of employee restricted stock grants, we repurchased 1,617 shares of our common stock at a cost of $0.1 million

during the three months ended January1, 2022.

(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.

27 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Comparative Stock Performance

The graph below compares the total cumulative shareholder return on our common stock over the last five years to the

total cumulative return on the Standard and Poor’s (S&P) 400 Specialty Stores Index and The Nasdaq Stock Market (U.S.)

Index assuming a $100 investment made on December31, 2016. Each of the three measures of cumulative total return

assumes reinvestment of dividends. The stock performance shown on the graph below is not necessarily indicative of

future price performance. The information contained in this “Comparative Stock Performance” section shall not be

deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the

liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that we specifically

request that it be treated as soliciting material or incorporate it by reference into a document filed under the Securities

Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

Sleep Number Corporation S&P 400 Specialty Stores Index

The Nasdaq Stock Market (U.S.) Index

12/31/16 12/30/17 12/29/18 12/28/19 01/02/21 01/01/22

$50

$100

$150

$200

$250

$300

$350

$400

 12/31/16 12/30/17 12/29/18 12/28/19 01/02/21 01/01/22

Sleep Number Corporation $ 100 $ 166 $ 142 $ 219 $ 362 $ 339

S&P 400 Specialty Stores Index 100 78 71 80 96 139

The Nasdaq Stock Market (U.S.) Index 100 130 125 171 248 304

28 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

ITEM 6. SELECTED FINANCIAL DATA

(in thousands, except per share and selected operating data, unless otherwise indicated)

The Consolidated Statements of Operations Data and Consolidated Balance Sheet Data presented below have been derived from our

Consolidated Financial Statements and should be read in conjunction with “Management’s Discussion and Analysis of Financial

Condition and Results of Operations” and our Consolidated Financial Statements and Notes thereto included in this Annual Report on

Form 10-K.

Consolidated Statements of Operations Data:

Net sales

$ 2,184,949 $ 1,856,555 $ 1,698,352 $ 1,531,575 $ 1,444,497

Gross profit

1,318,847 1,156,000 1,051,923 927,961 897,347

Operating expenses:

Sales and marketing

905,359 771,195 766,922 687,380 650,357

General and administrative

161,412 158,999 137,956 119,378 127,269

Research and development

58,540 40,910 34,950 28,775 27,806

Operating income

193,536 184,896 112,095 92,428 91,915

Net income

$ 153,746 $ 139,189 $ 81,845 $ 69,539 $ 65,077

Net income per share:

Basic

$ 6.40 $ 5.03 $ 2.78 $ 1.97 $ 1.58

Diluted

$ 6.16 $ 4.90 $ 2.70 $ 1.92 $ 1.55

Shares used in calculation of net income per

Basic

24,038 27,665 29,472 35,256 41,212

Diluted

24,947 28,428 30,355 36,165 42,085

Consolidated Balance Sheet Data:

Cash and cash equivalents

$ 2,389 $ 4,243 $ 1,593 $ 1,612 $ 3,651

Total assets

(2)

919,540 800,136 806,043 470,138 471,834

Borrowings under revolving credit facility

382,500 244,200 231,000 199,600 24,500

Total shareholders’ (deficit) equity

(424,953) (223,978) (159,431) (109,550) 89,156

Selected Operating Data:

Stores open at period-end

648 602 611 579 556

Stores opened during period

77 30 59 53 36

Stores closed during period 31 39 27 30 20

Average sales per store (000’s)

(3)

$ 3,600 $ 3,052 $ 2,877 $ 2,707 $ 2,618

Percentage of stores with > $2 million in net

sales

(4)

84% 67% 70% 65% 61%

Percentage of stores with > $3 million in net

sales

(4)

48% 29% 30% 25% 22%

Average revenue per mattress unit - Total

Retail

(5)

$ 5,102 $ 4,856 $ 4,865 $ 4,482 $ 4,283

Total Retail comparable-sales increase

(6)

17% 6% 6% 3% 4%

Total retail square footage (at period-end)

(000’s)

1,948 1,762 1,749 1,598 1,489

Average square footage per store open

during period

(4)

3,006 2,926 2,802 2,725 2,647

 Year

 2021 2020

(1)

2019 2018 2017

29 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Average sales per square foot

(3)

$ 1,212 $ 1,051 $ 1,034 $ 998 $ 995

Average store age (in months at period-end)

91 97 94 95 97

Earnings before interest, depreciation and

amortization (Adjusted EBITDA)

(7)

$ 276,701 $ 267,891 $ 190,351 $ 165,588 $ 169,097

Free cash flows

(7)

$ 233,110 $ 242,561 $ 129,921 $ 86,025 $ 112,778

Return on invested capital (ROIC)

(7)

27.6% 25.0% 17.8% 16.0% 14.3%

 Year

 2021 2020

(1)

2019 2018 2017

_____________________

(1)

Fiscal year 2020 had 53 weeks. All other fiscal years presented had 52 weeks.

(2)

On December 30, 2018, we adopted ASC Topic 842, Leases, on a modified-retrospective basis. Comparative information has not been restated and

continues to be reported under the standards in effect for those periods.

(3)

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

(4)

For stores open during the entire period indicated (excludes Online, Phone and Chat sales).

(5)

Represents Total Retail net sales divided by Total Retail smart bed units.

(6)

Stores are included in the comparable sales calculation in the 13th full month of operation. Stores that have been remodeled or repositioned within

the same shopping center remain in the comparable-store base. The number of comparable stores used to calculate such data was 568, 567, 539,

524 and 512 for 2021, 2020, 2019, 2018 and 2017, respectively. Fiscal 2020 included 53 weeks, as compared to 52 weeks for the other periods

presented. Comparable sales have been adjusted and reported as if all years had the same number of weeks.

(7)

These non-GAAP measures are not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we

believe it facilitates annual and year-over-year comparisons for investors and financial analysts. See pages 31 and 32 for the reconciliation of these

non-GAAP measures to the appropriate GAAP measures.

30 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

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):

 Year



2021 2020 2019 2018 2017

Net income

$ 153,746 $ 139,189 $ 81,845 $ 69,539 $ 65,077

Income tax expense

33,545 36,783 18,663 16,982 25,961

Interest expense

6,245 9,021 11,591 5,911 975

Depreciation and amortization

59,779 60,783 61,410 61,648 61,077

Stock-based compensation

23,214 21,813 16,657 11,412 15,763

Asset impairments

172 302 185 96 244

Adjusted EBITDA

$ 276,701 $ 267,891 $ 190,351 $ 165,588 $ 169,097

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 operations,” 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):

 Year



2021 2020 2019 2018 2017

Net cash provided by operating activities

$ 300,010 $ 279,661 $ 189,160 $ 131,540 $ 172,607

Subtract: Purchases of property and equipment

(66,900) (37,100) (59,239) (45,515) (59,829)

Free cash flow

$ 233,110 $ 242,561 $ 129,921 $ 86,025 $ 112,778

31 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Non-GAAP Data Reconciliations (continued)

Return on Invested Capital (ROIC)

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 (in thousands):

 Year

 2021 2020 2019 2018 2017

Net operating profit after taxes (NOPAT)



Operating income

$ 193,536 $ 184,896 $ 112,095 $ 92,428 $ 91,915

Add: Rent expense

(1)

101,679 91,458 87,835 79,390 74,019

Add: Interest income

— 97 3 4 97

Less: Depreciation on capitalized operating

leases

(2)

(25,592) (24,001) (22,358) (20,392) (18,865)

Less: Income taxes

(3)

(65,216) (59,387) (42,592) (36,444) (48,970)

NOPAT

$ 204,407 $ 193,063 $ 134,983 $ 114,986 $ 98,196

Average invested capital

Total (deficit) equity

$ (424,953)

$ (223,978)

$ (159,431)

$ (109,550)

$ 89,156

Add: Long-term debt

(4)

383,037 244,849 231,756 200,458 —

Add: Capitalized operating lease obligations

(5)

813,432 731,664 702,680 635,120 592,152

Total invested capital at end of period

$ 771,516 $ 752,535 $ 775,005 $ 726,028 $ 681,308

Average invested capital

(6)

$ 739,873 $ 773,413 $ 757,361 $ 719,055 $ 686,436

Return on invested capital (ROIC)

(7)

27.6% 25.0% 17.8% 16.0% 14.3%

_____________________

(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 five 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 24.2%, 23.5%, 24.0%, 24.1% and 33.3% for 2021, 2020, 2019, 2018 and

2017, 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.

32 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

Forward-Looking Statements

The discussion in this Annual 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;

• Risks inherent in global sourcing activities, including tariffs, outbreaks of pandemics or contagious diseases, strikes and

the potential for shortages in supply or disruption or delay of production and delivery of materials and products in our

supply chain;

• Risks of disruption in the operation of any of our manufacturing, distribution, logistics, home delivery, product

development, or customer service facilities or operations;

• 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, including several sole-source suppliers or service providers;

• Rising commodity costs and other inflationary pressures;

• 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;

• 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 or maintaining 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;

• Environmental risks, including increasing environmental regulation and the broader impacts of climate change such as

from weather-related events; and

• Our ability, and the ability of our suppliers and vendors, to attract, retain and motivate qualified management,

executive and other key team members, including qualified retail sales professionals and managers.

33 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Additional information concerning these and other risks and uncertainties is contained under the caption “Risk

Factors” in this Annual Report on Form 10-K.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide

a reader of our 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 the following sections:

• Overview

• Results of Operations

• Liquidity and Capital Resources

• Critical Accounting Policies and Estimates

• Recent Accounting Pronouncements

Overview

Business Overview

At Sleep Number, our purpose is to improve the health and wellbeing of society through higher quality sleep. We are

committed to leveraging the power of sleep, and sleep science, to improve lives and create a healthier, kinder, more

inclusive world. And because our more than 5,500 team members are dedicated to our mission as well as the disciplined

execution of our vertically integrated business model and differentiated strategy, Sleep Number is at the forefront of

sleep innovation. As the exclusive designer, manufacturer, marketer, retailer and servicer of Sleep Number 360 smart

beds and SleepIQ technology, Sleep Number is uniquely equipped to offer the life-changing benefit of high-quality,

individualized sleep solutions and services. To date, we have improved almost 14 million lives.

With our enterprise-wide investments in innovation, technology, logistics, marketing and customer service, Sleep

Number has created a highly relevant, competitively advantaged strategy and has become a beloved brand built on a

foundation of individuality and wellbeing. Together with our expertise in sleep research, commitment to data science

and analytics, and deep understanding of consumers – including structural shifts in their behavior that we have

anticipated since the 2012 inception of our consumer innovation strategy and which were accelerated by the global

pandemic – we are driving profitable growth and delivering superior value for all our stakeholders.

COVID-19 Pandemic — Impact on our Business

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. Despite the COVID-19 pandemic challenges, we continue to design, manufacture, sell and service Sleep

Number products, invest in our business, develop and launch new products, and deliver innovative customer solutions.

The COVID-19 pandemic impacted our 2020 and 2021 financial performance. In 2020, the COVID-19 pandemic mainly

impacted our second-quarter financial performance, as we generated strong demand and financial performance during

the full-year of 2020. In 2021 we continued to generate strong demand; however, our financial performance was

impacted by: (i) global supply constraints which affected our ability to deliver products to our customers; and (ii)

incremental costs from labor and material inflation, and expediting costs resulting from current-period supply chain

shortages. The pandemic's future effects on our global supply chain, consumer demand and our ongoing financial

performance remains uncertain. See Part I: Item 1. Business and Item 1A. Risk Factors for additional discussion on the

COVID-19 pandemic and the impact on our business.

34 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Results of Operations

Fiscal 2021 Summary

Financial highlights for fiscal 2021 were as follows:

• Net sales for 2021 increased 18% to $2.2 billion, compared with $1.9 billion in 2020, and increased 29% compared

with $1.7 billion in 2019. While customer order demand remained strong during 2021, global supply constraints

limited our ability to deliver products to our customers, shifting more than $125 million of net sales to future periods.

2020 included 53 weeks compared with 52 weeks in 2021 and 2019, with the extra week benefiting 2020 net sales by

$41 million. Total Retail comparable sales increased 17% and sales from net opened/closed stores in the past 12

months, and other (including the additional 53rd week in 2020) added 1.0 percentage point (ppt.) of growth in 2021.

For additional details, see the components of total net sales growth on page 36.

• Sales per store in 2021 (sales for stores open at least one year, Total Retail, including online, phone and chat, adjusted

for the additional 53rd week in 2020) on a trailing twelve-month basis totaled $3.6 million, 18% higher than 2020.

• 2021 operating income of $194 million increased by $9 million, or 5%, compared with $185 million in the prior year,

driven by the strong increase in net sales. Our 2021 operating income rate decreased to 8.9% of net sales, compared

with 10.0% of net sales in 2020. Our 2021 operating income rate was impacted by the 1.9 ppt. decrease in our gross

profit rate, partially offset by the leveraging impact of the 18% increase in net sales.

• We continued to prioritize investments in near- and long-term growth drivers in 2021, including a 43% increase in our

innovation driving R&D expenses.

• Net income in 2021 increased 10% to $154 million, compared with net income of $139 million in 2020, and increased

88% compared with net income of $82 million in 2019. Net income per diluted share increased 26% to $6.16,

compared with $4.90 per diluted share in 2020, and increased 128% compared with $2.70 per diluted share in 2019.

Diluted earnings per share for 2020 benefited from the profits generated during the additional 53rd week ($0.30 per

diluted share).

• We achieved a return on invested capital (ROIC) of 27.6% in 2021, compared with 25.0% in 2020.

• Cash provided by operating activities in 2021 increased by 7% to $300 million, compared with $280 million for the

prior year. Purchases of property and equipment for 2021 increased to $67 million, compared with $37 million in 2020.

Purchases of property and equipment in 2020 were temporarily reduced based on the economic uncertainties

associated with the pandemic.

• On December 3, 2021, we amended our revolving credit facility to expand the aggregate availability from $600 million

to $825 million. We also replenished our outstanding share repurchase authorization to $600 million effective April 4,

2021, the beginning of our fiscal second quarter. We remain committed to our capital deployment priorities focused

on performance drivers.

• We ended 2021 with $383 million of borrowings under our credit facility, compared with $244 million at the end of

2020. Net liquidity available under our credit facility was $439 million at January1, 2022. Our leverage ratio as defined

in our credit agreement was 2.6x as of January1, 2022. The maximum leverage ratio under our credit agreement is

4.5x.

• In 2021, we invested $364 million to repurchase 3.1 million shares of our common stock ($116.79 per share, based on

trade dates) under our Board-approved share repurchase program. As of January1, 2022, the remaining authorization

under our Board-approved share repurchase program was $403 million.

35 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

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.

2021 2020 2019

% of

Net

Sales

% of

Net

Sales

% of

Net Sales

Net sales $ 2,184.9 100.0% $ 1,856.6 100.0 % $ 1,698.4 100.0 %

Cost of sales 866.1 39.6% 700.6 37.7 % 646.4 38.1 %

Gross profit 1,318.8 60.4% 1,156.0 62.3 % 1,051.9 61.9 %

Operating expenses:

Sales and marketing 905.4 41.4% 771.2 41.5 % 766.9 45.2 %

General and administrative 161.4 7.4% 159.0 8.6 % 138.0 8.1 %

Research and development 58.5 2.7% 40.9 2.2 % 35.0 2.1 %

Total operating expenses 1,125.3 51.5% 971.1 52.3 % 939.8 55.3 %

Operating income 193.5 8.9% 184.9 10.0 % 112.1 6.6 %

Interest expense, net 6.2 0.3% 8.9 0.5 % 11.6 0.7 %

Income before income taxes 187.3 8.6% 176.0 9.5 % 100.5 5.9 %

Income tax expense 33.5 1.5% 36.8 2.0 % 18.7 1.1 %

Net income $ 153.7 7.0% $ 139.2 7.5 % $ 81.8 4.8 %

Net income per share:

Basic $ 6.40 $ 5.03 $ 2.78

Diluted $ 6.16 $ 4.90 $ 2.70

Weighted-average number of common shares:

Basic 24.0 27.7 29.5

Diluted 24.9 28.4 30.4

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

2021 2020 2019

Retail stores

87.1 % 85.2 % 91.8 %

Online, phone, chat and other

12.9 % 14.8 % 8.2 %

Total Company

100.0 % 100.0 % 100.0 %

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

Net Sales Increase/(Decrease)

2021 2020 2019

Retail comparable-store sales

(1)

19% (3%) 6%

Online, phone and chat

(1)

4% 104% 12%

Total Retail comparable sales change

(1)

17% 6% 6%

Net opened/closed stores, other and 53rd week 1% 3% 5%

Total Company 18% 9% 11%

____________________

(1)

Stores are included in the comparable-store calculation 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. Fiscal 2020 included 53 weeks, as compared to 52 weeks for the other periods

presented. Total Retail comparable sales have been adjusted to remove the estimated impact of the additional week.

36 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Other sales metrics were as follows:

2021 2020 2019

Average sales per store ($ in thousands)

(1)(4)

$ 3,600 $ 3,052 $ 2,877

Average sales per square foot

(1)(4)

$ 1,212 $ 1,051 $ 1,034

Stores > $2 million in net sales

(2)(4)

84 % 67 % 70 %

Stores > $3 million in net sales

(2)(4)

48 % 29 % 30 %

Average revenue per smart bed unit – Total Retail

(3)

$ 5,102 $ 4,856 $ 4,865

____________________

(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 net sales divided by Total Retail smart bed 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:

2021 2020 2019

Beginning of period

602 611 579

Opened

77 30 59

Closed

(31) (39) (27)

End of period

648 602 611

Comparison of 2021 and 2020

Net sales

Net sales in 2021 increased 18% to $2.2 billion, compared with $1.9 billion in 2020, and increased 29% compared with

$1.7 billion in 2019. 2020 included 53 weeks compared with 52 weeks in 2021 and 2019, with the extra week benefiting

2020 net sales by $41 million. While customer order demand remained strong during 2021, global supply constraints

limited our ability to deliver products to our customers, shifting more than $125 million of net sales to future periods.

The 18% net sales increase was driven by a 17% comparable sales increase in Total Retail and 1.0 percentage point

(ppt.) of growth from net opened/closed stores in the past 12 months, and other (including the additional 53rd week in

2020). Online, phone and chat sales (included in comparable sales noted above) made up 13% and 15% of total net

sales in 2021 and 2020, respectively, compared with 8% in 2019 as consumers embraced transacting remotely with Sleep

Number as well as in our stores. For additional details, see the components of total net sales growth on page 36.

The $328 million net sales increase compared with the same period one year ago was primarily comprised of: (i) a $297

million increase in our Total Retail comparable net sales; (ii) a $30 million increase resulting from net store openings; and

(iii) a $1 million increase in phone, online, chat and other sales. Total Retail smart bed unit sales increased 12%

compared with the prior year. Average revenue per smart bed unit in Total Retail increased by 5% to $5,102, compared

with $4,856 in the prior-year period.

Gross profit

Gross profit for 2021 of $1.3 billion increased by $163 million, or 14%, compared with $1.2 billion in 2020. The 2021

gross profit rate decreased to 60.4% of net sales, compared with 62.3% for the prior-year period. The 1.9 ppt. decrease

in the gross profit rate was mainly due to: (i) incremental costs due to rapid inflation related to labor and materials, and

expediting costs resulting from current-period supply chain shortages (3.2 ppt.); partially offset by (ii) the leverage from

the 18% net sales increase, including price increases to offset inflation pressures, combined with a more favorable sales

mix of higher-margin products. In addition, our gross profit rate will fluctuate from year to year due to a variety of other

factors, including return and exchange costs, and changes in performance-based incentive compensation.

37 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Sales and marketing expenses

Sales and marketing expenses totaled $905 million in 2021, compared with $771 million last year. The sales and

marketing expense rate decreased to 41.4% of net sales, compared with 41.5% for the same period one year ago. The

current-year sales and marketing expenses rate decrease of 0.1 ppt. was primarily due to: (i) the leveraging impact of the

18% net sales increase; (ii) efficiency gains through our digital ecosystem and operating initiatives; partially offset by (iii)

restored marketing expenses which were temporarily reduced last year when we implemented appropriate expense

management actions in response to the COVID-19 pandemic. Efficiency gains and operating initiatives included

improved store operating productivity.

General and administrative expenses

General and administrative (G&A) expenses increased $2 million to $161 million in 2021, compared with $159 million in

the prior year, but decreased to 7.4% of net sales, compared with 8.6% of net sales one year ago. The $2 million

increase in G&A expenses mainly consisted of the following: (i) $3 million of additional professional and consulting fees;

partially offset by (ii) a $1 million net reduction in employee compensation resulting from a year-over-year decrease in

Company-wide performance-based incentive compensation, partially offset by increased employee compensation to

support 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). The G&A expenses rate decreased by 1.2 ppt. in 2021,

compared with 2020 due to the leveraging impact of the 18% net sales increase, partially offset by the items discussed

above.

Research and development expenses

Research and development (R&D) expenses increased by 43% to $59 million in 2021, compared with $41 million in 2020.

The R&D expense rate for 2021 increased to 2.7% of net sales, compared with 2.2% of net sales for the prior year. The

43% spending level increase supports our ongoing consumer innovation strategy.

Interest expense, net

Interest expense, net decreased to $6 million for the year ended January1, 2022, compared with $9 million for the same

period one year ago. The $3 million decrease was mainly driven by a lower level of outstanding borrowings during 2021

compared with 2020. 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 pandemic disruption. We repaid the $75 million term loan

in September 2020.

Income tax expense

Income tax expense was $34 million for the year ended January1, 2022, compared with $37 million for the same period

one year ago. The effective income tax rate for the year ended January1, 2022 was 17.9% compared with 20.9% for the

year ended January2, 2021. Both years’ effective tax rates were positively impacted by stock-based compensation

excess tax benefits.

Comparison of 2020 and 2019

For a discussion of our 2020 versus 2019 results, see our 2020 Form 10-K.

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 $825 million

revolving credit facility (increased from $600 million to $825 million as of December 3, 2021). As of January1, 2022, we

do not have any off-balance sheet financing other than our $4 million in outstanding letters of credit. 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, strategic initiatives and contractual obligations such as lease payments and

38 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

capital commitments for new retail store locations for the foreseeable future. See Notes 7, Leases, and 12, Commitments

and Contingencies, for further details on our contractual obligations.

Cash and cash equivalents totaled $2 million and $4 million at January1, 2022 and January2, 2021, respectively.

Significant changes in cash and cash equivalents during 2021 included $300 million of cash provided by operating

activities and $145 million increase in short-term borrowings, which were offset by$67 million of cash used to purchase

property and equipment, and$382 million of cash used to repurchase our common stock.

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

2021 2020

Total cash provided by (used in):

Operating activities

$ 300.0 $ 279.7

Investing activities

(66.6) (39.0)

Financing activities

(235.2) (238.0)

Net change in cash and cash equivalents

$ (1.9) $ 2.7

Cash provided by operating activities for the fiscal year ended January1, 2022 was $300 million compared with $280

million for the fiscal year ended January2, 2021. Significant components of the $20 million year-over-year increase in

cash from operating activities included: (i) a $15 million increase in net income in 2021 compared with 2020; (ii) a $71

million fluctuation in accounts payable with both years impacted by business changes and timing of payments; (iii) a $62

million fluctuation in the amount of compensation and benefits accrued and timing of the related payments resulting

from year-over-year changes in Company-wide performance-based incentive compensation; and (iv) a $30 million

change in inventories with both years’ changes in inventory balances driven by forecasted future customer demand and

anticipated supply chain constraints. In addition, the 2021 balance included $10 million higher purchase costs due to

rapid inflation pressures and increased inbound transportation expenses.

Net cash used in investing activities was $67 million for the fiscal year ended January1, 2022, compared with $39 million

in 2020. Investing activities in 2021 included $67 million of property and equipment purchases, compared with$37

million last year. The $30 million year-over-year increase was primarily due to higher property and equipment purchases

for new and remodeled stores. In addition, 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 $235 million for the fiscal year ended January1, 2022, compared with $238

million in 2020. During the fiscal year ended January1, 2022, we repurchased $382 million of our common stock (based

on settlement dates, $364 million under our Board-approved share repurchase program and $18 million in connection

with the vesting of employee restricted stock grants), compared with $236 million in 2020. Short-term borrowings

increased by $145 million during 2021 due to a $138 million increase in borrowings under our credit facility to $383

million, in addition to a $7 million increase in book overdrafts which are included in the net change in short-term

borrowings. Short-term borrowings decreased by $12 million during 2020 due to a $13 million increase in borrowings

under our credit facility to $244 million, which was more than offset by a $25 million decrease in book overdrafts.

Financing activities for both years reflect the cash proceeds from the exercise of employee stock options.

Under our Board-approved share repurchase program, we repurchased 3.1 million shares at a cost of $364 million (based

on trade dates, $116.79 per share) during the fiscal year ended January1, 2022. During 2020, we repurchased 3.4

million shares at a cost of $228 million ($66.49 per share). As of January1, 2022, the remaining authorization under our

Board-approved share repurchase program was $403 million. There is no expiration date governing the period over

which we can repurchase shares.

On December 3, 2021, we amended our revolving credit facility to increase our net aggregate availability from

$600million to $825 million. We maintain the accordion feature which allows us to increase the amount of the credit

facility from $825 million to $1.2 billion, subject to lenders’ approval. The amended credit facility matures in December

2026. There were no other significant changes to the credit facility’s terms and conditions. As of January1, 2022, we had

$383 million of borrowings under our credit facility. We also had $4 million in outstanding letters of credit. Net liquidity

available under our credit facility was $439 million at January1, 2022. 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,

39 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

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 2.6x as of January1, 2022. 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 common stock. As of

January1, 2022, the weighted-average interest rate on borrowings under the credit facility was 1.6% and we were in

compliance with all financial covenants.

We have an agreement with Synchrony Bank to offer qualified customers revolving credit arrangements to finance

purchases from us (Synchrony Agreement). The Synchrony Agreement contains certain financial covenants, including a

maximum leverage ratio and a minimum interest coverage ratio consistent with our Credit Agreement. As of January1,

2022, 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 customers’ 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.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles

(GAAP). In connection with the preparation of our financial statements, we are required to make estimates and

assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, sales,

expenses and the related disclosures. Predicting future events is inherently an imprecise activity and as such requires the

use of judgment. We base our assumptions, estimates and judgments on historical experience, current trends and other

factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a

regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our

financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects

cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such

differences could be material.

Our significant accounting policies are discussed in Note 1, Business and Summary of Significant Accounting Policies, of

the Notes to Consolidated Financial Statements, which are included in Item 8, Financial Statements and Supplementary

Data, of this Annual Report on Form 10-K. Management believes the accounting policies discussed below are the most

critical because they require management’s most difficult, subjective or complex judgments, resulting from the need to

make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical

accounting policies and estimates, and related disclosures with the Audit Committee of our Board.

Our critical accounting policies and estimates relate to stock-based compensation, warranty liabilities and revenue

recognition.

40 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Stock-Based Compensation  

We have stock-based compensation

plans, which include non-qualified stock

options and stock awards.



See Note 1, Business and Summary of

Significant Accounting Policies, and

Note 8, Shareholders’ Deficit, to the

Notes to Consolidated Financial

Statements, included in Item 8, Financial

Statements and Supplementary Data, of

this Annual Report on Form 10-K, for a

complete discussion of our stock-based

compensation programs.

Option-pricing models and generally

accepted valuation techniques require

management to make assumptions and

to apply judgment to determine the fair

value of our awards. These assumptions

and judgments include estimating the

volatility of our stock price, future

employee forfeiture rates and future

employee stock option exercise

behaviors. Changes in these

assumptions can materially affect the

fair value estimates or future earnings

adjustments.



Performance-based stock awards

require management to make

assumptions regarding the likelihood of

achieving performance targets.

We do not believe there is a reasonable

likelihood that there will be a material

change in the future estimates or

assumptions we use to determine stock-

based compensation expense.

However, if actual results are not

consistent with our estimates or

assumptions, we may be exposed to

changes in stock-based compensation

expense that could be material.



In addition, if actual results are not

consistent with the assumptions used,

the stock-based compensation expense

reported in our financial statements may

not be representative of the actual

economic cost of the stock-based

compensation. Finally, if the actual

forfeiture rates, or the actual

achievement of performance targets,

are not consistent with the assumptions

used, we could experience future

earnings adjustments.



A 10% change in our stock-based

compensation expense for the year

ended January1, 2022, would have

affected net income by approximately

$1.7 million in 2021.



Warranty Liabilities  

We provide a limited warranty on most

of the products we sell.



See Note 1, Business and Summary of

Significant Accounting Policies, to the

Notes to Consolidated Financial

Statements, included in Item 8, Financial

Statements and Supplementary Data, of

this Annual Report on Form 10-K, for a

complete discussion of our warranty

program and liabilities.



The majority of our warranty claims are

incurred within the first year. However,

our warranty liability contains

uncertainties because our warranty

obligations cover an extended period of

time. A revision of estimated claim rates

or the projected cost of materials and

freight associated with sending

replacement parts to customers could

have a material adverse effect on future

results of operations.



We have not made any material

changes in our warranty liability

assessment methodology during the

past three fiscal years. We do not

believe there is a reasonable likelihood

that there will be a material change in

the estimates or assumptions we use to

calculate our warranty liability. However,

if actual results are not consistent with

our estimates or assumptions, we may

be exposed to losses or gains that could

be material.



A 10% change in our warranty liability at

January1, 2022, would have affected

net income by approximately $0.8

million in 2021.

Description Judgments and Uncertainties

Effect if Actual Results

Differ from Assumptions

41 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Revenue Recognition

Certain accounting estimates relating to

revenue recognition contain uncertainty

because they require management to

make assumptions and to apply

judgment regarding the effects of future

events.



See Note 1, Business and Summary of

Significant Accounting Policies, and

Note 9, Revenue Recognition, to the

Notes to Consolidated Financial

Statements, included in Item 8, Financial

Statements and Supplementary Data, of

this Annual Report on Form 10-K, for a

complete discussion of our revenue

recognition policies.

Our estimates of sales returns contain

uncertainties as actual sales return rates

may vary from expected rates, resulting

in adjustments to net sales in future

periods. These adjustments could have

an adverse effect on future results of

operations.

We have not made any material

changes in the accounting methodology

used to establish our sales returns

allowance during the past three fiscal

years. We do not believe there is a

reasonable likelihood that there will be

a material change in the estimates or

assumptions we use to calculate our

sales returns allowance. However, if

actual results are not consistent with our

estimates or assumptions, we may be

exposed to additional losses or gains in

future periods.



A 10% change in our sales returns

allowance at January1, 2022 would

have affected net income by

approximately $1.7 million in 2021.

Description Judgments and Uncertainties

Effect if Actual Results

Differ from Assumptions

Recent Accounting Pronouncements

See “Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note

1, Business and Summary of Significant Accounting Policies - “New Accounting Pronouncements” for recent accounting

pronouncements that may affect our financial reporting.

ITEM 7A. 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

million based on the $383 million of borrowings under our credit facility at January1, 2022. We do not manage our

interest-rate volatility risk through the use of derivative instruments.

42 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Sleep Number Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Sleep Number Corporation and subsidiaries (the

“Company”) as of January 1, 2022, and January 2, 2021, and the related consolidated statements of income,

shareholders’ equity, and cash flows, for each of the three years in the period ended January 1, 2022, and the related

notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our

opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of

January 1, 2022, and January 2, 2021, and the results of its operations and its cash flows for each of the three years in

the period ended January 1, 2022, in conformity with accounting principles generally accepted in the United States of

America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United

States) (PCAOB), the Company’s internal control over financial reporting as of January 1, 2022, based on criteria

established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of

the Treadway Commission and our report dated March 1, 2022, expressed an unqualified opinion on the Company’s

internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an

opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the

PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities

laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and

perform the audit to obtain reasonable assurance about whether the financial statements are free of material

misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material

misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to

those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the

financial statements. Our audits also included evaluating the accounting principles used and significant estimates made

by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits

provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements

that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or

disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or

complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial

statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate

opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Warranty Liability - Refer to “Note 1 -Warranty Liabilities”

Critical Audit Matter Description

The Company provides a limited warranty on most products sold. The estimated warranty liabilities, which are expensed

at the time of sale and included in cost of sales, are based on historical trends and warranty claim rates incurred and the

assumptions are adjusted for any current trends as appropriate. As of January 1, 2022, the Company has warranty liability

of $10.1 million.

We identified the warranty liability as a critical audit matter because of the significant judgments made by management

to estimate warranty claim rates. This required a high degree of auditor judgment and an increased extent of effort when

43 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

performing audit procedures to evaluate the reasonableness of management’s estimates of future warranty claims based

on historical claims paid, from which management uses to develop warranty liability estimates.

How the Critical Audit Matter Was Addressed in the Audit

Our procedures related to the warranty liabilities included the following, among others:

• We tested the effectiveness of controls related to warranty liabilities, including those over historical warranty

claim data and estimated future warranty claim rates.

• We evaluated the reasonableness of management’s estimate of warranty liabilities by comparing the historical

warranty claim trends to the current warranty claim rates of the Sleep Number 360 smart bed line and other

products.

• We evaluated the completeness of the warranty liabilities through inquiries of operational and executive

management regarding knowledge of known product warranty claims or product issues and evaluated whether

they were appropriately considered in the determination of the warranty liabilities.

• We evaluated the methods and assumptions used by management to estimate the warranty liabilities by:

– Testing the underlying data that served as the basis for the estimate, to test that the inputs to the

estimate were reasonable and to test the mathematical accuracy of the calculation.

– Developing an expectation of warranty liabilities and comparing it to the recorded balance.

– Comparing management’s prior-year assumption of expected claim rates to actuals incurred during the

year to evaluate management’s ability to estimate the warranty liabilities.

/s/DELOITTE & TOUCHE LLP

Minneapolis, Minnesota

March 1, 2022

We have served as the Company’s auditor since 2010.

44 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Sleep Number Corporation

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Sleep Number Corporation and subsidiaries (the

“Company”) as of January 1, 2022, based on the criteria established in Internal Control—Integrated Framework (2013)

issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the

Company maintained, in all material respects, effective internal control over financial reporting as of January 1, 2022,

based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United

States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended

January 1, 2022, of the Company and our report dated March 1, 2022 expressed an unqualified opinion on those

financial statements and financial statement schedule.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its

assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s

Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s

internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB

and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and

the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and

perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was

maintained in all material respects. Our audit included obtaining an understanding of internal control over financial

reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating

effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered

necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding

the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with

generally accepted accounting principles. A company’s internal control over financial reporting includes those policies

and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the

transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are

recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting

principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of

management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely

detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on

the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become

inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may

deteriorate.

/s/DELOITTE & TOUCHE LLP

Minneapolis, Minnesota

March 1, 2022

45 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

 2021 2020

Assets

Current assets:

Cash and cash equivalents

$ 2,389 $ 4,243

Accounts receivable, net of allowances of $924 and $1,046, respectively 25,718 31,871

Inventories

105,644 81,362

Prepaid expenses

18,953 20,839

Other current assets

54,917 43,489

Total current assets

207,621 181,804

Non-current assets:

Property and equipment, net

195,128 175,223

Operating lease right-of-use assets

371,133 314,226

Goodwill and intangible assets, net

70,468 72,871

Other non-current assets

75,190 56,012

Total assets

$ 919,540 $ 800,136

Liabilities and Shareholders’ Deficit

Current liabilities:

Borrowings under revolving credit facility

$ 382,500 $ 244,200

Accounts payable

162,547 91,904

Customer prepayments

129,499 72,017

Accrued sales returns

22,368 24,765

Compensation and benefits

51,240 76,786

Taxes and withholding

22,087 23,339

Operating lease liabilities

72,360 62,077

Other current liabilities

64,177 60,856

Total current liabilities

906,778 655,944

Non-current liabilities:

Deferred income taxes

688 242

Operating lease liabilities

336,192 283,084

Other non-current liabilities

100,835 84,844

Total liabilities

1,344,493 1,024,114

Shareholders’ deficit:

Undesignated preferred stock; 5,000 shares authorized, no shares issued and

outstanding — —

Common stock, $0.01 par value; 142,500 shares authorized, 22,683 and 25,390

shares issued and outstanding, respectively 227 254

Additional paid-in capital

3,971 —

Accumulated deficit

(429,151) (224,232)

Total shareholders’ deficit

(424,953) (223,978)

Total liabilities and shareholders’ deficit

$ 919,540 $ 800,136

See accompanying notes to consolidated financial statements.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Consolidated Balance Sheets

January1, 2022 and January2, 2021

(in thousands, except per share amounts)

46 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

 2021 2020 2019

Net sales

$ 2,184,949 $ 1,856,555 $ 1,698,352

Cost of sales

866,102 700,555 646,429

Gross profit

1,318,847 1,156,000 1,051,923

Operating expenses:

Sales and marketing

905,359 771,195 766,922

General and administrative

161,412 158,999 137,956

Research and development

58,540 40,910 34,950

Total operating expenses

1,125,311 971,104 939,828

Operating income

193,536 184,896 112,095

Interest expense, net

6,245 8,924 11,587

Income before income taxes

187,291 175,972 100,508

Income tax expense

33,545 36,783 18,663

Net income

$ 153,746 $ 139,189 $ 81,845

Basic net income per share:

Net income per share – basic

$ 6.40 $ 5.03 $ 2.78

Weighted-average shares – basic

24,038 27,665 29,472

Diluted net income per share:

Net income per share – diluted

$ 6.16 $ 4.90 $ 2.70

Weighted-average shares – diluted

24,947 28,428 30,355

See accompanying notes to consolidated financial statements.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Operations

Years ended January1, 2022, January2, 2021 and December28, 2019

(in thousands, except per share amounts)

47 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

 Common Stock

Additional

Paid-in

Capital

Accumulated

Deficit



 Shares Amount Total

Balance at December 29, 2018

30,868 $ 309 $ — $ (109,859) $ (109,550)

Net income

— — — 81,845 81,845

Exercise of common stock options

381 4 7,186 — 7,190

Stock-based compensation

480 5 16,652 — 16,657

Repurchases of common stock

(3,768) (38) (23,838) (131,697) (155,573)

Balance at December 28, 2019

27,961 $ 280 $ — $ (159,711) $ (159,431)

Net income

— — — 139,189 139,189

Exercise of common stock options

420 4 9,598 — 9,602

Stock-based compensation

620 6 21,807 — 21,813

Repurchases of common stock

(3,611) (36) (31,405) (203,710) (235,151)

Balance at January 2, 2021

25,390 $ 254 $ — $ (224,232) $ (223,978)

Net income

— — — 153,746 153,746

Exercise of common stock options

174 2 4,439 — 4,441

Stock-based compensation

369 4 23,210 — 23,214

Repurchases of common stock

(3,250) (33) (23,678) (358,665) (382,376)

Balance at January 1, 2022

22,683 $ 227 $ 3,971 $ (429,151) $ (424,953)

See accompanying notes to consolidated financial statements.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Deficit

Years ended January1, 2022, January2, 2021 and December28, 2019

(in thousands)

48 | 2021 FORM 10-K SLEEP NUMBER CORPORATION



2021 2020 2019

Cash flows from operating activities:

Net income

$ 153,746 $ 139,189 $ 81,845

Adjustments to reconcile net income to net cash provided by

operating activities:

Depreciation and amortization

60,394 61,563 61,866

Stock-based compensation

23,214 21,813 16,657

Net loss (gain) on disposals and impairments of assets

37 247 (430)

Deferred income taxes

446 (3,566) (1,014)

Changes in operating assets and liabilities:

Accounts receivable

6,153 (11,893) 4,817

Inventories

(24,282) 5,703 (2,183)

Income taxes

(3,066) 1,057 3,066

Prepaid expenses and other assets

(13,836) (13,717) (13,959)

Accounts payable

54,405 (16,755) 10,661

Customer prepayments

57,482 37,769 7,182

Accrued compensation and benefits

(24,790) 36,825 12,920

Other taxes and withholding

1,814 111 725

Other accruals and liabilities

8,293 21,315 7,007

Net cash provided by operating activities

300,010 279,661 189,160

Cash flows from investing activities:

Purchases of property and equipment

(66,900) (37,100) (59,239)

Proceeds from sales of property and equipment

257 55 2,615

Purchase of intangible assets

— (1,973) —

Net cash used in investing activities

(66,643) (39,018) (56,624)

Cash flows from financing activities:

Repurchases of common stock

(382,376) (235,644) (165,079)

Net increase (decrease) in short-term borrowings

145,473 (11,639) 26,357

Proceeds from issuance of common stock

4,441 9,602 7,190

Debt issuance costs

(2,759) (312) (1,023)

Net cash used in financing activities

(235,221) (237,993) (132,555)

Net (decrease) increase in cash and cash equivalents

(1,854) 2,650 (19)

Cash and cash equivalents, at beginning of period

4,243 1,593 1,612

Cash and cash equivalents, at end of period

$ 2,389 $ 4,243 $ 1,593

Non-cash financing transactions:

Change in unsettled repurchases of common stock

$ — $ (493) $ (9,506)

Supplemental Disclosure of Cash Flow Information

Income taxes paid, net of refunds

$ 36,305 $ 38,698 $ 17,182

Interest paid

$ 5,438 $ 9,053 $ 10,656

Purchases of property and equipment included in accounts payable

$ 13,968 $ 5,015 $ 5,725

See accompanying notes to consolidated financial statements.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended January1, 2022, January2, 2021 and December28, 2019

(in thousands)

49 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

(1) Business and Summary of Significant Accounting Policies

Business & Basis of Presentation

Sleep Number Corporation and our 100%-owned subsidiaries (Sleep Number or the Company) have a vertically

integrated business model and are the exclusive designer, manufacturer, marketer, retailer and servicer of Sleep Number

beds which allows us to offer consumers high-quality, individualized sleep solutions and services. Sleep Number also

offers FlextFit adjustable bases, and Sleep Number pillows, sheets and other bedding products.

We generate revenue by marketing our innovations directly to new and existing customers, and selling products through

our Stores, Online, Phone, Chat (Total Retail) and Other.

The consolidated financial statements include the accounts of Sleep Number Corporation and our subsidiaries. All

significant intra-entity balances and transactions have been eliminated in consolidation.

Fiscal Year

Our fiscal year ends on the Saturday closest to December 31. Fiscal years and their respective fiscal year ends were as

follows: fiscal 2021 ended January1, 2022; fiscal 2020 ended January2, 2021; and fiscal 2019 ended December28,

2019. Fiscal 2020 had 53 weeks, 2021 and 2019 each had 52 weeks.

Use of Estimates in the Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles

(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 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. Changes in these estimates will

be reflected in the financial statements in future periods. 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, inflation, consumer confidence, store restrictions mandated by federal, state and/or local authorities and

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.

Our critical accounting policies consist of stock-based compensation, warranty liabilities and revenue recognition.

Cash and Cash Equivalents

Cash and cash equivalents include highly-liquid investments with original maturities of three months or less. The carrying

value of these investments approximates fair value due to their short-term maturity.Our banking arrangements allow us

to fund outstanding checks when presented to the financial institution for payment, resulting in book overdrafts. Book

overdrafts are included in accounts payable in our consolidated balance sheets and in net increase (decrease) in short-

term borrowings in the financing activities section of our consolidated statements of cash flows. Book overdrafts totaled

$15 million and $8million at January1, 2022 and January2, 2021, respectively.

Accounts Receivable

Accounts receivable are recorded net of an allowance for expected credit losses and consist primarily of receivables from

third-party financiers for customer credit card purchases. The allowance is recognized in an amount equal to anticipated

future write-offs. We estimate future write-offs based on delinquencies, aging trends, industry risk trends, our historical

experience and current trends. Account balances are charged off against the allowance when we believe it is probable

the receivable will not be recovered.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

50 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Inventories

Inventories include materials, labor and overhead and are stated at the lower of cost or net realizable value. Cost is

determined by the first-in, first-out method. We review inventory quantities on hand and record reserves for

obsolescence based on historical selling prices, current market conditions and forecasted product demand, to reduce

inventory to net realizable value.

Property and Equipment

Property and equipment, carried at cost, is depreciated using the straight-line method over the estimated useful lives of

the assets. The cost and related accumulated depreciation of assets sold or retired is removed from the accounts with

any resulting gain or loss included in net income in our consolidated statements of operations. Maintenance and repairs

are charged to expense as incurred. Major renewals and betterments that extend useful life are capitalized.

Leasehold improvements are depreciated over the shorter of the estimated useful lives of the assets or the contractual

term of the lease, with consideration of lease renewal options if renewal appears probable.

Estimated useful lives of our property and equipment by major asset category are as follows:

Leasehold improvements

5 to 15 years

Furniture and equipment

3 to 15 years

Production machinery

3 to 7 years

Computer equipment and software

3 to 12 years

Goodwill and Intangible Assets, Net

Goodwill is the difference between the purchase price of a company and the fair market value of the acquired company’s

net identifiable assets. Our intangible assets include developed technologies and trade names/trademarks. Definite-lived

intangible assets are being amortized using the straight-line method over their estimated lives, ranging from 8-10 years.

Asset Impairment Charges

Long-lived Assets and Definite-lived Intangible Assets - we review our long-lived assets and definite-lived intangible

assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may

not be recoverable. When evaluating long-lived assets for potential impairment, we first compare the carrying value of

the asset to the estimated future cash flows (undiscounted and without interest charges - plus proceeds expected from

disposition, if any). If the estimated undiscounted cash flows are less than the carrying value of the asset, we calculate an

impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair

value. When we recognize an impairment loss, the carrying amount of the asset is reduced to estimated fair value based

on discounted cash flows, quoted market prices or other valuation techniques. Assets to be disposed of are reported at

the lower of the carrying amount of the asset or fair value less costs to sell. We review retail store assets for potential

impairment based on historical cash flows, lease termination provisions and expected future retail store operating results.

If we recognize an impairment loss for a depreciable long-lived asset, the adjusted carrying amount of the asset

becomes its new cost basis and will be depreciated (amortized) over the remaining useful life of that asset.

Goodwill and Indefinite-lived Intangible Assets - goodwill and indefinite-lived intangible assets are not amortized but are

tested for impairment annually or when there are indicators of impairment using a fair value approach. The Financial

Accounting Standards Board’s (FASB) guidance allows us to perform either a quantitative assessment or a qualitative

assessment before calculating the fair value of a reporting unit. We have elected to perform the quantitative assessment.

The quantitative goodwill impairment test is a two-step process. The first step is a comparison of the fair value of the

reporting unit with its carrying amount, including goodwill. If this step reflects impairment, then the loss would be

measured as the excess of recorded goodwill over its implied fair value. Implied fair value is the excess of fair value of

the reporting unit over the fair value of all identified assets and liabilities. Fair value is determined using a market-based

approach utilizing widely accepted valuation techniques, including quoted market prices and our market capitalization.

Indefinite-lived intangible assets are assessed for impairment by comparing the carrying value of an asset with its fair

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (continued)

51 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

value. If the carrying value exceeds fair value, an impairment loss is recognized in an amount equal to the excess. Based

on our 2021 assessments, we determined there was no impairment.

Warranty Liabilities

We provide a limited warranty on most of the products we sell. The estimated warranty costs, which are expensed at the

time of sale and included in cost of sales, are based on historical trends and warranty claim rates incurred by us and are

adjusted for any current trends as appropriate. The majority of our warranty claims are incurred within the first year. Our

warranty liability contains uncertainties because our warranty obligations cover an extended period of time and require

management to make estimates for claim rates and the projected cost of materials and freight associated with sending

replacement parts to customers. We regularly assess and adjust the estimate of accrued warranty claims by updating

claims rates for actual trends and projected claim costs.

We classify as non-current those estimated warranty costs expected to be paid out in greater than one year. The activity

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



2021

2020 2019

Balance at beginning of period

$ 12,152 $ 11,345 $ 10,389

Additions charged to costs and expenses for current-year sales

16,732 13,387 10,949

Deductions from reserves

(18,134) (12,158) (11,007)

Change in liabilities for pre-existing warranties during the current

 year, including expirations (681) (422) 1,014

Balance at end of period

$ 10,069 $ 12,152 $ 11,345

Fair Value Measurements

Fair value measurements are reported in one of three levels based on the lowest level of significant input used:

• Level 1 – observable inputs such as quoted prices in active markets;

• Level 2 – inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

• Level 3 – unobservable inputs in which there is little or no market data, which require the reporting entity to develop

its own assumptions.

We generally estimate fair value of long-lived assets, including our retail stores, using the income approach, which we

base on estimated future cash flows (discounted and with interest charges). The inputs used to determine fair value

relate primarily to future assumptions regarding sales volumes, gross profit rates, retail store operating expenses and

applicable probability weightings regarding future alternative uses. These inputs are categorized as Level 3 inputs under

the fair value measurements guidance. The inputs used represent management’s assumptions about what information

market participants would use in pricing the assets and are based upon the best information available at the balance

sheet date.

Shareholders’ Deficit

Dividends

We are not restricted from paying cash dividends under our Credit Agreement so long as we are not in default under the

Credit Agreement, our leverage ratio (as defined in our Credit Agreement) after giving effect to such restricted payments

(as defined in our Credit Agreement) would not exceed 3.75:1.00 and no default or event of default (as defined in our

Credit Agreement) would result therefrom. However, we have not historically paid, and have no current plans to pay,

cash dividends on our common stock.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (continued)

52 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Share Repurchases

At January1, 2022, we had $403 million remaining authorization under our $600 million board-approved share

repurchase program. There is no expiration date governing the period over which we can repurchase shares. Any

repurchased shares are constructively retired and returned to an unissued status. The cost of stock repurchases is first

charged to additional paid-in-capital. Once additional paid-in capital is reduced to zero, any additional amounts are

charged to accumulated deficit.

Revenue Recognition

We recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that

reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenue recognized

excludes sales taxes. Amounts billed to customers for delivery and setup are included in net sales. For most products, we

receive payment before or promptly after, the products or services are delivered to the customer.

We accept sales returns of most products during a 100-night trial period. Accrued sales returns represent a refund

liability for the amount of consideration that we do not expect to be entitled to because it will be refunded to customers.

The refund liability estimate is based on historical return rates and is adjusted for any current trends as appropriate. Each

reporting period we remeasure the liability to reflect changes in the estimate, with a corresponding adjustment to net

sales.

Our beds sold with SleepIQ technology contain multiple performance obligations including the bed, and SleepIQ

hardware and software. We analyze our multiple performance obligation(s) to determine whether they are distinct and

can be separated or whether they must be accounted for as a single performance obligation. We determined that the

beds sold with the SleepIQ technology have two performance obligations consisting of: (i) the bed; and (ii) SleepIQ

hardware and software. SleepIQ hardware and software are not separable as the hardware and related software are not

sold separately and the software is integral to the hardware’s functionality. We determine the transaction price for

multiple performance obligations based on their relative standalone selling prices. The performance obligation related to

the bed is satisfied at a point in time. The performance obligation related to SleepIQ technology is satisfied over time

based on the ongoing access and usage by the customer of software essential to the functionality of SleepIQ

technology. 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.

See Note 9, Revenue Recognition, for additional information on revenue recognition and sales returns.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (continued)

53 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Cost of Sales, Sales and Marketing, General and Administrative (G&A) and Research & Development (R&D) Expenses

The following tables summarize the primary costs classified in each major expense category (the classification of which

may vary within our industry):

Cost of Sales Sales & Marketing

•

Costs associated with purchasing, manufacturing, shipping,

handling and delivering our products to our retail stores

and customers;

• Advertising, marketing and media production;

• Marketing and selling materials such as brochures, videos,

websites, customer mailings and in-store signage;

•

Physical inventory losses, scrap and obsolescence; • Payroll and benefits for sales and customer service staff;

•

Related occupancy and depreciation expenses; • Store occupancy costs;

•

Costs associated with returns and exchanges; and

•

Store depreciation expense;

•

Estimated costs to service customer warranty claims. • Credit card processing fees; and

•

Promotional financing costs.

G&A R&D

(1)

•

Payroll and benefit costs for corporate employees,

including information technology, legal, human resources,

finance, sales and marketing administration, investor

relations and risk management;

• Internal labor and benefits related to research and development

• Outside consulting services related to research and development

activities; and

• Testing equipment related to research and development activities.

•

Occupancy costs of corporate facilities;

____________________

(1)

Costs incurred in connection with R&D are charged to expense as incurred.

•

Depreciation related to corporate assets;

•

Information hardware, software and maintenance;

•

Insurance;

•

Investor relations costs; and

•

Other overhead costs.

Leases

We determine if an arrangement is a lease at inception. Right-of-use (ROU) assets and operating lease liabilities are

recognized at the lease commencement date based on the estimated present value of future lease payments over the

lease term. We elected the option to not separate lease and non-lease components for all of our leases. Most of our

leases do not provide an implicit interest rate nor is the rate available to us from our lessors. As an alternative, we use

our estimated incremental borrowing rate, which is derived from information available at the lease commencement

date,including publicly available data, in determining the present value of lease payments. Leases with an initial term of

12 months or less are not recorded on the balance sheet as an ROU asset or operating lease liability. We recognize

operating lease costs for these short-term leases, primarily small equipment leases, on a straight-line basis over the lease

term. At January1, 2022, our finance lease ROU assets and associated lease liabilities were not significant.

See Note 7, Leases, for further information regarding our operating leases.

Pre-opening Costs

Costs associated with the start-up and promotion of new retail store openings are expensed as incurred.

Advertising Costs

We incur advertising costs associated with print, digital and broadcast advertisements. Advertising costs are charged to

expense when the ad first runs. Advertising expense was $323 million, $253million and $242million in 2021, 2020 and

2019, respectively. Advertising costs deferred and included in prepaid expenses in our consolidated balance sheet were

not significant at January1, 2022 and January2, 2021, respectively.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (continued)

54 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Insurance

We are self-insured for certain losses related to health and workers’ compensation claims, although we obtain third-party

insurance coverage to limit exposure to these claims. We estimate our self-insured liabilities using a number of factors

including historical claims experience and analysis of incurred but not reported claims. Our self-insurance liability was

$13 million and $11million at January1, 2022 and January2, 2021, respectively. At January1, 2022 and January2,

2021, $9 million and $7million, respectively, were included in current liabilities: compensation and benefits in our

consolidated balance sheets and $4 million and $4million, respectively, were included in other non-current liabilities in

our consolidated balance sheets.

Software Capitalization

For software developed or obtained for internal use, we capitalize direct external costs associated with developing or

obtaining internal-use software. In addition, we capitalize certain payroll and payroll-related costs for employees who are

directly involved with the development of such applications. Capitalized costs related to internal-use software under

development are treated as construction-in-progress until the program, feature or functionality is ready for its intended

use, at which time depreciation commences. We expense any data conversion or training costs as incurred. Capitalized

software costs are included in property and equipment, net in our consolidated balance sheet.

We capitalize costs incurred with the implementation of a cloud computing arrangement that is a service contract,

consistent with our policy for software developed or obtained for internal use. The capitalized implementation costs of

cloud computing arrangements are expensed over the term of the cloud computing arrangement in the same line item

in the statement of operations as the associated hosting fees. Capitalized costs incurred with the implementation of a

cloud computing arrangement are included in prepaid expenses and other non-current assets in our consolidated

balance sheet, and in operating cash flows in our consolidated statement of cash flows.

Stock-based Compensation

We compensate officers, directors and key employees with stock-based compensation under stock plans approved by

our shareholders and administered under the supervision of our Board of Directors (Board). At January1, 2022, a total of

2.5million shares were available for future grant. These plans include non-qualified stock options and stock awards.

We record stock-based compensation expense based on the award’s fair value at the grant date and the awards that are

expected to vest. We recognize stock-based compensation expense over the period during which an employee is

required to provide services in exchange for the award. We reduce compensation expense by estimated forfeitures.

Forfeitures are estimated using historical experience and projected employee turnover. We include, as part of cash flows

from operating activities, the benefit of tax deductions in excess of recognized stock-based compensation expense. In

addition, excess tax benefits or deficiencies are recorded as discrete adjustments to income tax expense.

Stock Options - stock option awards are granted at exercise prices equal to the closing price of our stock on the grant

date. Generally, options vest proportionally over three years and expire after 10 years. Compensation expense is

recognized ratably over the vesting period.

We determine the fair value of stock options granted and the resulting compensation expense at the date-of-grant using

the Black-Scholes-Merton option-pricing model. Descriptions of significant assumptions used to estimate the expected

volatility, risk-free interest rate and expected term are as follows:

Expected Volatility – expected volatility was determined based on implied volatility of our traded options and

historical volatility of our stock price.

Risk-Free Interest Rate – the risk-free interest rate was based on the implied yield available on U.S. Treasury zero-

coupon issues at the date of grant with a term equal to the expected term.

Expected Term – expected term represents the period that our stock-based awards are expected to be outstanding

and was determined based on historical experience and anticipated future exercise patterns, giving consideration to

the contractual terms of unexercised stock-based awards.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (continued)

55 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Stock Awards - we issue stock awards to certain employees in conjunction with our stock-based compensation plan. The

stock awards generally vest over three years based on continued employment (time-based). Compensation expense

related to stock awards, except for stock awards with a market condition, is determined on the grant date based on the

publicly quoted closing price of our common stock and is charged to earnings on a straight-line basis over the vesting

period. Stock awards with a market condition are valued using a Monte Carlo simulation model. The significant

assumptions used to estimate the expected volatility and risk-free interest rate are similar to those described above in

Stock Options.

In April 2020, we took actions to maintain liquidity and cut costs in response to the COVID-19 pandemic, including

offering a salary for stock program. Under that program, certain employees elected to forego a percentage of their cash

salary for the remainder of the year in exchange for time-based stock awards that represented the value of the cash

salary foregone. Subject to continuing employment, these awards vested in December 2020.

Certain time-based stock awards have a performance condition (performance-based). The final numberof shares earned

for performance-based stock awards and the related compensation expenseis adjusted up or down to the extent the

performance target is met. The actual number of shares that will ultimately be awarded range from 0% - 200% of the

targeted amount for the 2021, 2020 and 2019 awards. We evaluate the likelihood of meeting the performance targets at

each reporting period and adjust compensation expense, on a cumulative basis, based on the expected achievement of

each of the performance targets. For performance-based stock awards granted in 2021, 2020 and 2019, the performance

targets are based on growth in net sales and in operating profit, and the performance periods are fiscal 2021 through

2023, fiscal 2020 through 2022 and 2019 through 2021, respectively.

See Note 8, Shareholders’ Deficit, for additional information on stock-based compensation.

Income Taxes

We recognize deferred tax assets and liabilities for the future tax consequences attributable to temporary differences

between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years

in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and

liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation

allowance is established for any portion of deferred tax assets that are not considered more likely than not to be realized.

We evaluate all available positive and negative evidence, including our forecast of future taxable income, to assess the

need for a valuation allowance on our deferred tax assets.

We record a liability for unrecognized tax benefits from uncertain tax positions taken, or expected to be taken, in our tax

returns. We follow a two-step approach to recognizing and measuring uncertain tax positions. The first step is to

evaluate the tax position for recognition by determining if the available evidence indicates it is more likely than not that

the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second

step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate

settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may

require periodic adjustments, and may not accurately forecast actual outcomes.

We classify net interest and penalties related to income taxes as a component of income tax expense in our consolidated

statements of operations.

Net Income Per Share

We calculate basic net income per share by dividing net income by the weighted-average number of common shares

outstanding during the period. We calculate diluted net income per share based on the weighted-average number of

common shares outstanding adjusted by the number of potentially dilutive common shares as determined by the

treasury stock method. Potentially dilutive shares consist of stock options and stock awards.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (continued)

56 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Sources of Supply

We currently obtain materials and components used to produce our beds from outside sources. As a result, we are

dependent upon suppliers that in some instances, are our sole source of supply, or supply the vast majority of the

particular component or material. We continuously evaluate opportunities to dual-source key components and materials.

The failure of one or more of our suppliers to provide us with materials or components on a timely basis could

significantly impact our consolidated results of operations and net income per share. While we believe that these

materials and components, or suitable replacements, could be obtained from other sources in the event of a disruption

or loss of supply, we may not be able to find alternative sources of supply or alternative sources of supply on comparable

terms and an unexpected loss of supply over a short period of time may not allow us to replace these sources in the

ordinary course of business.

New Accounting Pronouncements

Accounting Guidance Issued but Not Yet Adopted as of January 1, 2022

Currently, our credit facility and our Synchrony financing agreement reference LIBOR-based rates. In 2017, the United

Kingdom’s Financial Conduct Authority (FCA) announced that after 2021 it would no longer compel banks to submit the

rates required to calculate the London Interbank Offered Rate (LIBOR), which have been widely used as reference rates

for various securities and financial contracts, including loans, debt and derivatives. This announcement indicates that the

continuation of LIBOR on the current basis is not guaranteed after 2021. Subsequently in March 2021, the FCA

announced some USD LIBOR tenors (overnight, 1 month, 3 month, 6 month and 12 month) will continue to be published

until June 30, 2023. Regulators in the U.S. and other jurisdictions have been working to replace these rates with

alternative reference interest rates that are supported by transactions in liquid and observable markets, such as the

Secured Overnight Financing Rate (SOFR) for USD LIBOR. Our credit facility contains provisions specifying alternative

interest rate calculations to be employed when LIBOR ceases to be available as a benchmark. ASU 2020-04, Reference

Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, as amended, helps

limit the accounting impact from contract modifications due to the transition from LIBOR to alternative reference rates

that are completed by December 31, 2022. We do not expect a significant impact to our operating results, financial

position or cash flows from the transition from LIBOR to alternative reference interest rates, but we will continue to

monitor the impact of this transition until it is completed.

(2) Fair Value Measurements

At January1, 2022 and January2, 2021, we had $19 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 $19 million and $12million at January1, 2022 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.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (continued)

57 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

(3) Inventories

Inventories consisted of the following (in thousands):



January 1,

2022

January 2,

2021

Raw materials

$ 11,752 $ 12,599

Work in progress

83 103

Finished goods

93,809 68,660

$ 105,644 $ 81,362

Finished goods inventories consisted of the following (in thousands):



January 1,

2022

January 2,

2021

Finished beds, including retail display beds and deliveries in-transit to those customers

who have utilized home delivery services

$ 40,686 $ 21,442

Finished components that were ready for assembly for the completion of beds 32,835 28,108

Retail accessories 20,288 19,110

 $ 93,809 $ 68,660

(4) Property and Equipment

Property and equipment consisted of the following (in thousands):



January 1,

2022

January 2,

2021

Leasehold improvements

$ 130,640 $ 115,901

Furniture and equipment

136,464 125,292

Production machinery, computer equipment and software

257,802 233,249

Construction in progress

14,246 7,059

Less: Accumulated depreciation and amortization

(344,024) (306,278)

$ 195,128 $ 175,223

(5) Goodwill and Intangible Assets, Net

Goodwill and Indefinite-lived Intangible Assets

Goodwill was $64million at January1, 2022 and January2, 2021. Indefinite-lived trade name/trademarks totaled

$1.4million at January1, 2022 and January2, 2021.

Definite-lived Intangible Assets

The gross carrying amount of our developed technologies was $19million at January1, 2022 and January2, 2021.

Accumulated amortization was $16 million and $13million at January1, 2022 and January2, 2021, respectively.

Amortization expense for our developed technologies was $2million in each of 2021, 2020 and 2019.

The gross carrying amount of our patents, which were acquired in June 2020, was $2million at both January1, 2022 and

January2, 2021. Accumulated amortization was $0.3million and $0.1million at January1, 2022 and January2, 2021,

respectively.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (continued)

58 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Amortization expense for our patents was $0.2 million and $0.1million, in 2021 and 2020, respectively.

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

2022 $ 2,403

2023 1,431

2024 222

2025 226

2026 222

Thereafter 522

Total future amortization for definite-lived intangible assets $ 5,026

(6) Credit Agreement

As of January 1, 2022, our credit facility had a total commitment amount of $825million. The credit facility is for general

corporate purposes, to meet our seasonal working capital requirements and to repurchase our stock. The credit

agreement includes an accordion feature which allows us to increase the amount of the credit facility from $825million

to $1.2billion, subject to lenders’ approval. 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). 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 matures in

December 2026. We were in compliance with all financial covenants as of January1, 2022.

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



January 1,

2022

January 2,

2021

Outstanding borrowings

$ 382,500 $ 244,200

Outstanding letters of credit

$ 3,997 $ 3,997

Additional borrowing capacity

$ 438,503 $ 201,803

Weighted-average interest rate

1.6 % 1.5 %

(7) 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.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (continued)

59 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

At January1, 2022, our finance lease right-of-use assets and lease liabilities were not significant.

Lease costs were as follows (in thousands):

2021

2020 2019

Operating lease costs

(1)

$ 99,474 $ 90,311 $ 86,026

Variable lease costs

$ 2,205 $ 1,147 $ 1,809

____________________

(1)

Includes short-term lease costs which are not significant.

The maturities of operating lease liabilities as of January1, 2022, were as follows

(1)

(in thousands):

2022

$ 94,881

2023

85,944

2024

74,288

2025

64,404

2026

53,113

Thereafter

118,977

Total operating lease payments

(2)

491,607

Less: Interest

83,055

Present value of operating lease liabilities $ 408,552

___________________

(1)

Total operating lease payments exclude $82 million of legally binding minimum lease payments for leases signed but not yet commenced.

(2)

Includes the current portion of $72 million for operating lease liabilities.

Other information related to operating leases was as follows:



January 1,

2022

January 2,

2021

Weighted-average remaining lease term (years)

6.4 6.3

Weighted-average discount rate

6.1 % 6.9 %

(in thousands) 2021 2020 2019

Cash paid for amounts included in present value of operating lease

$ 90,198 $ 85,497 $ 81,718

Right-of-use assets obtained in exchange for operating lease liabilities $ 109,000 $ 43,860 $ 75,384

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (continued)

60 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

(8) Shareholders’ Deficit

Stock-Based Compensation Expense

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

 2021 2020 2019

Stock awards

$ 20,216 $ 19,435 $ 14,265

Stock options

2,998 2,378 2,392

Total stock-based compensation expense

(1)

23,214 21,813 16,657

Income tax benefit

5,722 5,126 3,998

Total stock-based compensation expense, net of tax

$ 17,492 $ 16,687 $ 12,659

____________________

(1)

Changes in annual stock-based compensation expense reflects the cumulative impact of the change in the expected achievements of certain

performance targets.

Stock Options

A summary of our stock option activity was as follows (in thousands, except per share amounts and years):



Stock

Options

Weighted-

Average

Exercise

Price per

Weighted-

Average

Remaining

Contractual

Term (years)

Aggregate

Intrinsic

Value

(1)

Outstanding at January 2, 2021

813 $ 30.74 6.5 $ 41,568

Granted

63 143.06

Exercised

(175) 25.42

Canceled/Forfeited

(2) 69.78

Outstanding at January 1, 2022

699 $ 42.02 6.3 $ 28,258

Exercisable at January 1, 2022

496 $ 30.24 5.5 $ 22,993

Vested and expected to vest at January 1, 2022

685 $ 41.58 6.3 $ 27,937

____________________

(1)

Aggregate intrinsic value includes only those options where the current share price is equal to or greater than the share price on the date of grant.

Other information pertaining to options was as follows (in thousands, except per share amounts):

 2021 2020 2019

Weighted-average grant date fair value of stock options granted

$ 71.93 $ 15.10 $ 18.97

Total intrinsic value (at exercise) of stock options exercised

$ 16,003 $ 14,357 $ 9,636

Cash received from the exercise of stock options for the fiscal year ended January1, 2022 was $4.4million. Our tax

benefit related to the exercise of stock options for the fiscal year ended January1, 2022 was $3.9million.

At January1, 2022, there was $4.2million of total stock option compensation expense related to non-vested stock

options not yet recognized, which is expected to be recognized over a weighted-average period of 1.9 years.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (continued)

61 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

The assumptions used to calculate the fair value of options granted using the Black-Scholes-Merton option-pricing

model were as follows:

Valuation Assumptions 2021 2020 2019

Expected dividend yield

0.0 % 0.0 % 0.0 %

Expected volatility

58 % 46 % 43 %

Risk-free interest rate

0.9 % 0.7 % 2.2 %

Expected term (years)

5.2 5.4 5.4

Stock Awards

Stock award activity was as follows (in thousands, except per share amounts):



Time-

Based

Stock

Awards

Weighted-

Average

Grant Date

Fair Value

Performance-

Based

Stock Awards

Weighted-

Average

Grant Date

Fair Value

Outstanding at January 2, 2021

302 $ 38.96 520 $ 38.52

Granted

70 128.72 172 97.40

Vested

(156) 37.86 (247) 34.71

Canceled/Forfeited

(10) 60.76 (4) 65.57

Outstanding at January 1, 2022

206 $ 69.55 441 $ 63.37

At January1, 2022, there was $8.3million of unrecognized compensation expense related to non-vested time-based

stock awards, which is expected to be recognized over a weighted-average period of 1.9 years, and $19.4million of

unrecognized compensation expense related to non-vested performance-based stock awards, which is expected to be

recognized over a weighted-average period of 1.9 years.

Repurchases of Common Stock

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

 2021 2020 2019

Amount repurchased under Board-approved share repurchase program

$ 364,479 $ 228,111 $ 145,900

Amount repurchased in connection with the vesting of employee

restricted stock grants 17,897 7,040 9,673

Total amount repurchased (based on trade dates)

$ 382,376 $ 235,151 $ 155,573

As of January1, 2022, the remaining authorization under our Board-approved $600million share repurchase program

was $403 million.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (continued)

62 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Net Income per Common Share

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

 2021 2020 2019

Net income

$ 153,746 $ 139,189 $ 81,845

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding

24,038 27,665 29,472

Dilutive effect of stock-based awards

909 763 883

Diluted weighted-average shares outstanding

24,947 28,428 30,355

Net income per share – basic

$ 6.40 $ 5.03 $ 2.78

Net income per share – diluted

$ 6.16 $ 4.90 $ 2.70

Additional potential dilutive stock options totaling 0.1million for fiscal year 2021 and 0.2million for fiscal years 2020 and

2019 have been excluded from our diluted net income per share calculations because these securities’ exercise prices

were anti-dilutive (e.g., greater than the average market price of our common stock).

(9) Revenue Recognition

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

thousands):



January 1,

2022

January 2,

2021

Deferred contract assets included in:  

Other current assets $ 28,048 $ 26,593

Other non-current assets 49,343 37,976

 $ 77,391 $ 64,569



January 1,

2022

January 2,

2021

Deferred contract liabilities included in:  

Other current liabilities $ 36,490 $ 35,288

Other non-current liabilities 63,680 49,689

 $ 100,170 $ 84,977

During the years ended January1, 2022, January2, 2021 and December 28, 2019, we recognized revenue of $29

million, $34million and $32million, respectively, that was included in the deferred contract liability balance at the

beginning of the year.

Revenue from goods and services transferred to customers at a point in time accounted for approximately 98% of our

revenues for 2021, 2020 and 2019.

Net sales consisted of the following (in thousands):

 2021 2020 2019

Retail stores $ 1,904,037 $ 1,582,266 $ 1,558,638

Online, phone, chat and other 280,912 274,289 139,714

Total Company $ 2,184,949 $ 1,856,555 $ 1,698,352

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (continued)

63 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Obligation for Sales Returns

The activity in the sales returns liability account for 2021 and 2020 was as follows (in thousands):

 2021 2020

Balance at beginning of year $ 24,765 $ 19,809

Additions that reduce net sales 91,975 81,513

Deduction from reserves (94,372) (76,557)

Balance at end of period $ 22,368 $ 24,765

(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 year, we may make a discretionary contribution equal to a

percentage of the employee’s contribution. During 2021, 2020 and 2019, our contributions, net of forfeitures, were

$7million, $6million and $6million, respectively.

(11) Income Taxes

Income tax expense consisted of the following (in thousands):

2021 2020 2019

Current:

Federal $ 17,019 $ 29,762 $ 12,299

State 4,568 6,528 3,293

21,587 36,290 15,592

Deferred:

Federal 10,954 584 2,591

State 1,004 (91) 480

11,958 493 3,071

Income tax expense $ 33,545 $ 36,783 $ 18,663

The following table provides a reconciliation between the statutory federal income tax rate and our effective income tax

rate:

2021 2020 2019

Statutory federal income tax 21.0 % 21.0 % 21.0 %

State income taxes, net of federal benefit 3.0 2.4 3.6

Stock-based compensation (6.3) (2.4) (4.3)

R&D tax credits (1.4) (1.4) (2.2)

Non-deductible compensation 1.5 1.0 —

Changes in unrecognized tax benefits (0.1) 0.3

(0.5)

Other 0.2 — 1.0

Effective income tax rate 17.9 % 20.9 % 18.6 %

We file income tax returns with the U.S. federal government and various state jurisdictions. In the normal course of

business, we are subject to examination by federal and state taxing authorities. We are no longer subject to federal

income tax examinations for years prior to 2018 or state income tax examinations prior to 2017.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (continued)

64 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Deferred Income Taxes

The tax effects of temporary differences that give rise to deferred income taxes were as follows (in thousands):

2021 2020

Deferred tax assets:

Stock-based compensation

$ 8,037 $ 7,518

Operating lease liabilities 102,292 86,692

Warranty and returns liabilities

7,459 8,496

Net operating loss carryforwards and credits

1,939 2,027

Compensation and benefits

8,206 6,045

Other

6,607 7,440

Total gross deferred tax assets

134,540 118,218

Valuation allowance

(615) (615)

Total gross deferred tax assets after valuation allowance

133,925 117,603

Deferred tax liabilities:

Property and equipment

34,655 31,881

Operating lease right-of-use assets 92,778 78,824

Deferred revenue

5,460 4,987

Other

1,720 2,153

Total gross deferred tax liabilities

134,613 117,845

Net deferred tax liabilities

$ (688) $ (242)

At January1, 2022, we had net operating loss carryforwards for federal purposes of $0.5million, which will expire

between 2025 and 2027.

We evaluate our deferred income taxes quarterly to determine if valuation allowances are required. As part of this

evaluation, we assess whether valuation allowances should be established for any deferred tax assets that are not

considered more likely than not to be realized, using all available evidence, both positive and negative. This assessment

considers, among other matters, the nature, frequency, and severity of historical losses, forecasts of future profitability,

taxable income in available carryback periods and tax planning strategies. In making such judgments, significant weight

is given to evidence that can be objectively verified. We have provided a $0.6million valuation allowance resulting

primarily from our inability to utilize certain foreign net operating losses, and federal net operating losses associated with

our 2015 acquisition of BAM Labs, Inc.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (continued)

65 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Unrecognized Tax Benefits

Reconciliations of the beginning and ending amounts of unrecognized tax benefits were as follows (in thousands):

Federal and State Tax

2021 2020 2019

Beginning balance

$ 3,912 $ 3,337 $ 3,866

Increases related to current-year tax positions

831 860 638

Increases related to prior-year tax positions

4 27 134

Decreases related to prior-year tax positions

(33) — (363)

Lapse of statute of limitations

(845) (312) (663)

Settlements with taxing authorities

— — (275)

Ending balance

$ 3,869 $ 3,912 $ 3,337

At both January1, 2022 and January2, 2021, we had $3.7million and $3.6million, respectively, of unrecognized tax

benefits, which if recognized, would affect our effective tax rate. The amount of unrecognized tax benefits is not

expected to change materially within the next 12 months.

(12) Commitments and Contingencies

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 December 14, 2021, Steamfitters Local 449 Pension & Retirement Security Funds filed a putative class action

complaint in the United States District Court for the District of Minnesota on behalf of all purchasers of Sleep Number

common stock between February 18, 2021 and July 20, 2021, inclusive, against Sleep Number, Shelly Ibach and David

Callen. Plaintiff alleges material misstatements and omissions in certain of Sleep Number’s public disclosures during the

purported class period, in violation of Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The

complaint seeks, among other things, unspecified monetary damages, reasonable costs and expenses and equitable/

injunctive or other relief as deemed appropriate by the Court. We believe these claims are without merit and intend to

vigorously defend the matter.

Consumer Credit Arrangements

We refer customers seeking extended financing to certain third-party financiers (Card Servicers). The Card Servicers, if

credit is granted, establish the interest rates, fees, and all other terms and conditions of the customer’s account based on

their evaluation of the creditworthiness of the customer. As the accounts are owned by the Card Servicers, at no time are

the accounts purchased or acquired from us. We are not liable to the Card Servicers for our customers’ credit defaults.

SLEEP NUMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements - (continued)

66 | 2021 FORM 10-K SLEEP NUMBER CORPORATION

Commitments

As of January1, 2022, we had $56million of inventory purchase commitments. As part of the normal course of business,

there are a limited number of inventory supply contracts that contain penalty provisions for failure to purchase

contracted quantities. We do not currently expect any material payments under these provisions. At January1, 2022, we

had entered into 45 lease commitments primarily for future retail store locations. These lease commitments provide for

total lease payments over the next three to 10 years, which if consummated based on current cost estimates, would

approximate $82million over the initial lease term. The future lease payments for these lease commitments have been

excluded in the total operating lease payments in Note 7, Leases.

(13) COVID-19 Pandemic