Sleep Number shareholder issues letter to board regarding execution

Stadium Capital sent the below letter to Sleep Number’s 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: Failed to follow basic corporate governance best practices, such as maintaining a de-classified Board or separating the roles of Chairman and CEO; Enriched itself at the expense of shareholders by taking dilutive compensation during a period of massive value destruction; Members who have been net sellers of Sleep Number stock and collectively own a fraction of the stock that Stadium Capital owns, and; Determined that spending investor resources on defense advisors is preferred to adding a shareholder representative and independent directors to the Board… 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.”