UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
(Rule 13d-101)
INFORMATION TO BE INCLUDED
IN STATEMENTS FILED PURSUANT
TO § 240.13d-1(a)
AND AMENDMENTS THERETO FILED PURSUANT TO
§ 240.13d-2(a)
(Amendment No. 1)1
Sleep Number Corporation
(Name
of Issuer)
Common Stock, par value $0.01 per share
(Title of Class of Securities)
83125X103
(CUSIP Number)
STADIUM CAPITAL MANAGEMENT, LLC
199 Elm Street
New Canaan, CT 06840-5321
(203) 972-8235
STEVE WOLOSKY
ELIZABETH GONZALEZ-SUSSMAN
OLSHAN FROME WOLOSKY LLP
1325 Avenue of the Americas
New York, New York 10019
(212) 451-2300
(Name, Address and Telephone Number of Person
Authorized to Receive Notices
and Communications)
September 13, 2023
(Date of Event Which Requires
Filing of This Statement)
If
the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D,
and is filing this schedule because of §§ 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box ☒.
Note: Schedules
filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See
§ 240.13d-7 for other parties to whom copies are to be sent.
1
The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to
the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided
in a prior cover page.
The information required
on the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities
Exchange Act of 1934 (“Act”) or otherwise subject to the liabilities of that section of the Act but shall be subject
to all other provisions of the Act (however, see the Notes).
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1 |
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NAME OF REPORTING PERSON |
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Stadium Capital Management, LLC |
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CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP |
(a) ☐ |
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(b) ☐ |
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3 |
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SEC USE ONLY |
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4 |
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SOURCE OF FUNDS |
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AF |
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CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e) |
☐ |
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6 |
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CITIZENSHIP OR PLACE OF ORGANIZATION |
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Delaware |
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NUMBER OF |
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7 |
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SOLE VOTING POWER |
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SHARES |
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BENEFICIALLY |
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- 0 - |
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OWNED BY |
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8 |
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SHARED VOTING POWER |
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EACH |
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REPORTING |
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2,002,227* |
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PERSON WITH |
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9 |
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SOLE DISPOSITIVE POWER |
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- 0 - |
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10 |
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SHARED DISPOSITIVE POWER |
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2,002,227* |
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11 |
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AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON |
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2,002,227* |
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12 |
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CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES |
☐ |
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13 |
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PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) |
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9.0% |
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TYPE OF REPORTING PERSON |
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IA, OO |
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*Includes 470,000 Shares underlying certain call options which are currently
exercisable.
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1 |
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NAME OF REPORTING PERSON |
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Stadium Capital Management GP, L.P. |
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2 |
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CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP |
(a) ☐ |
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(b) ☐ |
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3 |
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SEC USE ONLY |
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4 |
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SOURCE OF FUNDS |
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AF |
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5 |
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CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e) |
☐ |
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6 |
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CITIZENSHIP OR PLACE OF ORGANIZATION |
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Delaware |
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NUMBER OF |
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7 |
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SOLE VOTING POWER |
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SHARES |
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BENEFICIALLY |
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- 0 - |
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OWNED BY |
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8 |
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SHARED VOTING POWER |
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EACH |
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REPORTING |
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2,002,227* |
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PERSON WITH |
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9 |
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SOLE DISPOSITIVE POWER |
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- 0 - |
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10 |
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SHARED DISPOSITIVE POWER |
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2,002,227* |
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11 |
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AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON |
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2,002,227* |
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12 |
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CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES |
☐ |
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13 |
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PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) |
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9.0% |
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TYPE OF REPORTING PERSON |
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PN |
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*Includes 470,000 Shares underlying certain call options which are currently
exercisable.
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1 |
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NAME OF REPORTING PERSON |
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Stadium Special Opportunity I, L.P. |
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2 |
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CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP |
(a) ☐ |
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(b) ☐ |
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3 |
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SEC USE ONLY |
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4 |
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SOURCE OF FUNDS |
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WC |
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5 |
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CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e) |
☐ |
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6 |
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CITIZENSHIP OR PLACE OF ORGANIZATION |
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Delaware |
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NUMBER OF |
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SOLE VOTING POWER |
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SHARES |
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BENEFICIALLY |
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- 0 - |
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OWNED BY |
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8 |
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SHARED VOTING POWER |
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EACH |
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REPORTING |
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401,459 |
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PERSON WITH |
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9 |
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SOLE DISPOSITIVE POWER |
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- 0 - |
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10 |
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SHARED DISPOSITIVE POWER |
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401,459 |
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11 |
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AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON |
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401,459 |
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12 |
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CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES |
☐ |
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PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) |
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1.8% |
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14 |
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TYPE OF REPORTING PERSON |
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PN |
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1 |
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NAME OF REPORTING PERSON |
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Stadium Capital Partners, L.P. |
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2 |
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CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP |
(a) ☐ |
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(b) ☐ |
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3 |
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SEC USE ONLY |
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4 |
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SOURCE OF FUNDS |
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WC |
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5 |
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CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e) |
☐ |
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6 |
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CITIZENSHIP OR PLACE OF ORGANIZATION |
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Delaware |
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NUMBER OF |
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SOLE VOTING POWER |
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SHARES |
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BENEFICIALLY |
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- 0 - |
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OWNED BY |
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SHARED VOTING POWER |
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EACH |
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REPORTING |
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1,600,768* |
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PERSON WITH |
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SOLE DISPOSITIVE POWER |
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- 0 - |
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SHARED DISPOSITIVE POWER |
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1,600,768* |
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11 |
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AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON |
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1,600,768* |
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12 |
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CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES |
☐ |
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13 |
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PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) |
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7.2% |
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14 |
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TYPE OF REPORTING PERSON |
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PN |
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*Includes 470,000 Shares underlying certain call options which are currently
exercisable.
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1 |
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NAME OF REPORTING PERSON |
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Alexander M. Seaver |
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2 |
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CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP |
(a) ☐ |
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(b) ☐ |
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3 |
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SEC USE ONLY |
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4 |
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SOURCE OF FUNDS |
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AF |
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5 |
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CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e) |
☐ |
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6 |
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CITIZENSHIP OR PLACE OF ORGANIZATION |
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USA |
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NUMBER OF |
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7 |
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SOLE VOTING POWER |
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SHARES |
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BENEFICIALLY |
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- 0 - |
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OWNED BY |
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8 |
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SHARED VOTING POWER |
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EACH |
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REPORTING |
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2,002,227* |
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PERSON WITH |
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9 |
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SOLE DISPOSITIVE POWER |
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- 0 - |
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10 |
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SHARED DISPOSITIVE POWER |
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2,002,227* |
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11 |
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AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON |
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2,002,227* |
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12 |
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CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES |
☐ |
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13 |
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PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) |
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9.0% |
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TYPE OF REPORTING PERSON |
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IN |
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*Includes 470,000 Shares underlying certain call options which are currently
exercisable.
The following constitutes
Amendment No. 1 to the Schedule 13D filed by the undersigned (“Amendment No. 1”). This Amendment No. 1 amends the Schedule
13D as specifically set forth herein. Capitalized terms used by not otherwise defined herein have the meanings ascribed to such terms
in the Schedule 13D.
| Item 3. | Source and Amount of Funds or Other Consideration. |
Item 3 is hereby amended
and restated to read as follows:
All of the Shares
reported herein were purchased on behalf of the Reporting Persons using their investment capital or funds under management. The
aggregate purchase price of 1,532,227 Shares reported herein was approximately $41,274,861 (including brokerage commissions and
transaction costs). The aggregate purchase price of the call options referencing 470,000 Shares reported herein was approximately
$502,271. All such transactions were effected in the open market unless otherwise noted in Schedule A.
| Item 4. | Purpose of Transaction. |
Item 4 is hereby amended
to add the following:
On September 13, 2023, the
Reporting Persons issued a letter and press release (the “September 13 Letter”) to the Board requesting a meeting with the
independent directors to discuss the urgent need for shareholder-driven Board change. In the September 13 Letter, the Reporting Persons
asserted that the Board has presided over abysmal shareholder returns, egregious capital allocation, poor corporate governance practices
and questionable compensation decisions. The Reporting Persons also expressed their views that the Board’s ineffective oversight
has enabled management to let costs run out-of-control in pursuit of its wellness technology strategy.
The Reporting Persons also
expressed disappointment with the Board’s rejection of a good faith offer to collaborate on director refreshment, including to add
a representative of the Reporting Persons to the Board.
The Reporting Persons remain
open to engaging constructively with the Board and urge the independent directors to meet with them directly.
The foregoing description
of the September 13 Letter is qualified in its entirety by reference to the full text of the September 13 Letter filed as Exhibit 99.1
to this Amendment No. 1 and is incorporated herein by reference.
| Item 5. | Interest in Securities of the Issuer. |
Items 5(a) and (b) are hereby
amended and restated to read as follows:
(a) – (b) The responses
of the Reporting Persons to rows 7, 8, 9, 10, 11 and 13 on the cover pages of this Amendment No. 1 are incorporated herein by reference.
As of the date of this Amendment No. 1, the Reporting Persons beneficially owned 2,002,227 Shares, including 470,000 Shares underlying
certain call options, representing approximately 9.0% of the outstanding Shares. The percentage in this paragraph relating to beneficial
ownership of Shares is based upon 22,214,000 Shares outstanding as of July 1, 2023 as reported in the Issuer’s Quarterly Report
on Form 10-Q filed with the Securities and Exchange Commission on August 8, 2023.
To the knowledge of each
of the Reporting Persons, other than as set forth above, none of the persons named in Item 2 is the beneficial owner of any Shares.
| Item 7. | Material to be Filed as Exhibits. |
Item 7 is hereby amended
to add the following exhibit:
SIGNATURES
After reasonable inquiry
and to the best of his knowledge and belief, each of the undersigned certifies that the information set forth in this statement is true,
complete and correct.
Dated: September 13, 2023
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STADIUM CAPITAL MANAGEMENT, LLC |
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By: |
/s/ Alexander M. Seaver |
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Name: |
Alexander M. Seaver |
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Title: |
Manager |
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STADIUM CAPITAL MANAGEMENT GP, L.P. |
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By: |
Stadium Capital Management, LLC |
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General Partner |
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By: |
/s/ Alexander M. Seaver |
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Name: |
Alexander M. Seaver |
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Title: |
Manager |
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STADIUM SPECIAL OPPORTUNITY I, L.P. |
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By: |
Stadium Capital Management GP, L.P. |
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General Partner |
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By: |
Stadium Capital Management, LLC |
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General Partner |
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By: |
/s/ Alexander M. Seaver |
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Name: |
Alexander M. Seaver |
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Title: |
Manager |
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STADIUM CAPITAL PARTNERS, L.P. |
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By: |
Stadium Capital Management GP, L.P. |
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General Partner |
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By: |
Stadium Capital Management, LLC |
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General Partner |
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By: |
/s/ Alexander M. Seaver |
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Name: |
Alexander M. Seaver |
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Title: |
Manager |
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/s/ Alexander M. Seaver |
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Alexander M. Seaver |
SCHEDULE A
Transactions in the Securities of the
Issuer Since the Schedule 13D
Nature of the Transaction |
Amount of Securities
Purchased / (Sold) |
Price ($) |
Date of
Purchase / Sale |
STADIUM CAPITAL PARTNERS, L.P.
Purchase of Common Stock |
1,814 |
24.8885 |
09/06/2023 |
Purchase of Common Stock |
86,427 |
24.5999 |
09/07/2023 |
Purchase of Common Stock |
16,816 |
24.4930 |
09/08/2023 |
Purchase of Common Stock |
7,709 |
24.6927 |
09/13/2023 |
Exhibit 99.1
Stadium Capital Management Issues Letter to Sleep Number’s
Board of Directors Regarding the Urgent Need for Shareholder-Driven Change
Asserts the Board has Presided Over Abysmal Shareholder
Returns, Egregious Capital Allocation, Poor Corporate Governance Practices and Questionable Compensation Decisions
Believes the Board’s Ineffective Oversight
has Enabled Management to Escape Accountability and Let Costs Run Out-of-Control in Pursuit of Flawed “Wellness Technology”
Strategy
Expresses Disappointment with the Board’s
Rejection of a Good Faith Offer to Collaborate on Director Refreshment
Urges the Board to Meet with Stadium Capital to
Understand Shareholders’ Concerns and Chart a Better Path Forward
NEW CANAAN, Conn.--(BUSINESS WIRE)—Stadium Capital
Management, LLC today sent the below letter to Sleep Number Corporation’s (Nasdaq: SNBR) Board of Directors.
***
September 13, 2023
Board of Directors
Sleep Number Corporation
1001 Third Avenue South
Minneapolis, Minnesota 55404
Members of the Board of Directors,
Stadium Capital Management, LLC (collectively with
its affiliates, “Stadium Capital” or “we”) is the beneficial owner of approximately 9% of the outstanding common
shares of Sleep Number Corporation (“Sleep Number” or the “Company”), making us a top five shareholder of the
Company. We are not typically activist investors and strongly prefer to collaborate privately with those who lead our portfolio companies.
Our investment in Sleep Number was made following several years of diligence into the Company, its customer base and store fleet, and
relevant operating markets. Given our alignment with fellow shareholders and years of in-depth analysis, we believe Stadium Capital
is ideally positioned to (i.) diagnose the issues adversely affected by the business, (ii.) provide value-enhancing ideas and (iii.) support
the Board of Directors (the “Board”) as it oversees management’s strategic decisions, forecasting and operational execution.
To be clear, we believe Sleep Number is a tremendous
brand with a compelling, differentiated product set and an attractive business model. Unfortunately, these positive attributes have been
obscured by poor execution and ineffective corporate governance from our view. We believe the Board has failed to oversee accretive capital
allocation, effective forecasting and a culture of strong accountability for management. Meanwhile, Sleep Number executives and directors
have received tens of millions of dollars in dilutive compensation over the past decade. All of this has resulted in Sleep Number producing
unacceptable negative total shareholder returns (“TSR”) over the past 10+ years.
In our view, shareholder-driven change in the boardroom
is necessary to address Sleep Number’s abysmal TSR, suspect governance and questionable transformation strategy. As a starting point,
we believe Sleep Number needs targeted changes to the composition of its Board to ensure the Company’s positive attributes translate
into enhanced future shareholder returns. The Board, as presently constituted, includes long-tenured members who have been part of questionable
decisions and would likely not fare well in a contested election next year. Given the urgent problems at Sleep Number, we are disappointed
in the Board’s tone-deaf response to our proposal to add one Stadium Capital representative to the Board and appoint two additional
independent directors. Instead, by suggesting we align on a “mutual director,” you offered that the same entrenched group
runs the same process used in past years to pick a single new director, who would specifically not be a shareholder. In return
for minimal participation in this process, we were nevertheless asked to give up our voice and our valuable voting rights by agreeing
to a “customary standstill.” Prior Board-led “refreshes” have clearly not produced acceptable returns; as such,
we have no reason to expect that this time will be any different. Furthermore, the Board’s characterization that a Stadium Capital
representative would only represent Stadium Capital’s interests, not the interests of all shareholders, is preposterous coming from
a Board that has:
| 1. | Failed to follow basic corporate governance best practices, such as maintaining a de-classified Board or separating the roles of Chairman
and CEO;
|
| 2. | Enriched itself at the expense of shareholders by taking dilutive compensation during a period of massive value destruction;
|
| 3. | Members who have been net sellers of Sleep Number stock and collectively own a fraction of the stock that Stadium Capital owns, and; |
| 4. | Determined that spending investor resources on defense advisors is preferred to adding a shareholder representative and independent
directors to the Board. |
An Overview of Sleep Number’s Unacceptably
Poor TSR
The table below shows Sleep Number’s TSR on an
absolute basis as well as compared to its close peer, Tempur Sealy International, Inc. (“Tempur Sealy”), and relevant market
indices. Notably, Sleep Number has produced negative TSR and dramatically underperformed across every relevant time horizon.
|
Total Shareholder Return (as of 8/24/2023) |
|
|
|
|
|
Ibach |
|
1-Year |
3-Year |
5-Year |
10-Year |
Tenure |
Sleep Number |
-50% |
-54% |
-34% |
-7% |
-17% |
|
|
|
|
|
|
Tempur Sealy |
63% |
105% |
211% |
366% |
315% |
|
|
|
|
|
|
Out (under) performance |
-113% |
-159% |
-245% |
-374% |
-332% |
|
|
|
|
|
|
S&P 500 |
7% |
34% |
66% |
218% |
325% |
Russell 2000 |
-3% |
22% |
14% |
104% |
192% |
|
|
|
|
|
|
Out (under) performance |
|
|
|
|
|
S&P 500 |
-58% |
-88% |
-100% |
-225% |
-343% |
Russell 2000 |
-47% |
-76% |
-48% |
-111% |
-209% |
Note: CEO Shelly Ibach's tenure began June 1, 2012. |
|
|
|
|
|
Source: S&P Capital IQ; TSR runs through
the day before Stadium Capital filed its initial Schedule 13D.
|
While we acknowledge that mattress industry
unit volumes have fallen recently, this is not a compelling excuse for such poor long-term performance. Sleep Number does not have a revenue
problem. In fact, its anemic returns have occurred during a period in which it has more than doubled its revenue, increased its store
count by 50% and likely maintained or grown its share of overall mattress industry retail sales.
Sleep Number’s Glaring Issues Are
Fixable
If a refreshed Board embraces new perspectives
and pursues stronger oversight, we believe it can understand and remedy the issues identified herein.
Questionable Strategy
In
recent years, the Company has shifted its strategy in an attempt to become a “purpose-driven, sleep tech wellness company that
is poised to lead in the emerging connected sleep health space.”1
This transition occurred as Sleep Number essentially doubled its annual R&D
budget to approximately $60 million since 2019, purportedly to support “Sleep Number’s continued prioritization in its
long-term life-changing sleep innovation initiatives.”2
Further, Sleep Number’s Technology/Corporate/Management headcount increased
by 70% from early 2020 to early 2023, despite mattress unit deliveries planned for the upcoming year remaining flat to 2020.3
To contextualize how significant its R&D
spend has become, Sleep Number spends 2x on R&D relative to Tempur Sealy even though Tempur Sealy generates, by our estimates, roughly
4x the retail sales of Sleep Number. Yet, based on our research, if Sleep Number spent proportionally the same amount on R&D as Tempur
Sealy does, Sleep Number’s 2023 expected EPS would double.
We are skeptical that management’s efforts
to increase R&D focused on generating non-mattress revenue streams will be a success. We would hope that the Company is aware that
many fitness wearables companies have spent multiples of what Sleep Number spends on R&D, yet to our knowledge, none has produced
a durable, attractive business model around whatever subscription revenues are generated. Why should Sleep Number expect to produce a
different result? The Company has not demonstrated that its sleep-tracking technologies are substantially differentiated from other sleep-tracking
technologies. Its trading multiple is languishing near a decade low despite R&D at an all-time high percentage of EBITDA and industry
unit volumes near record per-capita lows.
To be clear, we are not opposed to increasing
R&D investment; to the contrary, we understand that sacrificing profit today for more durable cash flows tomorrow is a compelling
way to build long-term shareholder value and, in our view, too few public companies adopt this mentality. Our concern with Sleep Number
is that management has drastically increased R&D as the Company’s valuation multiple has declined, suggesting that investors
have concluded that foregone profits today will NOT produce greater profits in the future. In light of the fact that management
has continually failed to deliver on its long-term targets without being held to account, and the Board’s stewardship of capital
proved so poor in its decisions around the previous buyback program, it is no surprise that investors have lost confidence in the Board’s
ability to set the R&D budget appropriately. It is this dynamic that we believe is destroying shareholder value.
Capital Allocation Missteps
Nearly all of Sleep Number’s cash balances
and cash generated since 2012, plus cash generated from leveraging the balance sheet, have been deployed into share repurchases. In fact,
Sleep Number’s share count has declined by approximately 60%, since June 30, 2012.
1 March 14, 2022 press release: Sleep
Number Announces Board Leadership Changes.
2 Source: Sleep Number Form 10K for the
2022 fiscal year.
3 Source: Sleep Number Form 10Ks for the
2019 and 2022 fiscal years and Sleep Number annual guidance.
While share repurchases can be an effective
tool for creating long-term shareholder value, the context around buybacks is important. Buybacks only create real value when the issuer
forms a sober view of its long-term prospects, uses that outlook to estimate the long-term return of buying back stock and appropriately
compares that return to both the issuer’s cost of capital and alternative investment options. By contrast, buyback programs that
do not have a long-term shareholder return framework, are premised on unrealistic views of long-term prospects, or are followed by poor
execution of a reasonable business plan can be disastrous for shareholders. Unfortunately, the latter case applies to Sleep Number.
Sleep Number’s buyback approach in 2020
and 2021 was catastrophically flawed and has substantially weakened the Company’s financial position. As context, on August 24,
2023, the day before we filed our initial Schedule 13D, Sleep Number closed trading at $21.48 per share. Yet, the Board authorized more
than $630 million of share repurchases at an average price of approximately $90.00 between Q4 2020 and Q1 2022, including spending
almost $150 million at average prices above $140.00 in March of 2021 alone. The question is, how could this have happened?
As with most durable goods companies related
to the home, Sleep Number saw a substantial increase in demand for its products in 2020 and early 2021, and a corresponding spike in revenue
and EBITDA. Instead of acknowledging the risk that much of this could have been pandemic-related pull-forward demand that would eventually
unwind (as Tempur Sealy regularly did on earnings calls), management and the Board appear to have convinced themselves that the Company
was “different,” attributing the revenue increase not to the pandemic but to Sleep Number’s new positioning as a “wellness
technology” business. We believe that this remarkable lack of self-awareness caused leadership to project sustained growth off of
already significantly inflated revenue and EBITDA figures.
The net result was that the Company leveraged
the balance sheet to repurchase stock at prices so high that earning an acceptable return would require exceeding the unrealistic
long-term goals that presumably justified the buyback program and that were explicitly communicated to shareholders in early 2022. We
believe that given management’s persistently poor track record of achieving its own long-term objectives (as detailed below), the
buyback program was another significant and miscalculated risk for the Company to take. This decision has now put the business in an unnecessarily
precarious financial position, as evidenced by the fact that Sleep Number has had to seek covenant waivers from its lenders.
We believe that a Board with a more informed
and objective view of the broader markets and macro landscape would have understood that the overall mattress industry was experiencing
an unsustainable boost – similar to countless consumer businesses during and right after the pandemic. A more thoughtful approach
to such an enormous share repurchase program would have been to apply a risk-management overlay through some combination of reducing the
size of the repurchases, having better price discipline and/or hedging the term and interest rate risk of the Company’s debt. The
Board seems to have done none of these things, and shareholders are now paying the price.
What makes these poor decisions more damning
is that even with Sleep Number’s Board lacking the requisite situational awareness we describe above, the Company’s own history
should have provided the caution signs. In 2006-2007, as Sleep Number’s growth accelerated concurrent with the housing boom, the
Board also authorized leveraged share repurchases that ultimately put the Company in a precarious position. We would point out that Sleep
Number’s current Board includes two directors and a paid advisor who approved those decisions, yet for reasons that defy explanation,
the Board failed to draw on that history and take a more cautious approach to capital allocation in 2020 and 2021.
Poor Execution and Financial Planning
Sleep
Number has lowered its guidance nearly every quarter over the past 18 months. In our view, these recent struggles are part of a longer-running
pattern. Sleep Number missed its 2015 targets management laid out in 2013, missed its 2019 targets laid out in 2015 and management’s
current plans are far below the long-range targets the Company put out in early 2022. In fact, the Company missed its stated 2022 profitability
objectives by 50%.4 These
shortfalls cannot be explained away by the recent industry conditions; as mentioned, they are part of a clear and long-running pattern.
The blame largely falls on management as a result of its poor financial planning and weak execution against its operating goals. But blame
must also be placed on the Board for failing to hold management accountable for these clear performance issues.
In
fact, despite management’s consistent pattern of missing its targets, the Board has nevertheless elected to pay Chief Executive
Officer Shelly Ibach more than $50 million during her tenure, while shareholders have suffered negative TSR.5
Furthermore, to make matters worse, certain current Directors were, remarkably,
net sellers into the ill-conceived 2020-2022 buyback program, cashing out over $3 million during periods when Sleep Number was
actively repurchasing stock. In addition, executive accountability was further weakened when the Board combined the Chairman and Chief
Executive Officer roles.
In Conclusion: Stadium Capital Can Help
Sleep Number Adopt a Shareholder Value Creation Mentality and Establish a Culture of Accountability
We are strong believers in the Sleep Number
brand, but we also believe that the Company is materially undervalued and underperforming relative to its potential. We have grave concerns
that deficiencies in the boardroom are an impediment to realizing the true value of Sleep Number’s brand and business model. Rather
than debate the facts and work at cross purposes, we urge you to collaborate with us on a Board refresh that includes a Stadium Capital
representative and other new directors with relevant expertise.
As a next step, we request that the independent
members of the Board meet with us this month. We wish to share our perspectives and demonstrate the depth of work we have conducted on
the business. We are confident that if you meaningfully engage with us, you will realize that we can add substantial value for all Sleep
Number shareholders.
Thoughtful and genuinely collaborative Board
changes can help Sleep Number begin to regain some semblance of shareholder trust, even as it maintains an outdated classified Board structure
and other unfriendly governance policies.
Sincerely,
The Investment Committee of Stadium Capital Management GP, LP
***
Contacts
Longacre Square Partners
Greg Marose / Aaron Rabinovich, 646-386-0091
gmarose@longacresquare.com / arabinovich@longacresquare.com
###
4 Sources: Investor Presentations from
January 2013, November 2015, March 2022 and July 2023.
5 Defined as cash compensation, benefits
and the estimated value of options and RSUs granted during Ibach’s tenure as CEO that have either been sold or currently are owned
by Ibach.
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