MW A big investor says Sleep Number's board can't be trusted on this crucial matter
By Bill Peters
Stadium Capital Management calls for board changes and a 'completely independent' CEO search process, sending shares higher during regular trading
After a long slump for Sleep Number Corp.'s stock price and weaker demand for its smart mattresses, one big investor, Stadium Capital Management, went public with its frustrations with the company on Monday, calling for a shakeup of its board and changes to what it said was a "flawed" search process for a new CEO.
Shares of Sleep Number $(SNBR)$ jumped 18.9% during regular trading after the investment firm's announcement this morning. After hours on Monday, they were down 4.4%.
After the close on Monday, Sleep Number, in its own statement, defended itself, saying its search process was robust, and adding that its leadership transition and other board changes were "consistent with nearly all the suggestions we had received from Stadium over the past year." The dispute follows what both sides characterized as extensive meetings.
In a letter to Sleep Number's shareholders on Monday, Stadium Capital, which owns around 11.7% of mattress maker's stock, said recent changes the company made to its upper ranks last month - including the retirement of Chief Executive Shelly Ibach and plans to shrink its board - amounted to efforts by the board to "cling to the status quo and maintain control."
Thus, they said, Sleep Number's board couldn't be trusted to choose a leader who was right for the company.
"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," Stadium Capital Management's investment committee said in the letter.
Moreover, the firm encouraged other shareholders to air their concerns to the company, and said that Sleep Number's shareholder returns significantly trailed those of rival Tempur Sealy International $(TPX)$. And they said that despite opening more stores and pouring money into advertising and R&D, Sleep Number failed to gain market share during Ibach's tenure.
Stadium Capital said it tried to convince the board to work with it to change its CEO search process, without success. And they alleged that Ibach was "involved in drafting the specifications for her successor and will interview the candidates," adding that the search team and executive search partner heading up the process were too closely tied with Ibach.
The firm said Sleep Number should "collaborate with its largest shareholder to refresh the board and ensure the CEO search process is completely independent."
They added: "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."
Sleep Number's shares, as of Monday's close, had eked out a gain year-to-date. However, the stock has tumbled from highs reached in 2021.
The company's prospects, to some degree, are tied to the housing market, which has suffered from higher home prices and higher interest rates. A big jump in the cost of living over more than two years has forced people to put off bigger purchases.
Last year, Sleep Number warned that demand had dropped "abruptly." Shortly before that announcement, Stadium urged Sleep Number's board to make "shareholder-driven change."
Sleep Number, in its statement on Monday, noted that it added two directors recommended by Stadium to its board last year. And it said that its management development and compensation committee had been planning for CEO succession for years. All six members of that committee, it said, were "fully independent" and qualified to handle the task.
"Given our robust approach, we were surprised when Stadium made the highly unusual demand that it be granted direct participation in the CEO succession process," the company said.
"There is no predicate, in our view, for changing the board's best-in-class CEO search process," it added. "As noted, our process has been underway for many months and has already identified highly qualified candidates. Resetting the process to accommodate a single shareholder's desire for direct participation on the committee may discourage participation by CEO candidates and would likely delay the appointment of a new CEO."
Sleep Number also said that three directors met with Stadium to hear the firm out on what it wants in a new chief executive, and that the committee invited the firm to a meeting to share its views with the committee and Korn Ferry, a firm that is helping with the CEO search.
"Stadium abruptly withdrew its participation less than 24 hours before the meeting was scheduled to take place," Sleep Number said.
-Bill Peters
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November 25, 2024 20:50 ET (01:50 GMT)
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