Stadium Capital Management, LLC recently sent the below letter to shareholders of Sleep Number Corporation (NASDAQ: SNBR).
November 25, 2024
Fellow Sleep Number Shareholders:
Stadium Capital Management, LLC (together with certain of its affiliates, “Stadium Capital” or
“we”) is the largest shareholder of Sleep Number Corporation (“Sleep Number” or the
“Company”), owning approximately 11.7% of the Company’s outstanding shares. We hold our position
because we remain convinced that there is enormous upside in the value of the Company if certain fundamental changes
occur.
Our successful and nearly three-decade investment strategy is typically based on close, friendly collaboration with
our concentrated portfolio of companies, anchored in deep research and a long-term investment horizon. We strongly
prefer to keep engagement private and are nothing if not patient, but after a decade of diligent work on Sleep
Number and over 15 meetings with the Company’s management and Board of Directors (the “Board”),
our frustration with current leadership, who has overseen massive shareholder value destruction, reached a tipping
point last year. As a result, we were compelled to take the rare step of publicly expressing our concerns regarding
Sleep Number’s leadership and governance last year.1 This ultimately led to the appointment of two
highly qualified new directors to the Board pursuant to a Cooperation Agreement between Stadium Capital and the
Company (the “Cooperation Agreement”).
On October 30, 2024, a mere four days before our one-year Cooperation Agreement expired, the Board announced several
management and governance changes, including the retirement of the CEO, President and Chair of the Board, Shelly
Ibach, and a gradual de-classification and shrinking of the Board. While on the surface these changes represent
forward progress, it is clear to us that they are the bare minimum, insufficient and wholly inadequate given the
gravity and urgency of the situation Sleep Number finds itself in today – thanks to this Board. In our view,
these changes reflect the current Board’s efforts to cling to the status quo and maintain control.
Now, Sleep Number’s shareholders are being asked to entrust this Board to hire the Company’s next CEO,
which is, without any doubt, the most critical decision facing the Company over the next decade. Given that these
are the same directors who have overseen massive value destruction and failed to hold Ms. Ibach accountable for far
too long, shareholders cannot trust the Board as currently constructed to get this decision right, a decision that
will define the future of Sleep Number.
Before deciding to make our concerns public, we worked tirelessly and in good faith to persuade the Board to
collaborate privately with us to improve its flawed CEO search process. As with most of our suggestions, the Board
summarily rejected our proposals. While shareholders cannot trust the current Board to hire Sleep Number’s
next CEO, we also believe that shareholders cannot trust this Board, which is still populated with many long-tenured
directors who presided over a truly colossal destruction of shareholder value, to oversee the crucial capital
allocation decisions facing the Company. A meaningfully reconstituted Board will be better positioned to identify a
great CEO, create the best incentives for that CEO and instill long overdue accountability into Sleep Number’s
corporate culture, all of which would help unlock the tremendous value that exists within this Company. It is well
past time to put an end to this relentless and extraordinary value destruction, and fix Sleep Number’s
leadership and governance.
We have spoken to many Sleep Number shareholders following the filing of our Schedule 13D on November 4, 2024 and
the feedback we received was unanimous – more and urgent change is desperately
needed. We are urging our fellow shareholders to express their views directly to the
Board, whether publicly or privately, so the Board can grasp just how widespread shareholder dissatisfaction
remains. For those shareholders with whom we have not already spoken, please know that our line is open
and we welcome the opportunity to hear your thoughts as well.
Significant Value Destruction Underscores the Urgent Need for Shareholder-Driven
Change
The immense shareholder value destruction that has occurred at Sleep Number makes blatantly obvious the need for
real change at the Company. Sleep Number has been a serial underperformer, both in absolute and relative terms, over
any relevant measurable period during Ms. Ibach’s tenure. The table below includes total shareholder returns
for various time periods compared to Sleep Number’s closest peer, Tempur Sealy International, Inc.
(“Tempur Sealy”). The performance disconnect between two direct competitors is staggering and
indisputable.2
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Total Return Data (as of 11/22/2024)
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Ibach
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1-year
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3-year
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5-year
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10-year
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Tenure
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Sleep Number Corporation
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23%
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-85%
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-74%
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-52%
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-52%
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Tempur Sealy International, Inc.
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40%
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29%
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172%
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311%
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430%
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Relative Underperformance
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-17%
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-114%
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-246%
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-364%
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-482%
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This comparison to Sleep Number’s closest peer is starkly informative because Tempur Sealy went through a
shareholder-driven leadership change in 2015. Consider the performance results between Tempur Sealy and Sleep Number
before and after this change:3
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Total Return Data
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Pre-Change
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Post-Change
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Sleep Number Corporation.
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24%
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-61%
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Tempur Sealy International, Inc.
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29%
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311%
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Relative Underperformance
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-5%
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-372%
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During Ms. Ibach’s tenure, the Board has unequivocally failed in its two primary responsibilities: (i)
ensuring the Company hires, incentivizes and holds accountable the right CEO, and (ii) allocating
capital.4 It is time for real change.
We believe that corporate governance improvements and shareholder-driven reform can make a big
difference.
Recent Governance Changes are Insufficient
It is clear to us (and the many shareholders we have spoken with) that the recent changes announced by the Company
are insufficient. Sleep Number is on a path to de-classify the Board, separate the Chair and CEO roles and slowly
shrink the Board. Normally, we would applaud these moves, as it would signal that a board has committed to better
governance by making itself more independent from management and more accountable to shareholders.
In this case, however, these corporate governance “improvements” should be viewed as wholly inadequate
self-preservation measures. The below provides some relevant context:
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What the Board Says:5
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The Reality:
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“These changes reflect the Board’s ongoing commitment to
progressive and effective corporate governance and accountability to
shareholders.”
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After almost a year of inaction, Sleep Number waited until two business days before the
expiration of the Cooperation Agreement to announce these changes. We have suggested that the
Board implement these standard, common sense governance practices for over a year, and many of
these changes should have been implemented at the Company’s 2024 Annual Meeting of
Shareholders.
The Company advised us that this year’s class of directors will yet again be nominated for
three-year terms, meaning that the declassification process will not
actually begin until 2026.
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“While we value the contributions of each of our talented directors,
we believe that strategically reducing the size of the Board at the appropriate time will
enhance our governance.”
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The Board has not committed to an accelerated departure date for Stephen Gulis or Brenda
Lauderback. The Board’s claim that time is needed to transition committee chair roles is
an absurd excuse. These over-tenured, under-performing directors who have served on the Board
since 2005 and 2004, respectively, should never have been nominated for re-election in 2024 in
the first place.
Sleep Number’s directors are cumulatively paid almost 50% more than those of Tempur Sealy
despite the Company having 3% the market capitalization and revenue that is 40% lower. On top of
this, Sleep Number’s former Chairman, who departed the Board in May 2023, continued to
receive director fees through the first three quarters of 2024.6
In our view, this extended transition has not only been costly to shareholders, but it is also
insulting to all Sleep Number employees who have suffered pay cuts and/or lost their jobs as
part of urgent cost-cutting initiatives. The long-tenured directors on the Board – the
people as responsible for this harm as anyone – have not been held accountable.
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“The Board has unanimously determined its intent to appoint Michael
Harrison as independent Chair following the 2025 Annual Meeting.”
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The Board’s choice of a new Chair is totally unacceptable and suggests that, collectively,
the current directors do not understand the importance of moving on from the disastrous Ibach
era. Sleep Number has several more highly qualified, shorter-tenured directors with fewer ties
to the failed Ibach era who are clearly more appropriate for the role.
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The Current CEO Search Process is Flawed
We have spoken with a large and diverse group of market and industry participants to gather perspectives regarding
Sleep Number and its CEO search. The overwhelming consensus is that, to be successful, a search process must be
fully and unequivocally independent from the outgoing CEO.
In recent conversations with the Board, we learned several deeply concerning facts. First, Ms. Ibach was involved in
drafting the specifications for her successor and will interview the candidates. Second, the executive search team
leading the process has close ties to the Ibach era, having led past searches for directors and senior leadership
roles. Finally, and perhaps most disturbingly, social media activity indicates that the executive search partner
leading this search appears to have a close relationship with Ms. Ibach. Given these dynamics, it is impossible to
believe this process is truly independent of Ms. Ibach.
We would note that the current process might indeed be appropriate in a situation where a successful CEO is
retiring. At Sleep Number, however, the Board is replacing a CEO whose failed leadership of the Company resulted in
significant underperformance and massive value destruction during her lengthy tenure. Successful succession planning
in this case requires an acknowledgement of past failings and a clean break from the past. While this is completely
obvious to all market participants with whom we engaged, somehow, the Board does not seem to understand this.
This Board Cannot be Trusted to Hire Sleep Number’s Next CEO
How big a failure was the Ibach era? Operationally, from 2012 to 2024, Sleep Number’s unit market share did
not increase despite increasing the store count by almost 60%, increasing the advertising budget by more than 50%
and deploying hundreds of millions of dollars into R&D and technology acquisition. Margins consistently fell
short of expectations. The Company began the Ibach era with over $175 million in excess cash, generated over $800
million in free cash flow and paid zero dividends during Ms. Ibach’s tenure.7 Sleep Number’s
market capitalization is currently less than $300 million and its stock is down an astonishing 91% from its
peak.8
The Chair of the Management Development and Compensation Committee (Ms. Lauderback) – the committee chartered
with succession planning and thus leading the CEO search – has been on the Board for over 20 years. The
incoming Board Chair (Mr. Harrison), who also sits on the search committee, has been on the Board for the entirety
of, and thus enabled, Ms. Ibach’s nearly 13-year tenure as CEO. One other search committee member (Deborah
Kilpatrick) has been on the Board for over six years and regularly lavishes public praise on Ms. Ibach. Another
director up for re-election this year (Barbara Matas) has stridently expressed her great admiration for Ms. Ibach,
insisting on a call this past spring to us that Ms. Ibach “is going to be our CEO” and that
shareholders had better accept that. In the face of overwhelming and completely damning evidence, the Board simply
refuses to see the obvious – Sleep Number urgently needs a clean break from the failed Ibach era.
On November 12, 2024, we made a proposal to the Company that was intended to be a non-disruptive and collaborative
solution to the current situation.9 We offered to support the Board at the Company’s upcoming
annual meeting if the Board committed to a truly independent CEO search process that excluded Ms. Ibach and either
changed the search committee structure or formally involved a Stadium Capital principal in the process. The Board
rejected this non-escalatory, constructive proposal on the grounds that changing the committee purportedly would
disrupt the ongoing process. Given Sleep Number’s poor governance and the fact that, as the Company’s
largest shareholder, we had expressed that the Board does not have our support absent these kinds of changes, we
thought this proposal would improve the process, expand the pool of interested and qualified candidates, and
potentially satisfy other shareholders who were apparently considering raising their own concerns publicly. The
Board’s grave miscalculation in rejecting our recent proposal confirmed for us that shareholders, the true
owners of the Company, need more and substantive change, now.
THE path forward
Sleep Number should collaborate with its largest shareholder to refresh the Board and
ensure the CEO search process is completely independent.
We are already aware of at least two highly qualified potential CEO candidates who were reluctant to get involved
because of Sleep Number’s ineffective and dysfunctional Board. That is extremely concerning to us, as it
should be to all owners. We are calling on the Board to collaborate with us immediately to refresh the Board and
improve the CEO search process. Time is of the essence. Our suggested path forward is as follows:
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Announce the immediate retirement of Mr. Gulis and Ms. Lauderback from the Board.
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Replace incoming Chairman Harrison and Ms. Matas with a Stadium Capital principal and another highly qualified
independent director.
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Reconstitute the CEO search committee by fully excluding Ms. Ibach from the process, shifting the composition
towards shorter-tenured directors with public company CEO experience and including a Stadium Capital principal.
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Appoint an Executive Chairman to help run the Company during Ms. Ibach’s transition period. If one of the
current qualified and relatively short-tenured Sleep Number directors is willing to fill this role, they would
have our support. If there is no internal candidate, we can provide a ready, willing and highly capable external
candidate.
It is nonsensical for shareholders and offensive to Sleep Number’s employees for the Board to continue wasting
shareholder money to pay advisors to “defend” the Board against an outcome that owners prefer during
this critical period of cost-cutting. To reiterate, if our fellow shareholders agree with our views, we
encourage you to express that to the Board in short order. If the Board listens to its business owners’
views, we see a quick path to creating an excellent Board that will be capable of hiring an outstanding CEO for
Sleep Number and all its stakeholders.
Should our requests and concerns continue to fall on deaf ears, we will be compelled to nominate several
exceptionally qualified directors for election at Sleep Number’s 2025 Annual Meeting of Shareholders. We
believe that a large portion of the Company’s shareholders would support our efforts. While a protracted
public battle may potentially delay the CEO transition, we are confident that the eventual result of our successful
campaign would be a high integrity search process, the hiring of the best possible CEO and an improved Board. With
these elements in place at Sleep Number, we believe shareholders will be positioned to realize enormous upside over
the next several years, and all stakeholders will benefit from a healthier culture based on accountability. We know
what is possible at Sleep Number, which is why we are committed to taking the necessary actions for the Company to
make good on its immense potential.
Sincerely,
The Investment Committee of Stadium Capital Management LLC
***
1 https://www.businesswire.com/news/home/20230913488935/en/Stadium-Capital-Management-Issues-Letter-to-Sleep-Number%E2%80%99s-Board-of-Directors-Regarding-the-Urgent-Need-for-Shareholder-Driven-Change
2 Source of share price performance data used throughout is Capital IQ.
3The pre-change period is from June 1, 2012 (the start of Ms. Ibach’s tenure) to February 16, 2015,
the day H Partners Management initiated a campaign that led to shareholder-driven board and CEO change at Tempur
Sealy. The post-change period is from February 16, 2015 to November 22, 2024.
4 Many of these mistakes are highlighted in our 2023 letter to the Board.
5 https://www.sec.gov/Archives/edgar/data/827187/000082718724000087/a2024-q3ex991skyway.htm
6 Company Securities and Exchange Commission filings.
7 Company Securities and Exchange Commission filings.
8 As of November 22, 2024.
9 Feel free to reach out to us if you would like a copy of this letter.