SNBR Sleep Number Corp - 10-K

ITEM 1A. RISK FACTORS

An investment in Sleep Number’s common stock involves a high degree of risk. Stakeholders 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 the Company. Additional

risks and uncertainties, including risks and uncertainties that impact the business environment generally, those not

presently known to the Company, or those that it currently sees as immaterial, may also harm its business. If any of these

risks occur, the Company’s business, results of operations, cash flows and financial condition could be materially and

adversely affected.

Risks Related to our Business and Industry

Adverse changes in general economic conditions and consumer sentiment have reduced, and could continue to

reduce discretionary consumer spending and, as a result, have adversely affected and could continue to

adversely affect the Company’s sales, profitability, cash flows, availability of credit, and financial condition.

The Company’s success depends significantly upon discretionary consumer spending, which is influenced by a number of

general economic factors, including without limitation economic growth, consumer confidence and sentiment, consumer

disposable income, the housing market, employment, fuel prices, income and debt levels, interest rates, inflation, taxation,

consumer shopping trends and the level of custo mer traffic, political conditions, inclement weather, natural disasters,

recession and fears of recession, civil unrest and disturbances, terrorist activities, war and fears of war, as well as

perceptions of personal wellbeing and security, health epidemics or pandemics. Adverse trends in these general economic

factors and reduced consumer spending have and may continue to adversely affect the Company’s sales, profitability,

cash flows, financial condition, availability of credit, including with respect to the Company’s current credit facility, its ability

to service and pay down debt, and any potential new or replacement sources of credit, or cause the Company to breach

covenants or other terms contained in its Credit Agreement, which could materially adversely affect the Company’s

business, results of operations, cash flows and financial condition. In the first quarter of 2026, to date, our net sales have

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been adversely affected by negative consumer sentiment, inclement weather, and we have experienced a year-over-year

decrease in net sales.

Although previously high inflation subsided somewhat in 2024 and 2025, it may again increase due to various economic

factors, such as the imposition of increased tariffs or other inflationary economic policies, and adversely affect the

Company’s business operations and financial results by increasing the costs of fuel, shipping, raw materials, labor,

commodity, and other costs. While the Company has historically been able to pass along some cost increases to its

customers, it has not and may not be able to offset such higher costs through price increases or other means, and its

margins, profitability, cash flows, availability of credit, and financial condition have been and could continue to be

adversely impacted.

The federal funds rates have fluctuated over the past three years and remain relatively high compared to the 10-year

average, adversely affecting customer purchasing behavior. It is uncertain whether the Federal Reserve will hold, reduce,

or increase the rate going forward and such uncertainty, as well as any Federal Reserve action or non-action with respect

to the rate, has and may continue to negatively affect customer purchasing behavior, which has and may continue to

adversely affect the Company’s sales, profitability, cash flows, credit availability and financial condition.

The United States (U.S.) debt ceiling and budget deficit concerns have increased the possibility of credit-rating

downgrades, economic slowdowns, or a recession in the U.S. The federal government has shutdown in 2026 and risks of

additional government shutdowns or sovereign defaults remain if the spending bills necessary to fund the government

through 2026 are not passed by Congress. Whether or not these concerns materialize, growing uncertainty may reduce

consumer confidence and increase levels of unemployment, all of which may reduce demand for the Company’s products,

causing harm to its sales, profitability, cash flows, availability of credit, and financial condition.

Additionally, instability or disruptions to credit markets or the financial services industry, including banks that fail or

otherwise become distressed, could adversely affect the Company’s, sales, operations, profitability, cash flows, availability

of credit, and financial condition.

Interest rates remain elevated, and may further increase, and impact the cost of servicing the Company’s

indebtedness and have an adverse effect on its results of operations, cash flows and stock price.

The Company’s Credit Agreement currently bears interest at a variable rate . The Company bears the risk that the rates

charged by the Company’s lenders will outpace expectations and the earnings and cash flow of its business. This has

reduced the Company’s profitability and has potential to continue to reduce profitability in addition to the potential to

adversely affect the Company’s ability to service its debt, or cause the Company to breach covenants or other terms

contained in its Credit Agreement, which could materially adversely affect the Company’s business, results of operations,

cash flows and financial condition.

A reduction in the availability of, or increase in the cost of, credit to consumers generally or under the

Company’s existing consumer credit programs has negatively impacted, and could continue to negatively

impact, the Company’s sales, profitability, cash flows and financial condition.

A significant percentage of the Company’s sales are made under consumer credit programs through third parties. The

amount and cost of credit available to consumers may be adversely impacted by macroeconomic factors, including

general economic conditions, consumer confidence and sentiment, consumer disposable income, the housing market,

employment, fuel prices, income and debt levels, interest rates, inflation, taxation, political conditions and uncertainty with

respect to the presidential administration , inclement weather, natural disasters, recession and fears of recession, civil

unrest and disturbances, terrorist activities, war and fears of war, including the war between Russia and Ukraine and the

conflicts in the Middle East, as well as consumer perceptions of personal wellbeing and security, health epidemics or

pandemics, which could cause suppliers of credit to adjust their lending criteria and costs. These macroeconomic factors

have, and may continue to, adversely impact the cost of credit which, in turn, has and may continue to negatively impact

the Company’s sales, profitability, cash flows and financial condition.

Synchrony Bank provides credit to the Company’s customers through a private label credit card agreement that is

currently scheduled to expire on December 31, 2028 , subject to earlier termination upon certain events. Adverse trends in

general economic factors and reduced consumer spending have and may continue to adversely affect the Company’s

sales, profitability, cash flows, financial condition, availability of credit, including with respect to the Company’s agreement

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with Synchrony Bank, or cause the Company to breach covenants or other terms contained in its agreement with

Synchrony Bank, which could materially adversely affect the Company’s business, results of operations, cash flows and

financial condition. Synchrony Bank has discretion to control the content of financing offers to the Company’s 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 the Company’s private label credit card program or changes in regulatory requirements,

or the termination of its agreement with Synchrony Bank, could harm the Company’s sales, profitability, cash flows and

financial condition.

The Company may not be successful in achieving the expected improvements, growth, cost savings, and other

benefits related to its turnaround strategy and such actions could have adverse effects on the Company.

The Company’s turnaround strategy is centered on product, marketing and distribution, as well as ongoing cost savings

and operating efficiencies, to reignite growth and increase financial resilience. The Company’s turnaround strategy and its

execution thereof may not be successful, which could adversely impact the Company’s business, results, profitability, cash

flows, availability of credit, and financial condition. Current or future demand may not support the costs of the Company’s

turnaround strategy, infrastructure at an acceptable margin, or vertically integrated business model. A failure or delay in

implementing or realizing the anticipated improvements, growth, cost savings, and other benefits of the turnaround

strategy could materially and adversely impact the Company’s business, results, profitability, cash flows, availability of

credit, and financial condition. Investments, costs and charges necessary or incurred in connection with implementing the

turnaround strategy may be significant and have been and may continue to be higher than expected. In addition,

implementing the cost savings and operating efficiency plans has and could continue to negatively impact the Company’s

workforce, partnerships, initiatives, innovation, brand, customer experience, and development plans or otherwise interfere

with the Company’s ability to grow and compete effectively, each of which could adversely impact the Company’s

business, results, profitability, cash flows, availability of credit, and financial condition.

Risks Related to Indebtedness and Liquidity

There is substantial doubt about the Company’s ability to continue as a going concern, and this may adversely

affect our stock price, our ability to raise capital or enter into strategic transactions, and our relationships with

key stakeholders.

In accordance with ASC Topic 205-40, Going Concern, the Company’s management evaluates whether there are certain

conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue

as a going concern. This evaluation includes considerations related to the Company’s forecasted liquidity and cash

consumption requirements for one year from the date of issuance of our consolidated financial statements included in this

Annual Report on Form 10-K.

As discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations –

Liquidity and Capital Resources , the Company has, throughout 2025, announced certain fixed cost reductions, pursued

alternative financing, and continues to pursue its t urnaround strategy , however the timing, costs and realization of these

cannot be guaranteed to ensure sufficient cash flow is generated to provide liquidity to meet the Company’s obligations.

While these actions demonstrate a series of material steps taken to improve the Company’s financial condition, the

Company has a history of net losses over the past three years and expects to continue to incur additional losses in the

near future. In addition, the Company anticipates that it will not remain in compliance with the financial covenants of its

Credit Agreement for the next twelve months. Inability to remain in compliance with such covenants will result in an event

of default under the Credit Agreement, allowing the lenders thereunder to declare all indebtedness thereunder due and

payable and terminate remaining commitments. As a result of these considerations, the Company’s liquidity may be

insufficient to meet its obligations for at least one year from the date of issuance of these financial statements, which

raises substantial doubt about the Company’s ability to continue as a going concern.

Management’s plans to address the substantial doubt about the Company’s ability to continue as a going concern, as

described above, include the following actions:

• execute the Company’s turnaround strategy centered on product, marketing and distribution with ongoing cost

savings and operating efficiencies to reignite growth and increase financial resilience;

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• engage in negotiations with the lenders in its Credit Agreement with the goal of amending or waiving financial

covenants and certain other provisions of its credit facility; and

• engaged financial advisors to assist in negotiating with the lenders and identifying and securing additional capital

options, alternative financing arrangements, strategic alternatives, or other comprehensive solutions to address

the Company’s capital structure and leverage needs to return to growth and create long-term value.

There can be no assurance of the Company’s ability to realize these plans , and the Company’s ability to realize these

plans depends, in part, on factors beyond the Company’s control . As a result, the Company has concluded that

management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern for at

least one year from the date of issuance of these financial statements.

There may be adverse impacts to the Company’s stock price, the Company’s ability to obtain supplies and services on

credit and the Company’s ability to raise capital, obtain waivers of the covenants under, or refinance the indebtedness

under, its Credit Agreement or enter into strategic transactions, or the Company’s relationship with its key stakeholders

and other counterparties as a result of the uncertainty regarding its ability to continue as a going concern or successfully

execute its plan to address the substantial doubt related thereto. If the Company is unable to successfully execute its

mitigation plan or obtain sufficient financial resources, its business, results of operations, financial condition, and cash

flows could be materially and adversely affected and it could be forced to terminate, significantly curtail or cease our

operations, pursue strategic alternatives or commence a case under the U.S. Bankruptcy Code.

The Company will require additional capital and its access to such capital or alternative financing options may

depend on factors beyond the Company’s control or may require the Company to accept unfavorable terms.

Absent a material improvement in the Company’s performance, the Company will need to obtain additional capital to

enable the Company to fund its operations, execute its business and turnaround strategies, service and repay its

indebtedness or to fund other liquidity needs. If the Company is unable to obtain additional capital to fund its operations

and strategies or satisfy its debt obligations, it will have to undertake alternative financing options, such as refinancing or

restructuring its indebtedness, selling assets, reducing or delaying capital investments, raising additional capital or

pursuing strategic alternatives, including commencement of a case under the U.S. Bankruptcy Code. The Company’s

ability to execute on these actions will depend on numerous factors including the Company’s financial condition at such

time and the condition of the capital markets and other factors beyond the Company’s control. Any new capital or

refinancing of the Company’s indebtedness could be at higher interest rates and could require the Company to comply

with more onerous covenants or other unfavorable terms, which could further restrict its business operations. The

Company cannot assure that any new capital raise, refinancing or debt restructuring would be possible, or if possible,

would be completed on favorable or acceptable terms. If sufficient cash from operations, refinancing, or external funding is

not available, the Company may be unable to adequately fund its business plan and operations and the Company’s

business, results of operations, cash flows and financial condition would be materially and adversely affected.

The Company’s credit facility contains financial covenants and other restrictions that may limit the Company’s

financial and operational flexibility or otherwise adversely affect our results of operations.

The terms of the Company’s credit facility, as set out in the Credit Agreement, includes a number of covenants, restrictions

and payment requirements that limit the Company’s ability to, among other things, incur additional indebtedness, grant

liens, sell or otherwise dispose of our assets, pay dividends, make redemptions and repurchases of stock, make

investments, loans and acquisitions or change the nature of our business. These may restrict the Company’s current and

future operations and could adversely affect its ability to finance its future operations or capital needs. In addition,

complying with the covenants and restrictions may make it more difficult for the Company to successfully execute its

business and turnaround strategies. In addition, the Credit Agreement includes financial covenants that, among other

things, require the Company to maintain a minimum liquidity amount and to satisfy certain leverage ratios, interest

coverage ratios and EBITDA targets. Absent a material improvement in the Company’s financial performance, it will be

unable to satisfy these ratios during 2026. A failure to comply with the covenants, restrictions or payment requirements set

out in the Credit Agreement could result in an event of default, which, if not cured or waived , would give the lenders the

right to terminate their commitments to provide additional loans, declare all borrowings outstanding, together with accrued

and unpaid interest and fees, to be immediately due and payable, increase the interest rates applicable to such debt, and

exercise rights and remedies, including by way of initiating foreclosure proceedings against any assets constituting

collateral for the obligations under the credit facilities. If our debt were to be accelerated, the Company may not have

sufficient liquidity or the ability to refinance the debt or sell sufficient assets to repay the debt, which could immediately

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adversely affect the Company’s business, results of operations, financial condition, and cash flows. Even if the Company

were able to obtain new financing, such financing may not be on favorable or acceptable terms.

Risks Related to the Company’s Marketing Strategy and Execution of Total Retail Distribution Strategy

The Company’s future growth and profitability depend upon the effectiveness and efficiency of its marketing

programs and promotions.

The Company is highly dependent on the effectiveness of its marketing messages, the efficiency of its advertising

expenditures in generating consumer awareness, consideration and conversation leading to sales of its products, and the

ability to competitively price its products. Sleep Number continues to evolve its marketing strategies, adjust its messages

and promotional discounts, differentiate its products, and review the amount it spends on advertising, the timing of its

spend, and where it is spent. The Company may not always be successful in developing effective messages or

addressing consumer perception regarding the price of its products, as the consumer and competition change, or in

achieving efficiency in its advertising expenditures . The Company has been and may continue to be constrained in its

ability to invest in advertising at a rate sufficient to drive demand.

The Company relies in part upon third parties, such as social media influencers and athletes, to market its brand, and is

unable to fully control their efforts. Influencers and athletes with whom the Company maintains a relationship could

engage in behavior or use their platforms to communicate directly with Sleep Number’s customers in a manner that

reflects poorly on its brand, and these communications may be attributed to the Company or otherwise adversely affect

the Company. It is not possible to prevent such behavior, and the precautions the Company takes to prevent or detect this

activity may not be effective.

Consumers expect seamless digital experiences and interactions as a part of their shopping experience. As a result, the

Company’s future growth and profitability will depend in part on (i) the effectiveness and efficiency of the Company’s

online experience, including without limitation advertising and search marketing and optimization programs and how our

brand shows up in artificial intelligence overviews and summaries, in generating consumer awareness and sales of its

products; (ii) the Company’s ability to prevent confusion among consumers that can result from search engines that allow

competitors to use its trademarks to direct consumers to competitors’ websites through confusing or misleading

advertisements; (iii) its ability to prevent Internet publication of false or misleading information regarding its products or the

Company’s competitors’ products; (iv) reviews of Sleep Number’s products; (v) the nature and tone of consumer

sentiment, including those published online or elsewhere; and (vi) the stability and effectiveness of the Company’s

website. Competitor spending on digital marketing programs has and may continue to increase, including without limitation

from a number of direct-to-consumer, digital and omnichannel retailers, which, in turn, has and may continue to increase

the cost of the Company’s digital marketing programs and online search terms.

If the Company’s marketing messages are ineffective or its advertising expenditures and other marketing programs,

including digital programs, are inefficient in creating awareness and consideration of its products and brand name, and in

driving consumer traffic to the Company’s website, call centers, or stores, the Company’s sales, profitability, cash flows,

availability of credit, and financial condition may be adversely impacted. In addition, if the Company is not effective in

preventing the publication of confusing, false or misleading information regarding its brand or its products, or if there is

publication online or elsewhere of significant negative consumer sentiment regarding the Company, brand or products,

sales, profitability, cash flows, availability of credit, and financial condition may be adversely impacted.

The Company’s future growth and profitability depend on its ability to execute its Total Retail distribution

strategy.

The vast majority of the Company’s sales occur through Total Retail, including its retail stores and website. The

Company’s retail stores carry significant fixed costs, and it has made significant capital expenditures in that store footprint.

The Company is highly dependent on its ability to maintain and increase sales per store to cover these fixed expenses,

provide a return on its capital investments and improve the Company’s operating margins. As a part of the Company’s

cost savings and operational efficiencies, select stores have been closed and additional stores are expected to be closed,

and store remodels have been delayed. These closures and older retail store designs have resulted and may continue to

result in higher than expected costs, charges, continued rent liability, lost sales, lower brand awareness, weakened

customer experience, deteriorated reputation, or otherwise negatively impact the Company’s sales, profitability, cash

flows, availability of credit, and financial condition.

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Some of the Company’s stores are mall-based, which stores depend on the continued popularity of malls as shopping

destinations and the ability of mall anchor tenants and other attractions to generate customer traffic. Any decrease in mall

traffic, including due to increased online shopping, could adversely affect the Company’s sales, profitability, cash flows,

availability of credit, and financial condition.

The Company’s Total Retail distribution strategy results in relatively few points of distribution, including 600 retail stores in

50 U.S. states as of the end of 2025 , Online, Phone and Chat. Several of the mattress manufacturers and retailers with

which the Company competes have significantly more brick-and-mortar points of distribution than it does, which makes

the Company highly dependent on its ability to drive consumers to its points of distribution to maintain and gain market

share.

When the Company is better positioned to extend existing leases or open new stores in the future, it may encounter

higher than anticipated rents, be unable to find or obtain suitable new locations or renew existing locations, and may need

to navigate a deteriorated reputation among potential landlords.

Risks Related to the Company’s Ability to Compete Effectively

Significant competition has affected and is likely to continue to adversely affect the Company’s business.

As a vertically integrated business, the Company’s products and distribution face significant competition from both

manufacturers of different types of mattresses and a variety of retailers.

The mattress industry is becoming more concentrated among the largest manufacturers of innerspring mattresses and

foam mattresses and one dominant national mattress manufacturer and retailer. The dominant national mattress

manufacturer and retailer may further consolidate through an announced potential acquisition of a national foam and

adjustable base supplier . 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. A variety of sleep tracking and monitoring products that compete

with the Company’s SleepIQ technology have been introduced by various manufacturers and retailers, both within and

outside of the traditional mattress industry. A variety of mattress and base manufacturers have also come to market with

copycat smart beds, some featuring a version of what they market as “adjustable firmness.” This competition has and may

continue to increase the costs of search terms and digital advertising and otherwise adversely affect the Company’s

business.

Some of the Company’s competitors have substantially greater financial, marketing and manufacturing resources, greater

investment in customer experience, and greater brand name recognition than the Company does and sell products

through broader and more established distribution touchpoints, which has and may continue to negatively impact traffic to

the Company’s distribution points. Consolidation in the mattress industry has and may continue to amplify this disparity.

The Company’s national, exclusive distribution competes with other retailers who generally provide a wider selection of

mattress and brand alternatives at varying price points than the Company offers.

These manufacturing and retailing competitors, or a combination of these competitors, or new entrants into the market,

may compete aggressively and maintain 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. The Company has limited ability to anticipate the timing and scale of new product introductions,

advertising campaigns or new pricing strategies by its competitors, which could inhibit its ability to maintain or increase

market share, or to maintain the Company’s profit margins.

If the Company is unable to effectively compete with other manufacturers and retailers of mattress and sleep tracking and

monitoring products, the Company’s sales, profitability, cash flows and financial condition may be adversely impacted.

Failure to achieve and maintain high levels of product and service quality could negatively impact the Company’s

sales, profitability, cash flows and financial condition.

The Company’s products and services 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, the Company’s beds may be susceptible to failures that do not exist with traditional or foam

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mattresses. Also, the Company has launched and is launching new products on a faster timeline than the Company’s prior

product launches, which truncated timeline could result in unforeseen issues like potential technical or quality issues.

Failure to achieve and maintain acceptable quality standards could impact consumer acceptance of its products and

services or result in negative media and Internet reports or owner dissatisfaction that could negatively impact the

Company’s brand image and sales levels. In addition, a decline in product or service 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 the Company’s

warranty reserves. An unexpected increase in return rates or warranty claims could harm the Company’s sales,

profitability, cash flows and financial condition.

The Company faces an inherent risk of exposure to product liability claims or regulatory actions if the use of its products is

alleged to have resulted in personal injury or property damage. If any of the Company’s products proves to be defective or

non-compliant with applicable regulations such as the federal Consumer Product Safety Commission flammability

standards, the Company may be required to recall or redesign such products. The Company has at times experienced

product liability claims and regulatory actions and may experience such actions in the future. The Company maintains

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 the Company outside of, or in excess of, available

insurance coverage, or any claim or product recall that results in significant adverse publicity about the Company, may

have a material adverse effect on the Company’s sales, profitability, cash flows and financial condition.

The Company’s future growth and profitability depend in part on its ability to continue to improve and expand its

product line, anticipate and respond to changing consumer trends, and to successfully execute new product

introductions.

The Company’s ability to compete effectively in the highly competitive sleep and wellness field and to profitably maintain

or grow its market share depend in part on its ability to continue to improve and expand the Company’s product line of

adjustable firmness air beds, adjustable bases, SleepIQ technology, and related accessory products. The Company incurs

significant research and development and other expenditures in the pursuit of improvements and additions to its product

line and is re-prioritizing research and development resources in this highly constrained environment. As part of the

Company’s turnaround strategy, it is repositioning the brand and reducing its core lineup from twelve mattresses to seven

mattresses, including five new mattresses, and doing so on a faster timeline than the Company’s prior product launches. If

these efforts do not result in meaningful product improvements, if the Company is not able to timely anticipate and

respond to changing consumer trends and to gain widespread consumer acceptance of product improvements or new

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

product introductions, the resulting impacts on our product mix and distribution strategy could adversely affect the

Company’s sales, profitability (including margin), cash flows and financial condition. The Company’s comprehensive new

product launch as part of its turnaround strategy has and may continue to result in inventory management issues including

increased obsolescence and write-offs, as well as, inventory shortages and longer fulfillment times, which would adversely

affect the Company’s sales, profitability (including margin), cash flows and financial condition.

In addition, if any significant product improvements or new product introductions are not successful, delayed, or

constrained the Company’s reputation and brand image may be adversely affected.

The Company’s intellectual property rights may not prevent others from using its technology or trademarks in

connection with the sale of competitive products. The Company is from time to time subject to claims that its

products, processes or trademarks infringe intellectual property rights of others.

The Company owns various U.S. and foreign patents and patent applications related to certain elements of the design and

function of the Company’s beds, biosignal monitoring and related products. The Company owns numerous registered and

unregistered trademarks and trademark applications, including in particular the Sleep Number, Climate360 and SleepIQ

trademarks, as well as other intellectual property rights, including trade secrets, trade dress and copyrights, which it

believes has significant value and is important to the development, function, and marketing of its 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 Sleep Number beds, biosignal

monitoring or other products, and may be costly and time-consuming to protect and enforce. The Company’s patents are

also subject to varying expiration dates. In addition, the laws of some foreign countries may not protect its intellectual

property rights and confidential information to the same extent as the laws of the U.S. If the Company is unable to protect

and enforce its intellectual property, the Company may be unable to prevent other companies from using the Company’s

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technology or trademarks in connection with competitive products, which could adversely affect the Company’s sales,

profitability, cash flows and financial condition.

The Company is from time to time subject to claims that its products, processes, advertising, or trademarks infringe the

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

litigation, and if the Company is not successful in its defense, it could be subject to injunctions and liability for damages or

royalty obligations, and the Company’s sales, profitability, cash flows and financial condition could be adversely affected.

Risks Related to the Company’s Reliance on Third Parties and Reliance on a Global Supply Chain

The Company relies upon several key suppliers and third parties that are, in some instances, the only source of

supply or services currently used by the Company for particular materials, components, products, systems,

services, or consumer financing. A disruption in the supply or substantial increase in cost of any of these

products or services has, and could continue to, harm the Company’s sales, profitability, cash flows, availability

of credit, and financial condition.

Sleep Number currently obtains all the materials and components used to produce its smart beds from outside sources

including some that are located outside the U.S. In several cases, including its air chambers, integrated non-adjustable

foundations, adjustable foundations, various components for its Firmness Control and Smart Control systems, certain

electronic componentry, certain foam formulations, as well as its fabrics and zippers, the Company obtains these

materials, components and products from suppliers who serve as the only source of supply, or who supply the vast

majority of the Company’s needs of the particular material, component or product. While the Company believes 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, it has not been able to, and in the future may not be able to, find alternative sources of

supply or alternative sources of supply on comparable terms, quantities and timelines. If the Company’s relationship with

these suppliers or the suppliers’ services are disrupted, terminated or otherwise negatively impacted, including by

consolidations in the industry or by government actions, such as the imposition of tariffs or other trade restrictions , the

Company could have difficulty in replacing these sources since there are relatively few other suppliers presently capable

of manufacturing these components and products or that offer similar services. Constraints on the ability of certain of its

suppliers to timely meet commitments, including in an environment of increased demand for consumer products and

services and labor challenges, has, and may continue to, adversely impact the Company’s ability to meet its products and

services demand, result in additional costs, or otherwise adversely impact the Company’s business, operations and

financial results.

The Company also relies on limited critical suppliers for its information technology systems and services and e-commerce

as well as Synchrony Financial for the majority of its consumer financing services. If the Company’s relationship with

these suppliers or the suppliers’ services are disrupted, terminated or otherwise negatively impacted, the Company could

have difficulty in replacing these systems, services and e-commerce in a timely and cost-effective manner, adversely

impacting the Company’s sales, profitability, cash flows, availability of credit, and financial condition.

In addition, third parties on which the Company relies, for various reasons have demanded or required or may demand or

require changes to their payment terms and frequency, credit limits and exposures, or other contractual terms with the

Company. As a part of its turnaround strategy and cost savings and operational efficiencies, the Company has and will

continue to carefully manage its cash, including extending payment terms and delaying payments. If the Company is

unable to accommodate or otherwise resolve third-party demands, changes to contractual terms or perceived

deterioration of its credit worthiness, the Company’s supply of goods, products and services from these third parties could

be disrupted, terminated or otherwise negatively impacted and the Company may not be able to or could have difficulty in

replacing the supply of such goods, products and services in a timely and cost-effective manner, adversely impacting the

Company’s sales, profitability, cash flows, availability of credit, and financial condition.

Fluctuations in commodity prices or availability, or third-party delivery or logistics costs, have resulted, and

could continue to result, in an increase in component costs and/or delivery costs.

The Company’s business is subject to significant increases or volatility in the prices or availability 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. Tariffs on these commodities, increases in

prices of these commodities or logistics costs, supply shortages or other inflationary pressures have resulted, and may

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SLEEP NUMBER CORPORATION

continue to result, in significant cost increases for the Company’s raw materials and product components, as well as

increases in the cost of delivering its products to customers. The Company has been, and may continue to be, unable to

offset any such increased costs through value engineering and similar initiatives, or through price increases or availability,

and, as a result, the Company’s profitability, cash flows and financial condition have been, and may continue to be

adversely impacted. Price increases to offset the increased costs, have, and may continue to, adversely impact the

Company’s sales volumes.

The Company relies on third parties to deliver some of its products to its facilities and customers on a timely and cost-

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

global health conditions, or other factors that may result in disruption, delays in deliveries or increased costs of deliveries.

Any significant delay in deliveries to its customers could lead to increased cancellations or returns and cause the

Company to lose sales or incur increased costs. Delays in deliveries and increases in freight charges or other costs of

deliveries has and could continue to harm the Company’s sales, profitability, cash flows and financial condition.

The Company’s business is subject to risks inherent in global sourcing activities.

Sleep Number’s air chambers, certain electronic components, and some of its other components are manufactured

outside the U.S., and therefore are subject to risks associated with foreign sourcing of materials, including but not limited

• Existing or potential duties, tariffs or quotas on certain types of goods that may be imported into the U.S., including

recent and proposed unilateral tariffs, tariffs on certain goods from China and Mexico, tariffs on goods subject to the

United States-Mexico-Canada Agreement (USMCA), and recent and proposed tariffs on materials such as steel;

• Foreign regulations that may impact availability or cost of supply;

• Political instability, unrest, geopolitical turmoil, acts of terrorism, global conflicts, including geopolitically challenging

situations in regions such as Russia, the Middle East and China, outbreaks of pandemics or contagious diseases,

shipping delays, foreign or domestic strikes, customs inspections, changes in immigration rates, laws, and

enforcement, or other factors resulting in disruption in supply, transportation, trade, labor, or the availability of global

contractors utilized in the Company’s business operations;

• Foreign currency fluctuations;

• Economic uncertainties, including inflation and policies that may have an inflationary effect, such as tariffs; and

• Adverse weather conditions, climate change or other natural or man-made disasters.

The Company cannot predict whether the countries in which some of its components are manufactured, or may be

manufactured in the future, or where the Company contracts for labor will be subject to new or additional trade restrictions

imposed by the U.S. or other foreign governments, including the likelihood, type, or effect of any such restrictions. The

U.S. government has implemented certain trade policies, including imposing and proposing tariffs on most of our foreign

suppliers. A significant portion of the Company’s imports are subject to the USMCA, so any changes increasing tariffs

under the USMCA would have negative consequences. Similarly, some of the Company’s third-party suppliers have

disclosed that they may source, directly or indirectly, a portion of their supply chain requirements of 3TGs or fabrics from

China, which materials have generally been under scrutiny for potential ties to Uyghur forced labor camps. These factors

have, and could continue to, increase the costs of doing business with foreign suppliers, lead to inadequate inventory

levels or delays in shipping products to customers, or the need to find new sources for certain materials on short notice,

which could harm the Company’s sales, customer satisfaction, profitability, cash flows and financial condition.

The locations where Sleep Number and its suppliers and global contractors operate have experienced, and may

experience in the future, adverse regional events such as extreme weather conditions, climate change and other natural

and man-made disasters, which could have a significant adverse effect on the Company, its ability to source necessary

materials, components and products, and its ability to develop, launch, sell and deliver its 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 have disrupted, and may continue to, disrupt the

Company’s operations and ability to source components and products.

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The Company has been, and could continue to be, vulnerable to shortages in supply of components necessary to

manufacture its products due to its manufacturing processes which operate with minimal levels of inventory or

due to global shortages of supply of electronic componentry or other materials, unexpected increased consumer

demand or inadequate demand forecasting, which, in turn, has and may continue to harm its ability to satisfy

consumer demand and adversely impact the Company’s sales and profitability.

A significant percentage of the Company’s products are assembled after it receives 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 its products are provided on a

sole source basis. The Company’s ongoing efforts to mitigate supply chain weaknesses may not be successful or may

have unfavorable effects such as increased storage costs or excess supply. Shortage of materials caused by disruptions

and unavailability of supply, an increase in the demand for some or all of its products or inability to adequately forecast

supply needs, has harmed and could continue to harm the Company’s ability to satisfy customer demand, delay deliveries

of its products to customers, lead to customer cancellations and returns, delay the development and launch of new

products, and increase its costs. These risks have been and will continue to be exacerbated by developments in the

semiconductor and technology supply chain, including increased global demand for more sophisticated, high‑performance

computing and artificial intelligence‑related chips, which has and will continue to strain and divert manufacturing capacity

and supplier resources from the production of lower‑capacity or legacy chips that remain critical to many of the Company’s

products. In addition, the Company may carry some excess inventory of certain components for various products from

time to time especially when the Company has faced component shortages or when the Company introduces new

products that use different components, and if the Company is unable to use that excess inventory fully or timely, the

Company m ay run the risk of obsolescence, which could result in write-downs of inventory and an adverse effect on gross

margins. As the Company executes its turnaround strategy, and has launched and is launching new products, for a

product transition that repositions the brand and reduces its core lineup from twelve mattresses to seven mattresses,

including five new mattresses, on a faster timeline than any prior product launches, it has incurred and may continue to

incur inventory obsolescence related to this significant product transition. Any such impacts or delays have and may

continue to adversely affect the Company’s sales, customer satisfaction, profitability, cash flows and financial condition.

Risks Related to the Company’s Vertically Integrated Business Model

Disruption to the Company’s facilities and operations could increase its costs of doing business or harm the

Company’s ability to satisfy customer demand, develop, test and launch new products, and service its products

and customers.

As a vertically integrated business, the Company has various facilities and operations including manufacturing, assembly,

distribution, logistics, field services, home delivery, headquarter, product development, retail and customer service. Sleep

Number operates a dedicated cut and sew facility for cover production in Irmo, SC and an advanced engineering and

prototyping facility in Salt Lake City, UT. Each of these facilities are combined with an assembly distribution center (ADC).

There are three additional ADCs (Minneapolis, MN; Cincinnati, OH; and Dallas, TX). The five ADCs leverage component

inventory to pre-assemble 100% of its mattresses to order rather than stocking finished goods. The Company has field

service and home delivery operations and contractors that deliver and service its products across the country as well as a

bedding fulfillment center that ships bedding products to consumers via third-party services. The product development and

testing operations primarily occur in the Company’s corporate headquarters in Minneapolis, Minnesota and Sleep Number

Labs facility in San Jose, California. Sleep Number’s customer service operations are largely remote positions with team

members located across the country and international third-party contractors, and the Company has retail stores across

the country. Disruption to any of the Company’s operations, facilities, workforce, third-party contractors, or the Company’s

nationwide logistics network, could harm or delay its ability to satisfy customer demand, develop, test and launch new

products, service its products and customers, and increase its costs. While the Company’s metrics related to customer’s

experience indicate that the customer experience has improved over prior year, the Company’s customer service

operations remain reliant on third-party contractors. Such impacts and delays could adversely affect the Company’s sales,

customer satisfaction, profitability, cash flows, availability of credit, and financial condition.

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Any future acquisitions, business combinations or divestitures t he Company completes involve a number of

risks, the occurrence of which could adversely affect the Company’s business, reputation, operating results and

financial condition.

The Company’s ability to complete future acquisitions, business combinations or divestitures will depend, in part, on the

availability of suitable candidates at acceptable prices, terms, and conditions; the Company’s ability to compete effectively

for transaction candidates; and the availability of capital and personnel to complete such transactions and run the resulting

operations effectively. The benefits of the transaction may take more time than expected to develop, integrate into or

divest from the Company’s operations, and the Company cannot guarantee that future transactions will, in fact, produce

any benefits. Such transactions may involve a number of risks, the occurrence of which could adversely affect the

Company’s business, reputation, operating results and financial condition, including: (i) diversion of management’s

attention; (ii) disruption to the Company’s existing operations and plans or the inability to effectively manage the

Company’s expanded operations; (iii) reallocation of amounts of capital from other operating initiatives and/or an increase

in the Company’s leverage and debt service requirements to fund any such transactions, which could in turn restrict the

Company’s ability to access additional capital when needed or pursue other important elements of its business strategy;

(iv) infringement by acquired businesses of intellectual property rights of others; (v) violation of confidentiality, intellectual

property and non-compete obligations or agreements by employees of an acquired business or lack of or inadequate

formal intellectual property protection mechanisms in place at an acquired business; (vi) inaccurate assessment of

additional post-transaction investments, undisclosed, contingent, tax or other liabilities or problems, unanticipated costs

associated with an acquisition, and an inability to recover or manage such liabilities and costs; (vii) incorrect estimates

made in the accounting for transactions and incurrence of non-recurring charges, including restructuring charges in

connection with any future effort to reduce costs and streamline operations; and (viii) additional risks that may arise as a

result of the transaction with international entities, including managing international laws and regulations applicable to the

business, operations and personnel.

Risks Related to Workforce

The Company’s operating performance, profitability, and future growth depend upon its ability to attract, retain

and motivate qualified and effective personnel.

As a vertically integrated manufacturer and retailer, the Company’s future growth and profitability will depend upon its

ability to attract, retain and motivate qualified personnel in a wide variety of areas to execute its growth strategy, including

qualified management and executive personnel, retail sales professionals and managers, and manufacturing, home

delivery and technical personnel. In addition, the Company’s success will depend upon the effectiveness of its

organizational leadership and managers as well as the capabilities of its team members; some of these risks may be

heightened while the Company executes its turnaround strategy and ongoing cost savings and operational efficiencies.

Labor challenges or other economic factors may prevent the Company, and its suppliers and vendors, from successfully

hiring and retaining qualified personnel especially for critical business functions. The failure to attract, retain and motivate

qualified personnel or the lack of effective organizational leadership, management or appropriate team capabilities or

resources may hinder the Company’s ability to execute its turnaround strategy, growth initiatives, business operations,

and may adversely impact the Company’s sales, profitability, cash flows and financial condition.

Certain portions of the Company’s workforce, in particular its home delivery, logistics, manufacturing, warehouse, and

retail, may seek to unionize or engage in unionization activities. Such activities may cause distraction from the Company’s

core business, reduce the Company’s ability to manufacture, sell, or deliver its products, increase the Company’s costs,

reduce efficiency, and adversely impact the Company’s sales, profitability, cash flows and financial condition.

Risks Related to Legal Compliance and Legal Proceedings

The Company’s 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 the Company’s operations or

increase its compliance costs. Failure to comply with such laws and regulations could have further adverse

impacts on the Company’s operations.

The Company is subject to a variety of laws and regulations. Laws and regulations at the international, federal, state and

local levels frequently change and the Company cannot always reasonably predict the impact from, or the ultimate cost of

compliance with, future regulatory or administrative changes. Changes in law, the imposition of new or additional

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regulations or the enactment of any new or more stringent legislation that impacts employment and labor, trade,

advertising claims, marketing practices, pricing, consumer credit offerings, “do not call/mail” requirements, text messaging

requirements, product testing and safety, health and wellness product requirements, use of artificial intelligence,

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 the

Company to change the way it does business and could have a material adverse impact on the Company’s sales,

profitability, cash flows and financial condition. New or different laws or regulations could increase direct compliance costs

for the Company or may cause its vendors to raise the prices they charge the Company 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 the Company is currently subject, particularly where the layers are in conflict, could require alteration of its

manufacturing processes or operational parameters which may adversely impact the Company’s business.

Legislative or regulatory changes that impact the Company’s relationship with its workforce, such as minimum wage

requirements or health insurance or other employee benefits mandates, could increase the Company’s expenses and

adversely affect its operations. While it is Sleep Number’s policy and practice to comply with legal and regulatory

requirements and its procedures and internal controls are designed to promote such compliance, the Company cannot

assure that all of its operations will comply with all such legal and regulatory requirements. Further, laws and regulations

change over time and the Company may be required to incur significant expenses, modify its operations, or delay new

product introductions in order to ensure compliance. This could harm the Company’s profitability, cash flows and financial

condition. If Sleep Number is found to be in violation of any laws or regulations, it could become subject to fines, penalties,

damages or other sanctions as well as potential adverse publicity or litigation exposure. This could adversely impact the

Company’s business, reputation, sales, profitability, cash flows and financial condition.

Risks Related to the Company’s 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 the

Company’s business and could result in a breach of the data.

The Company’s information systems and information systems of third-party vendors it uses to assist in the storage and

management of information, including on-premise and cloud-based systems, contain personal, financial, and SleepIQ ®

data and information related to its customers and team members collected and maintained in the ordinary course of its

business. These information systems also contain confidential Company data regarding its business and innovations. The

Company’s use and dependence on its information systems requires data storage in cloud-based systems. While the

Company maintains, and requires the Company’s third-party vendors to maintain, security measures to protect this

information, a breach of these security measures, such as through third-party action and attacks, team member error,

access to its data and systems, malfeasance or otherwise, could compromise the security of the Company’s data and

customers’ and team members’ personal information. Like many other businesses, Sleep Number has and will likely

continue to experience cyber-based attacks and incidents from time to time. As the techniques used to breach security

measures change frequently and may not be recognized until launched against a target, the Company may be unable to

anticipate these techniques or to implement adequate preventive measures. In addition, the Company or its third-party

vendors may not be successful in timely identification or containment of cyber-based attacks and incidents. Any failure of

the Company’s systems and processes or its third-party vendors’ systems and processes to adequately protect its data or

customer or team member personal information from exposure, theft or loss could adversely impact the Company’s

business, reputation, sales, profitability, cash flows and financial condition.

Advancements in and adoption of, or the failure to effectively adopt, artificial intelligence and related

technologies may increase cost and risks associated with competition, regulatory requirements, and

cybersecurity threats.

Rapidly evolving technological and regulatory developments related to artificial intelligence and related technologies may

increase competitive, legal, and security risks facing the Company. To effectively compete, the Company needs identify

and evolve with emerging technological and broader industry trends, including technologies such as artificial intelligence

and related technologies as well as to develop appropriate protections, safeguards, and policies for handling the

processing of data. In addition, the regulatory and legal landscape regarding artificial intelligence is rapidly evolving and

the Company may be challenged to timely comply in a cost-effective manner. Any actual or perceived failure to effectively

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adopt artificial intelligence or related technologies, comply with evolving regulatory frameworks regarding, or if adoption

introduces bias or other issues, the development and use of artificial intelligence could adversely affect the Company’s

business operations, reputation, customer satisfaction, profitability, cash flows and financial condition. In addition, new

artificial intelligence technologies may increase the risk of internal or external data loss, misappropriation of intellectual

property, and enable cyber-attackers to create increasingly effective and powerful methods of cyber-attack, including, for

example, the development of malicious code, denial-of-service attacks, use of quantum computing, sophisticated phishing

attempts, and other attacks. The Company may not be able to sufficiently identify, withstand, and contain such attacks,

which may cause disruption to business operations and harm the Company’s sales, customer satisfaction, profitability,

cash flows and financial condition.

Any maintenance, improvements or upgrades to information systems and services that may be required to meet

the ongoing and evolving needs of the Company’s business and cybersecurity needs as well as existing and

emerging regulatory requirements may be costly to implement, may take longer or require greater resources than

anticipated and may result in disruptions to its systems or business.

The Company depends on its information systems and services for many aspects of its business including those provided

by suppliers and third parties. Sleep Number has and may continue to have disruptions or outages to these information

systems and services that negatively impact its business and systems. If the Company’s information systems and services

or if any suppliers or other third-parties’ information systems and services upon which the Company relies are disrupted in

any material way, or maintenance, improvements or upgrades are required to meet the ongoing or evolving needs of its

business, cybersecurity needs, and existing and emerging regulatory requirements, then the Company may be required to

incur significant capital expenditures in the pursuit of continuity, improvements or upgrades to its information systems and

services. 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, fines, security vulnerabilities to, or otherwise

negatively impact the Company’s existing systems and business. Any of these outcomes could impair the Company’s

ability to achieve critical strategic initiatives and could adversely impact the Company’s sales, profitability, cash flows and

financial condition.

Risks Related to the Company’s Stock

The Company’s stock price has and may continue to fluctuate and the Company’s financial results, removal from

various stock indices and other factors have and may continue to adversely affect the Company’s stock price.

The Company’s stock price has and may continue to fluctuate significantly in response to numerous factors such as: the

overall performance of the equity markets and the economy as a whole; the Company’s’ financial and operating

performance, which may fluctuate due to the risk factors set forth herein; changes in the financial projections the

Company or third parties may provide to the public or the Company’s failure to meet these projections; actual or

anticipated changes in its growth rate relative to that of its competitors; inclusion or removal from various stock indices;

significant stock trades by large shareholders; failure of securities analysts to maintain coverage of the Company;

changes in financial estimates by securities analysts who follow the Company or its failure to meet these estimates or the

expectations of investors; sales of shares of the Company’s common stock by Sleep Number or its shareholders

particularly sales by its directors, executive officers and significant shareholders or the perception that these sales could

occur. Although the Company’s common shares are listed on the Nasdaq Stock Market, the volume of trades on any given

day may be limited and, as a result, shareholders might not be able to sell or purchase its common shares at the volume,

price or time desired.

A substantial amount of the Company’s stock is held by a small number of large investors and significant sales

of its common stock by one or more of these holders could adversely affect the Company’s stock price.

As of January 2, 2026, the Company’s 25 largest holders of common stock were investors who held approximately 79 % of

the outstanding shares of common stock in the aggregate. These investors have sold and may sell some or all of their

shares at any time for a variety of reasons, and such sales could depress the market price of the Company’s common

stock, which could adversely affect the Company’s stock price. In addition, any such sales of the Company’s common

stock by these entities could also impair its ability to raise capital through the sale of additional equity securities.

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The Company’s business could be negatively affected as a result of shareholder activism.

While the Company welcomes shareholders’ constructive input, the Company could be negatively affected as a result of

shareholder activism, which could cause the Company to incur significant expense, disrupt the execution of its business

strategy, and impact the performance of its stock price. The Company has been, and may continue to be, the subject of

shareholder activism, and it is subject to the risks associated therewith. Responding to shareholder activism, including

proxy contests, requires significant time and attention from management and the Board, potentially interfering with the

Company’s ability to execute its strategic plan. The Company may be required to incur significant legal fees and other

expenses, and the attention of management may be diverted by such activism. Any of these impacts could materially and

adversely affect the Company’s business and operating results, and the Company’s stock price has experienced, and may

continue to experience, fluctuation or otherwise be adversely affected by shareholder activism.

If securities analysts do not publish, or cease publishing, research or reports about the Company, the Company’s

business, or if they change their recommendations regarding the Company’s stock adversely, the price of the

Company’s common stock and trading volume could decline.

The trading market for the Company’s common stock could be influenced by any research and reports that securities or

industry analysts publish about the Company, the Company’s business or the Company’s market. If one or more of the

analysts who covers the Company downgrades the Company’s common stock or publishes inaccurate or unfavorable

research about the Company, the Company’s business or the Company’s market, the price of the Company’s common

stock would likely decline. If one or more of these analysts ceases coverage of the Company or fails to publish reports on

the Company regularly, demand for the Company’s common stock could decrease, which could cause the price of the

Company’s common stock and trading volume to decline.

Risks Related to Tax Treatment

Unfavorable tax treatment may adversely affect the Company’s financial condition.

The Company's effective tax rate could be adversely affected by changes in the valuation allowance of deferred tax assets

or changes in tax laws. The Company has significant deferred tax assets and must generate sufficient earnings of the

appropriate character in order to utilize its deferred tax assets. If the Company’s earnings remain flat or decline over an

extended period of time, it may not be able to utilize its deferred tax assets and it has and may in the future need to record

a valuation allowance against them that could adversely affect its results of operations, cash flows and financial condition

in the period in which the valuation allowance is recorded. As of January 3, 2026 , a valuation allowance of $55.3 million

has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized.

Risks Related to Environmental, Social and Governance Matters

The Company’s priorities and progress with respect to sustainability, or Environmental, Social and Governance

(ESG), matters, and scrutiny and evolving expectations from the public, investors, regulators, vendors, and other

stakeholders may expose the Company to numerous risks, including risks to its reputation and stock price,

additional costs, and compliance risks.

Different stakeholder groups have divergent views on ESG matters such environment, climate change, health and safety,

supply chain management, diversity, equity and inclusion, labor conditions and human rights in the Company’s operations

and supply chain, which increases the risk that any action or lack thereof with respect to ESG matters may be perceived

negatively by at least some stakeholders and adversely impact the Company’s reputation and business. Sleep Number’s

current ESG priorities reflect the Company’s strategic plans and aspirations and are not guarantees that it will be able to

achieve them. The Company’s ability to achieve any ESG-related objectives is subject to numerous risks, many of which

are outside of its control, including: the availability and cost of relevant technologies and materials and evolving regulatory

requirements affecting relevant standards or disclosures. While some stakeholders may not be satisfied with the

Company’s ESG practices or initiatives or the speed with which the Company is implementing such initiatives, other

stakeholders may be opposed to the implementation of such initiatives at all, which could result in customer backlash or

other adverse effects. The ESG performance of the Company’s competitors, some of which are subject to more rigorous

international ESG-related disclosure regulations, may be better perceived than the Company’s, which may result in

potential or current customers, suppliers or investors electing to do business with its competitors rather than the Company,

and may detract from the Company’s ability to attract or retain employees. Furthermore, the Company’s efforts to

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accurately report its ESG status under evolving and competing standards has resulted and may continue to result in a lack

of consistent or meaningful comparative data from period to period and which has and could result in revisions to the

Company’s ESG priorities and reported progress. The Company’s failure, or perceived failure, to pursue or fulfill its ESG

priorities or to satisfy various reporting standards may present numerous operational, reputational, competitive, financial,

legal, government enforcement action and other risks, any of which could have a material adverse impact, including on

the Company’s reputation, stock price, and results of operations, cash flows and financial condition.

The SEC adopted climate disclosure rules, which would have required new climate-related disclosures in SEC filings,

including certain climate-related metrics and greenhouse gas emissions data, information about climate-related targets

and goals, transition plans, if any, and extensive attestation requirements. However, these climate-related disclosure rules

remain stayed pending litigation in the Eighth Circuit Court of Appeals. The SEC has withdrawn its defense of the rules,

creating uncertainty regarding their future applicability. At the state level, California has enacted legislation that would

require the Company to make broad-based climate-related disclosures, and other states are considering similar

measures. In addition to requiring companies to quantify and disclose direct emissions data, the California rules seek

disclosure of climate impact arising from companies’ operations, their business partners and the end-users of their

products. The Company is refining its measurements and readiness to report under the California rules. Sleep Number

has and will continue to incur costs relating to the collection, review and assurance for required disclosures of climate-

related information and may experience increased costs, litigation, regulatory, business, reputation, or other risks.

Climate change and legal or regulatory responses may adversely affect the Company’s business, operations and

financial condition.

Climate change presents various near- and long-term risks that may adversely impact the Company’s business. The

enactment of certain 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 the Company’s operations

or harm its ability to source necessary materials and components and manufacture its products, which may adversely

affect the Company’s financial condition. If public perception of Sleep Number’s compliance with laws and regulations

related to climate change is negative, it could adversely affect the Company’s business, reputation and shareholder

perception. Adverse publicity or climate-related litigation that impacts the Company could also have a negative impact on

its business.

Extreme weather, natural disasters, power outages, or other unexpected climate-related events could result in physical

damage to and complete or partial closure of one or more of the Company’s manufacturing, distribution centers or other

facilities or those of its suppliers, temporary or long-term disruption in its supply chain or logistics, disruption of or harm to

the Company’s workforce and/or disruption of its 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 the Company’s 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, plywood, 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 the Company’s 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 its business. Any long-term disruption in the Company’s

ability to service its customers from one or more manufacturing, distribution centers or other facilities could have an

adverse effect on the Company’s results of operations, cash flows and financial condition.

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 the Company’s historical experience and present expectations or projections.

These risks and uncertainties include, among others:

• Changes in economic conditions and consumer sentiment and related impacts on discretionary consumer spending;

• Interest rates remain elevated, and may further increase and impact the cost of servicing the Company’s

indebtedness;

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

• Ability to achieve the improvements, growth, cost savings, efficiencies and other benefits related to its turnaround

strategy to avoid adverse effects and the costs to implement its turnaround strategy;

• Ability to continue as a going concern;

• Access to additional capital and its access to such capital or alternative financing options may depend on factors

beyond the Company’s control or require the Company to accept unfavorable terms;

• Ability to manage our credit agreement, which contains financial covenants and other restrictions on our actions;

• Effectiveness and efficiency of the Company’s marketing strategy and promotions;

• Ability to execute Sleep Number’s Total Retail distribution strategy;

• Ability to compete effectively;

• Ability to achieve and maintain high levels of product and service quality;

• Ability to improve and expand the product line, anticipate and respond to changing consumer trends, and execute new

product introductions;

• Ability to protect the Company’s technology, trademarks and brand, and the adequacy of its intellectual property

rights;

• Dependence on, and ability to maintain working relationships with key suppliers and third parties, including some that

are the only source of supply or services currently used by the Company;

• Fluctuations in commodity prices or third-party delivery or logistics costs and other inflationary pressures;

• Risks inherent in global-sourcing activities, including tariffs, foreign regulation, geo-political turmoil, war, pandemics,

labor challenges, foreign currency fluctuations, inflation, climate or other disasters and resulting supply shortages, and

production and delivery delays and disruptions;

• Operating with minimal levels of inventory, which may leave the Company vulnerable to supply shortages;

• Risks of disruption in the operation of any of the Company’s facilities and operations, including manufacturing,

assembly, distribution, logistics, field services, home delivery, headquarters, product development, retail or customer

service operations;

• Ability to effectively complete potential future acquisitions, business combinations or divestitures;

• Sleep Number’s ability, and the ability of its suppliers and vendors, to attract, retain and motivate qualified and

effective personnel;

• Ability to comply with existing and changing government regulations and laws;

• Ability to identify and withstand cyber threats that could compromise the security of the Company’s systems or those

of third parties upon which it relies and could result in a data breach or business disruption;

• Risks associated with advancements in, adoption of, or the failure to effectively adopt, artificial intelligence and related

technologies;

• Adequacy of the Company’s and third-party information systems, and costs and disruptions related to upgrading or

maintaining these systems;

37 |  2025 FORM 10-K

SLEEP NUMBER CORPORATION

• Volatility of Sleep Number stock, its removal from various stock indices and the potential negative effects of

shareholder activism or of changes in coverage by securities analysts;

• Unfavorable tax treatment;

• Environmental, social and governance risks, including increasing scrutiny and evolving regulatory and stakeholder

expectations; and

• Ability to adapt to climate change and readiness for legal or regulatory responses thereto.

Additional information concerning these and other risks and uncertainties is contained under the caption “Item

1A. 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 the Company’s consolidated financial statements with a narrative from the perspective of management on its

financial condition, results of operations, liquidity and certain other factors that may affect its future results. The

Company’s MD&A is presented in the following sections:

• Business Overview

• Results of Operations

• Liquidity and Capital Resources

• Non-GAAP Data Reconciliations

• Critical Accounting Policies and Estimates

• Recent Accounting Pronouncements

Business Overview

Sleep Number is the leader in personalized sleep wellnes s. Its mattresses are designed to evolve with each sleeper to

help them feel and perform their best . With adjustable firmness, pressure-relieving support and temperature balancing

comfort built into every mattress, Sleep Number beds adapt to customers’ changing needs, night after night, year after

year.

2025 was a transformational year for Sleep Number. Under the leadership of its new CEO, Linda Findley, who joined the

Company in April 2025, the business has undergone change at every level . The Company:

• Created a more streamlined operation designed to enable faster decision‑making by consolidating roles across

key functions and strengthening accountability;

• Reduced operating costs across the business by $136 million as compared to 2024, excluding restructuring and

other non-recurring costs;

• Added financial flexibility by extending the Credit Agreement through the end of 2027; and

• Executed the Twelfth Amendment to the Amended and Restated Credit and Security Agreement, dated as of

February 14, 2018 (as amended, supplemented or otherwise modified from time to time), among U.S. Bank

National Association, as Administrative Agent, Swing Line Lender and Issuing Lender, and certain other financial

institutions party thereto (the “Credit Agreement”) to amend financial covenants.

With a stronger foundation, in November 2025, the Company introduced its turnaround strategy “Sleep Number Shifts,” a

focused, company-wide effort to reposition the brand, expand reach to new customer groups, and reignite growth. The

aim is to drive value for shareholders, customers and team members with efforts rooted in the consumer through all

dimensions of the business. It is centered on three key areas:

• Product: The Company is simplifying its offering with the goal of growing its customer base while building on the

demand from repeat customers

• Marketing: The Company is modernizing its efforts by expanding channels and reach with new creative to better

connect with today’s consumer and drive engagement with a focus on better ROI

• Distribution: The Company is focused on optimizing store footprint as well as exploring opportunities to expand

distribution into new channels, both physical and digital.

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SLEEP NUMBER CORPORATION

“Sleep Number Shifts” is being implemented as the Company continues to execute cost savings and operating

efficiencies, including real estate optimization and right-sizing the fixed cost base. While the Company is focused on

implementing the “Sleep Number Shifts” and executing cost savings and operating efficiencies, it faces liquidity

challenges. See “Risk Factors—Risks Related to Indebtedness and Liquidity.”

Results of Operations

Financial Highlights for Fiscal 2025 were as follows:

• Net sales for 2025 decreased 16% to $1.4 billion , compared with $1.7 billion in 2024 . Demand was impacted by

ongoing industry demand pressure and lower store traffic. In addition, 2025 included 53 weeks compared with 52

weeks in the prior year, with the extra week benefiting 2025 net sales by approximately $25 million . For additional

details, see the components of total net sales growth on page 39 .

• The net sales change resulted from a 17% comparable sales decrease in Total Retail. For additional details, see the

components of total net sales change on page 39 .

• Average sales per store (sales for stores open at least one year, Total Retail, including online, phone and chat,

adjusted for the additional 53rd week) for the year ended January 3, 2026 totaled $1.9 million , compared with

$2.6 million for the same period last year.

• Gross profit margin of 59.0% was 0.6 percentage points (ppt.) lower than the prior-year. For additional details, see the

gross profit discussion on page 40 .

• The $100 million year-over-year reduction in the Company’s operating expenses was due to sales and marketing

expenses decrease of $102 million , general and administrative expenses decrease of $19 million , and research and

development expenses decrease of $11 million , partly offset by an increase in restructuring costs of $33 million when

compared to 2024 .

• Operating loss for 2025 was $47 million compared to operating income of $23 million for 2024 . The $69 million

decrease in operating income in the current year was driven by the lower gross profit, partially offset by the

Company’s $100 million reduction in total operating expenses. The Company’s 2025 operating loss rate was impacted

by the deleveraging impact of the 16% decrease in net sales.

• Adjusted EBITDA for 2025 was $78 million , compared to $120 million in 2024 due to year-over-year net sales decline

offset by ongoing cost reduction actions. For additional details, see Non-GAAP Data Reconciliations section on page

• Income tax expense in 2025 was $36.0 million , compared to income tax benefit of $5.2 million in 2024 . In 2025, the

Company recorded a $55 million valuation allowance on its deferred income taxes resulting primarily from its inability

to utilize certain net operating losses and state R&D tax credits. This was partially offset by a decrease in income tax

expense of $14 million when compared to 2024 due to higher net loss in 2025 .

• Net loss in 2025 was $132 million , compared with $20 million in 2024 . Net loss per diluted share increased to $5.77 ,

compared with $0.90 in 2024 .

• The Company’s adjusted return on invested capital (Adjusted ROIC) was negative 4.0% in 2025 , compared with 7.6%

in 2024 . For additional details, see Non-GAAP Data Reconciliations section on page 44 .

• The Company used $3 million in cash from operating activities in 2025 , compared with generated cash of $27 million

• Free cash flow used $18 million for the year ended January 3, 2026 , compared with free cash flow provided of

$4 million for the same period last year.

• The Company ended 2025 with $588 million of borrowings under its revolving credit facility, compared with

$547 million at the end of 2024 .

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The following table sets forth the Company’s 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.

Net

Sales

Net

Sales

Net Sales

Net sales

Cost of sales

Gross profit

Operating expenses:

Sales and marketing

General and administrative

Research and development

Restructuring costs

Total operating expenses

Operating (loss) income

Interest expense, net

Loss before income taxes

Income tax expense (benefit)

Net loss

Net loss per share:

Basic and diluted

Weighted-average number of common shares:

Basic and diluted

The percentage of the Company’s total net sales, by dollar volume, was as follows:

Retail stores

Online, phone, chat and other

Total Company

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

Net Sales Increase/(Decrease)

Retail comparable-store sales (1)

Online, phone and chat (1)

Total Retail comparable sales change (1)

Net opened/closed stores and 53rd week

Total Company

(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 2025 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.

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SLEEP NUMBER CORPORATION

Other sales metrics were as follows:

Average sales per store ($ in thousands) (1)(4)

Average sales per square foot (1)(4)

Stores > $2 million in net sales (2)(4)

Stores > $3 million in net sales (2)(4)

Average revenue per smart bed unit – Total Retail (3)

(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 2025 included 53 weeks, as compared to 52 weeks in fiscal 2024. The additional week in 2025 was in the fiscal fourth quarter. Total Retail

comparable sales have been adjusted to remove the estimated impact of the additional week on the twelve months ended January 3, 2026.

The number of retail stores operating was as follows:

Beginning of period

Opened

Closed

End of period

Comparison of 2025 and 2024

Net sales

Net sales in 2025 decreased 16% to $1.4 billion , compared with $1.7 billion in 2024 . The decrease was driven by ongoing

industry demand pressure and lower store traffic. The net sales change consisted primarily of a 17% Total Retail

comparable sales decrease. In addition, 2025 included 53 weeks compared with 52 weeks in the prior year, with the extra

week benefiting 2025 net sales by approximately $25 million . For additional details, see the components of total net sales

change on page 39 .

The $271 million net sales decrease compared with the same period one year ago was primarily comprised of: (i) a

$240 million decrease in the Company’s Total Retail comparable net sales; (ii) a $34 million decrease from phone, online

and chat; (iii) a $22 million decrease resulting from net opened/closed stores in the past 12 months; partially offset by (iv)

$25 million from the additional 53rd week. Total Retail smart bed unit sales decreased 12% compared with the prior year.

Average revenue per smart bed unit in Total Retail increased to $6,060 , compared with $5,818 in the prior-year period.

Gross profit

Gross profit for 2025 of $833.0 million decreased by $170 million , or 17% , compared with $1.0 billion in 2024 . The 2025

gross profit rate decreased to 59.0% of net sales, compared with 59.6% for the prior-year period. The 0.6 ppt. decrease in

the gross profit rate was mainly due to: (i) higher manufacturing costs driven primarily by increased obsolescence, tariffs,

and the impacts of lower volume decreased the rate by 1.2 ppt; partially offset by (ii) a favorable product sales mix which

increased the rate by 0.3 ppt, (iii) logistics savings and return rate favorability led to a 0.2 ppt. increase, and (iv) pricing

increases during the current year benefited the rate by 0.1 ppt.

Sales and marketing expenses

Sales and marketing expenses decreased $102 million to $664 million in 2025 , compared with $767 million in 2024 . The

sales and marketing expense rate increased to 47.1% of net sales, compared with 45.6% for the same period one year

ago. The current-year sales and marketing expense rate increase of 1.5 ppt. was primarily due to the deleveraging impact

of an 16% net sales decrease offset by a 13% decrease in expenses including a 9% lower media spend.

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General and administrative expenses

General and administrative (G&A) expenses decreased $19 million to $131 million in 2025 , compared with $150 million in

2024 , and increased to 9.3% of net sales, compared with 8.9% of net sales one year ago. The $19 million decrease in

G&A expenses mainly consisted of the following: (i) a $8 million year-over-year decrease in company-wide, performance-

based incentive compensation; (ii) a $5 million decrease in depreciation and amortization; (iii) a $4 million decrease in

employee compensation; and (iv) a $2 million decrease in other occupancy and miscellaneous expenses. The G&A

expenses rate increased by 0.4 ppt. in 2025 , compared with 2024 due to the items discussed above in addition to the

deleveraging impact of the 16% net sales decrease.

Research and development expenses

Research and development (R&D) expenses decreased $11 million to $34 million in 2025 , compared with $45 million in

2024 . While the Company’s consumer innovation pipeline remains robust, it is re-prioritizing R&D resources in this highly

constrained environment. Moving forward, the Company’s innovation agenda will focus on maintaining and improving the

Company’s core technologies and introducing additional advancements, while driving costs out of the product.

Restructuring costs

Restructuring costs increased $33 million to $51 million in 2025 , compared with $18 million in 2024 . Charges incurred

related to this initiative were primarily comprised of contract termination costs, severance and employee-related benefits,

professional fees and asset impairment charges . These costs are included in the restructuring costs line in the Company’s

consolidated statement of operations. The Company expects approximately $13 million of additional restructuring costs to

be incurred during 2026, primarily due to severance and employee-related benefits, contract termination costs, and asset

impairment charges. See Note 11, Restructuring Costs , of the Notes to Consolidated Financial Statements included in

Item 8, Financial Statements and Supplementary Data , of this Annual Report on Form 10-K for further information on

restructuring costs.

Interest expense, net

Interest expense, net increased $1 million to $49 million in 2025 , compared with $48 million in 2024 . The increase in the

average debt outstanding during 2025 compared to the prior year was partially offset by a lower weighted-average interest

rate.

Income tax expense (benefit)

Income tax expense was $36 million in 2025 , compared with an income tax benefit of $5 million in 2024 . In 2025, the

Company recorded a $55 million valuation allowance on its deferred income taxes resulting primarily from its inability to

utilize certain net operating losses and state R&D tax credits. This was partially offset by a decrease in income tax

expense of $14 million when compared to 2024 due to higher net loss in 2025 . The effective income tax rate for the year

ended January 3, 2026 was (37.5)% compared with 20.2% for the year ended December 28, 2024 .

The Company evaluates its deferred income taxes quarterly to determine if valuation allowances are required. As part of

this evaluation, the Company 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. In 2025, the Company recorded a change in

valuation allowance of $55 million on the basis of management’s reassessment of the amount of its deferred tax assets

that are more likely than not to not be realized. This decreased the effective tax rate for the year ended January 3, 2026.

The Company continues to assess the need for the valuation allowance and will make adjustments when appropriate.

Comparison of 2024 and 2023

For a discussion of the Company’s 2024 versus 2023 results, see its 2024 Form 10-K.

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SLEEP NUMBER CORPORATION

Liquidity and Capital Resources

Going Concern Considerations

In accordance with ASC Topic 205-40, Going Concern, the Company’s management evaluates whether there are certain

conditions and events, considered in aggregate, that raise substantial doubt about the Company’s ability to continue as a

going concern. This evaluation includes considerations related to the Company’s forecasted liquidity and cash

consumption requirements for one year from the date of issuance of its consolidated financial statements included in this

Annual Report on Form 10-K.

Historically, the Company has relied principally on liquidity generated from operating activities to fund the Company’s day-

to-day operations and service its debt. Over the past three years, the Company has a history of net losses and expects to

continue to incur additional net losses in the near future. Although the Company continues to pursue its turnaround

strategy “Sleep Number Shifts,” the timing, costs and realization of its turnaround strategy cannot be guaranteed to ensure

sufficient cash flow is generated to provide adequate liquidity to meet the Company’s obligations. As a result, the

Company anticipates that it will not remain in compliance with the financial covenants of its Credit Agreement for the next

twelve months. These conditions and events raise substantial doubt about the Company’s ability to continue as a going

concern.

Management’s plan to address the substantial doubt about the Company’s ability to continue as a going concern, as

described above, includes the following actions:

• execute the Company’s turnaround strategy centered on product, marketing and distribution with ongoing cost

savings and operating efficiencies to reignite growth and increase financial resilience;

• engage in negotiations with the lenders in its Credit Agreement with the goal of amending or waiving financial

covenants and certain other provisions of its credit facility; and

• engaged financial advisors to assist in negotiating with the lenders and identifying and securing additional capital

options, alternative financing arrange ments, strategic alternatives, or other c omprehensive solutions to address

the Company’s capital structure and leverage needs to return to growth and create long-term value.

There can be no assurance of the Company’s ability to realize these plans. As a result, the Company has concluded that

management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern for at

least one year from the date of issuance of these financial statements.

Sources and Uses of Cash

Managing the Company’s liquidity and capital resources is an important part of its commitment to deliver superior

shareholder value over time.

The Company’s primary sources of liquidity are cash flows provided by operating activities and cash available under its

$655 million revolving credit facility. As of January 3, 2026 , the Company did not have any off-balance sheet financing

other than its $9 million in outstanding letters of credit. As discussed above in “Going Concern Considerations,” t he cash

anticipated to be generated from ongoing operations and cash available under its Credit Agreement are not expected to

be sufficient to generate adequate liquidity to meet the Company’s obligations over the next twelve months. See Notes 7,

Leases , and Note 14, Commitments and Contingencies , of the Notes to Consolidated Financial Statements included in

Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further details on the

Company’s obligations .

The Company’s credit facility, as amended, is for general corporate purposes and to meet seasonal working capital

requirements. The credit facility, as amended, provides the lenders with a collateral security interest in substantially all of

the Company’s assets and those of its subsidiaries and requires the Company to comply with, among other things, a

maximum net leverage ratio and a minimum interest coverage ratio.

On November 4, 2025, the Company amended the Credit Agreement. The amendment, among other things: (a) extends

the maturity date of the Credit Agreement to December 3, 2027; (b) reduces the revolving credit facility from $485 million

to $475 million , which decreases further to $465 million on July 31, 2026; (c) replaces the leverage-based pricing grids

used to determine the Applicable Margin and Applicable Commitment Fee Rate (each as defined in the Credit Agreement)

43 |  2025 FORM 10-K

SLEEP NUMBER CORPORATION

in favor of (I) with respect to Applicable Margin for Term SOFR Loans, (x) 4.0% until December 31, 2026 and (y) 4.25%

starting January 1, 2027 and continuing thereafter, and (II) with respect to the Applicable Commitment Fee Rate, (x)

0.50% until December 31, 2026 and (y) 0.75% starting January 1, 2027 and continuing thereafter; (d) on each Regularly

Scheduled Payment Date (as defined in the Credit Agreement) occurring on and after March 31, 2027, increases the

amortization of outstanding term loans an additional $1,250,000 (for an aggregate scheduled principal payment of

$3,750,000); (e) terminates the accordion feature; (f) adjusts the permissible maximum Net Leverage Ratio (as defined in

the Credit Agreement) to (I) 5.25 to 1.00 for the quarterly reporting period ended September 27, 2025, (II) 4.50 to 1.00 for

the quarterly reporting period ending January 3, 2026, (III) 4.75 to 1.00 for the quarterly reporting period ending April 4,

2026, (IV) 4.80 to 1.00 for the quarterly reporting period ending July 4, 2026, and (V) 4.00 to 1.00 for each quarterly

reporting period thereafter; (g) adjusts the Liquidity financial covenant so that the Company must ensure that liquidity is no

lower than $30 million until September 30, 2026, and $40 million for each monthly reporting period thereafter; (h) adjusts

the permissible minimum Interest Coverage Ratio to (I) 1.50 to 1.00 for the quarterly reporting period ended September

27, 2025, (II) 2.10 to 1.00 for the quarterly reporting periods ending January 3, 2026 and April 4, 2026, (III) 1.80 to 1.00 for

the quarterly reporting period ending July 4, 2026, (IV) 2.10 to 1.00 for the reporting period ending October 3, 2026, and

(V) 2.20 to 1.00 for each quarterly reporting period occurring thereafter; (i) adds a new quarterly minimum EBITDA

covenant test that begins for the quarterly reporting period ending April 4, 2026; (j) adjusts the consolidated EBITDA

calculation to include an addback for certain expenses and costs incurred for the trailing twelve months for discontinued

operations, downsized functions and employment expenses for laid-off employees; and (k) provides for additional and

more frequent reporting requirements. Following such amendment, the Company was in compliance with all covenants.

In connection with the amendment, the Company also agreed to pay the lenders certain amendment fees and to

reimburse the lenders for certain expenses.

The Company’s management believes that its existing cash on hand combined with its anticipated future net losses may

be insufficient to fund its operations and debt obligations for at least the next 12 months. The Company’s management

has concluded that there is substantial doubt about the Company’s ability to continue as a going concern, which is not

alleviated, for one year from the date of issuance of this Annual Report on Form 10-K. The Company’s future capital

requirements will depend on many factors, including, but not limited to, amending or waiving financial covenants of the

Credit Agreement, the successful execution of any future financing arrangements, its ability to achieve cost efficiencies

and the success of its turnaround strategy. To the extent that the Company’s existing cash balance and ongoing cash from

operations is insufficient to fund its future activities, the Company may need to raise additional funds through public or

private equity or debt financing, and such funds may not be available on acceptable terms. If sufficient cash from

operations or external funding is not available, the Company may be unable to adequately fund its business plan and the

Company’s business, results of operations, cash flows and financial condition could be materially and adversely affected.

As of January 3, 2026 , the Company had an aggregate amount of $588 million of borrowings outstanding under its credit

facility, including $185 million in outstanding term loans and $403 million outstanding under its revolving credit facility,

along with $9 million in outstanding letters of credit. Availability under the revolving credit facility amounted to $58 million .

At January 3, 2026 , the company’s leverage ratio as defined in the Credit Agreement was 4.1 x versus the permissible net

leverage ratio of 4.5x, the weighted-average interest rate on borrowings under the credit facility was 7.8% and the

Company was in compliance with all financial covenants.

Cash Flow Information

Cash and cash equivalents totaled $2 million at both January 3, 2026 and December 28, 2024 . The following table

summarizes the Company’s cash flows (dollars in millions). Amounts may not add due to rounding differences:

Total cash provided by (used in):

Operating activities

Investing activities

Financing activities

Net decrease in cash and cash equivalents

Cash used in operating activities for the fiscal year ended January 3, 2026 was $3 million , compared with net cash

provided by operating activities of $27 million for the fiscal year ended December 28, 2024 . Significant components of the

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$30 million year-over-year decrease in cash from operating activities included: (i) an $112 million year-over-year increase

in net loss; (ii) a $19 million fluctuation in the amount of compensation and benefits accrued and timing of the related

payments resulting from decreased headcount in 2025 and year-over-year changes in Company-wide performance-based

incentive compensation; an (iii) $11 million reduction in depreciation and amortization due to recent lower capital spending

levels and restructuring related fixed asset impairments; partially offset by (iv) a $46 million fluctuation in deferred income

taxes primarily due to a valuation allowance recorded on deferred taxes; (v) a $39 million fluctuation in accounts payable

due to lower expenses in the current year and timing of payments; (vi) a $32 million fluctuation in the impairment of lease

and store related assets and strategic investment assets; and (vii) a $21 million change in prepaid expenses and other

assets .

Net cash used in investing activities was $18 million for the fiscal year ended January 3, 2026 , compared with net cash

used in investing activities of $26 million during the fiscal year ended December 28, 2024 . Investing activities in 2025

included $14 million of property and equipment purchases, compared with $24 million in 2024 . In addition, the Company

used $3 million cash for payment to secure contractual rights in 2025 .

Net cash provided by financing activities was $21 million for the fiscal year ended January 3, 2026 , compared with net

cash used in financing activities of $1 million in 2024 . Short-term borrowings increased by $29 million in 2025 due to a $42

million increase in borrowings under the revolving credit facility to $588 million , offset by a $13 million decrease in book

overdrafts, which are included in the net change in short-term borrowings. During the fiscal year ended January 3, 2026 ,

the Company used $6 million of cash for debt issuance costs related to the credit facility amendment during the first

quarter of 2025. During both 2025 and 2024 the Company repurchased $1 million of its stock in connection with the

vesting of employee restricted stock awards.

Share Repurchases

The Company suspended share repurchases under its Board-approved share repurchase program during fiscal 2022. As

of January 3, 2026 , the remaining authorization under its Board-approved $600 million share repurchase program was

$348 million . There is no expiration date governing the period over which the Company can repurchase shares. The

Company did not make any share repurchases under its Board-approved share repurchase program during 2025 or 2024.

Non-GAAP Data Reconciliations

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

The Company defines earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net loss plus:

income tax expense (benefit), interest expense, depreciation and amortization, stock-based compensation, restructuring

costs, other non-recurring costs and asset impairments. Management believes Adjusted EBITDA is a useful indicator of

the Company’s financial performance and its ability to generate cash from operating activities. The Company’s 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.

The Company’s Adjusted EBITDA calculations are as follows (in thousands):

Year

Net loss

Income tax expense (benefit)

Interest expense

Depreciation and amortization

Stock-based compensation

Restructuring costs (1)

Other non-recurring items (2)

Asset impairments

Adjusted EBITDA

(1) Represents costs related to business restructuring actions. See Note 11, Restructuring Costs , of the Notes to Consolidated Financial Statements

included in Item 8, Financial Statements and Supplementary Data , of this Annual Report on Form 10-K for further information on restructuring costs.

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(2) Other non-recurring items includes the following:

Year

Inventory obsolescence write off

CEO transition costs

Debt issuance cost write off

Proxy contest costs

CFO search costs

Legal and consulting costs

Other non-recurring items

Free Cash Flow

The Company’s “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, the Company is providing this

information management believes facilitates analysis for investors and financial analysts.

The following table summarizes the Company’s free cash flow calculations (in thousands):

Year

Net cash (used in) provided by operating activities

Subtract: Purchases of property and equipment

Free cash flow

Reconciliation of GAAP Operating Expenses to Non-GAAP Operating Expenses

The Company’s “non-GAAP operating expenses” is considered a non-GAAP financial measure and is not in accordance

with, or preferable to, “operating expenses,” or GAAP financial data. However, the Company is providing this information

management believes facilitates analysis for investors and financial analysts.

The following table summarizes the Company’s non-GAAP operating expenses calculations (in thousands):

Year

Operating expenses

Subtract: Restructuring costs

Subtract: Other non-recurring items (1)

Non-GAAP operating expenses

Operating expense reduction versus prior period, excluding restructuring costs and

non-recurring items

(1) Excludes inventory obsolescence write off of $9.6 million, which is included in the cost of sales line on the Company’s consolidated statement of

operations.

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Return on Invested Capital (Adjusted ROIC)

Adjusted ROIC is a financial measure the Company uses to determine how efficiently it deploys its capital. It quantifies the

return the Company earns on its adjusted invested capital. Management believes Adjusted ROIC is also a useful metric

for investors and financial analysts. The Company computes Adjusted ROIC as outlined below. Its definition and

calculation of Adjusted ROIC may not be comparable to similarly titled definitions and calculations used by other

companies.

The tables below reconcile adjusted net operating profit after taxes (Adjusted NOPAT) and total adjusted invested capital,

which are non-GAAP financial measures, to the comparable GAAP financial measures (in thousands):

Year

Adjusted net operating profit after taxes (Adjusted NOPAT)

Operating (loss) income

Add: Operating lease interest (1)

Add/Less: Income taxes (2)

Adjusted NOPAT

Average adjusted invested capital

Total deficit

Add: Long-term debt (3)

Add: Operating lease obligations (4)

Total adjusted invested capital at end of period

Average adjusted invested capital (5)

Adjusted return on invested capital (Adjusted ROIC)

(1) Represents the interest expense component of lease expense included in the Company’s financial statements under ASC 842, Leases .

(2) Reflects annual effective income tax rates, before discrete adjustments, of 20.2% , 24.0% and 23.4% for 2025 , 2024 and 2023 , respectively.

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

(4) Reflects operating lease liabilities included in the Company’s financial statements under ASC 842.

(5) Average adjusted invested capital represents the average of the last five fiscal quarters’ ending adjusted invested capital balances.

(6) Adjusted ROIC equals Adjusted NOPAT divided by average adjusted invested capital.

Note – The Company’s Adjusted ROIC calculation and data are considered non-GAAP financial measures and are not in accordance with, or preferable

to, GAAP financial data. However, the Company is providing this information as it believes it facilitates analysis of the Company’s financial performance

by investors and financial analysts.

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

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting

principles (GAAP). In connection with the preparation of its financial statements, the Company is 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. The Company bases its assumptions, estimates and judgments on historical experience,

current trends and other factors that management believes to be relevant at the time its consolidated financial statements

are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to

ensure that its 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 the Company’s assumptions and

estimates, and such differences could be material.

47 |  2025 FORM 10-K

SLEEP NUMBER CORPORATION

The Company’s 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 its Board.

The Company’s critical accounting policies and estimates relate to stock-based compensation, warranty liabilities and

revenue recognition.

Description

Judgments and Uncertainties

Effect if Actual Results

Differ from Assumptions

Stock-Based Compensation

The Company has 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 its 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 the awards. These assumptions

and judgments include estimating the

volatility of its 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.

The Company does not believe there is

a reasonable likelihood that there will be

a material change in the future estimates

or assumptions it uses to determine

stock-based compensation expense.

However, if actual results are not

consistent with its estimates or

assumptions, the Company 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 its 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, the Company could experience

future earnings adjustments.

A 10% change in its stock-based

compensation expense for the year

ended January 3, 2026 , would have

affected net loss by approximately

$0.5 million in 2025 .

48 |  2025 FORM 10-K

SLEEP NUMBER CORPORATION

Description

Judgments and Uncertainties

Effect if Actual Results

Differ from Assumptions

Warranty Liabilities

The Company provides a limited

warranty on most of the products it sells.

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 its warranty

program and liabilities.

The majority of its warranty claims are

incurred within the first year. However,

the Company’s warranty liability contains

uncertainties because its 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.

The Company has not made any

material changes in its warranty liability

assessment methodology during the

past three fiscal years. The Company

does not believe there is a reasonable

likelihood that there will be a material

change in the estimates or assumptions

it uses to calculate its warranty liability.

However, if actual results are not

consistent with its estimates or

assumptions, the Company may be

exposed to losses or gains that could be

material.

A 10% change in its warranty liability at

January 3, 2026 , would have affected

net loss by approximately $0.5 million in

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 its revenue

recognition policies.

The Company’s 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.

The Company has not made any

material changes in the accounting

methodology used to establish its sales

returns allowance during the past three

fiscal years. The Company does not

believe there is a reasonable likelihood

that there will be a material change in

the estimates or assumptions it uses to

calculate its sales returns allowance.

However, if actual results are not

consistent with its estimates or

assumptions, the Company may be

exposed to additional losses or gains in

future periods.

A 10% change in its sales returns

allowance at January 3, 2026 would

have affected net loss by approximately

$1.0 million in 2025 .

Valuation Allowance for Deferred Tax Assets

The Company records a reduction to the

carrying amounts of deferred tax assets

by recording a valuation allowance if,

based on the available evidence, it is

more likely than not such assets will not

be realized.

See Note 1, Business and Summary of

Significant Accounting Policies , and

Note 12, Income Taxes , 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 its income taxes policies.

The Company considers both positive

and negative evidence when measuring

the need for a valuation allowance. The

weight given to the evidence is

commensurate with the extent to which it

may be objectively verified. Current and

cumulative financial reporting results are

a source of objectively verifiable

information. We give operating results

during the most recent three-year period

a significant weight in our analysis. We

perform scheduling exercises to

determine if sufficient taxable income of

the appropriate character exists in the

periods required in order to realize our

deferred tax assets with limited lives

prior to their expiration.

On the basis of the Company’s

evaluation, as of January 3, 2026, a

valuation allowance of $55.3 million

has been recorded to recognize only the

portion of the deferred tax asset that is

more likely than not to be realized. The

amount of the deferred tax asset

considered realizable, however, could be

adjusted if additional objectively

verifiable positive evidence materializes

in future reporting periods, such as a

demonstrated operating profitability.

49 |  2025 FORM 10-K

SLEEP NUMBER CORPORATION

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 - “ Recently Adopted and Recently Issued Accounting

Pronouncements ” for recent accounting pronouncements that may affect the Company’s financial reporting.