Q4 2023 Sleep Number Corp Earnings Call

Participants

Dave Schwantes; Vice President – Finance, Investor Relations and Decision Support; Sleep Number Corp

Shelly Ibach; Chair, President and Chief Executive Officer; Sleep Number Corp

Francis Lee; Chief Financial Officer, Executive Vice President; Sleep Number Corp

Bobby Griffin; Analyst; Raymond James Financial, Inc.

Brad Thomas; Analyst; KeyBanc Capital Markets

Presentation

Operator

Yes, welcome, everyone to Sleep Number's Q4 and full-year 2013 earnings conference call. (Operator Instructions) Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I would like to introduce Dave Schwantes, Vice President of Finance and Investor Relations. You may begin.

Dave Schwantes

Good afternoon, and welcome to the Sleep Number Corporation fourth-quarter 2023 earnings conference call. Thank you for joining us. I am Dave Schwantes, Vice President of Finance and Investor Relations.
With me today are Shelly Ibach, our Chair, President, and CEO; and Francis Lee, our Chief Financial Officer. This telephone conference is being recorded and will be available on our website at sleepnumber.com. Please refer to the details in our news release to access the replay. Please also refer to our news release for a reconciliation of certain non-GAAP financial measures and supplemental financial information included in the news release or that may be discussed on this call.
The primary purpose of this call is to discuss the results of the fiscal period just ended. However, our commentary and responses to your questions may include certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties outlined in our earnings news release and discussed in some detail in our annual report on Form 10-K and other periodic filings with the SEC. The company's actual future results may vary materially.
I will now turn the call over to Shelly for her comments.

Shelly Ibach

Good afternoon, everyone, and thank you for joining our 2023 year end earnings call. My Sleep IQ score was 84 last night.
While the consumer demand environment remains challenging for our industry, the swift actions we took to improve demand and reduce costs allowed us to make important progress in the fourth quarter. We are continuing to transform our operating model to improve our financial resilience through the broad-based restructuring actions we discussed with you last quarter.
As we streamline our cost structure and strengthen our balance sheet, we are poised for accelerating growth at the mattress as the mattress industry demand environment improves. Importantly, our long-term opportunity remains intact as we lead through this transformation.
During today's call, I'll start with some observations on the industry and macro economic environment. Then focus my comments on our performance in the three strategic imperatives for repositioning our business, which are competing effectively restoring profit margins and paying down debt.
Following my remarks, Francis will provide further details on our 2023 financial results and 2024 outlook. Many of the macroeconomic challenges we discussed during our last call persisted in the fourth quarter, low consumer sentiment slower new home purchases and elevated interest rates continued to pressure demand for our category.
\Additionally, consumer purchasing power continues its steady downward trend. We estimate that mattress units in 2023 were below 2015 levels and down more than 25% from their 2020 peak per capita spending on mattresses is also nearing historic lows, approaching levels not experienced since the 2008, 2009, great recession. And although we are seeing some indications that the consumer environment may stabilize in the coming year, the mattress industry remains in a historic recession.
Considerations like price and perceived value continue to drive consumer purchasing decisions, which remain highly responsive to external factors and events that are disruptive for the mattress industry. This challenging demand environment continued to weigh on our financial results in the fourth quarter, though we slightly outperformed our demand and cost reduction expectations for the fourth quarter, net sales of $430 million were down 14% from the prior year with demand down low single digits.
For the full year, our net sales were $1.89 billion, a year-over-year decline at 11% with demand down high single digits. Against this backdrop, we executed several actions to strengthen our competitive positioning, which is our first strategic imperative with consumers' heightened focus on price and value and scrutiny of every purchase.
We prioritize actions to increase her consideration and conversion. We sharpened our marketing messages to emphasize our differentiated benefits of adjustable firmness and temperature, promoting the value of your best sleep every night and for every budget we renegotiated with our media partners to improve impressions per dollar spend, optimize the media mix and reflected media in Q4, resulting in improved traffic and media ROI. We refined our promotional strategy and selling process to focus on smart beds.
First, before communicating the additional benefits of our Smart adjustable bases. This approach is resonating with today's consumer who is acutely focused on value. Our vertical integrated model allows us to stay close to the customer and adjust our marketing strategy and coordinate our in-store an online experience in real time.
We also drove greater brand awareness through our partnership with the NFL, our why choose a Sleep Number smart bed campaign featuring Justin Jefferson and Jamar Chase increased purchase consideration with NFL fans for represent approximately half of the US population.
Since implementing these actions, our gym demand trajectory improved significantly to a low single digit year-over-year decline in the fourth quarter compared with a double digit decline in Q3. We also drove positive unit growth on a demand basis in the fourth quarter for the first time since the third quarter of 2021. With this demand performance, we expected that we outperformed the industry in the fourth quarter with our second strategic imperative, we are taking steps to reduce costs across our business to restore margins.
During the third quarter, we began aggressively executing our contingency plans to align our discretionary costs with the softer demand environment in the fourth quarter, we established operating mechanisms and tools to accelerate our restructuring efforts and drive sustainable change across the organization. We have initiated dozens of work streams with program charters, time lines and weekly reporting to promote accountability, continuous progress and recognition as benefits are realized.
I'm proud of our team's energy and efforts in executing this cost reduction roadmap and identifying and validating new opportunities. Broadly, our cost reduction initiatives fell into four categories, cost of customer acquisition, including streamlining vendors, and indirect spend based on capability and costs cost to serve our customers, such as condensing service outsourcing functions and increasing digital support assets for greater efficiency, COGS leverage through value engineering, including an exhaustive material cost reduction program and R&D leverage as we reprioritize R&D spend to accelerate near term innovation while driving greater efficiencies.
We are also realizing the benefits of the workforce restructuring actions taken in the fourth quarter, which reduced the number of team members to approximately 4,100 at the end of 2023, 7% lower than in 2019. Together these efforts enabled us to reduce our operating expenses in the fourth quarter before restructuring costs by $24,000,005 more than we had planned for the full year, we reduced operating expenses by $85 million.
With our team's commitment to the execution of our cost improvement roadmap, we expect $40 million to $45 million of in-year cost reductions in 2024 and expect full year operating expenses to be 125 to 130 million below 2022 levels.
As a result of this restructuring, we will have a leaner, more efficient business model with higher margins in stronger cash flow as industry trends improve. We also remain intently focused on restoring our gross margin rate to our historical average in the low-60s in a normalized demand environment.
In 2023, we grew gross margin rate by 80 basis points, while navigating a double digit decline in our net sales as the mattress industry experienced its second consecutive year of recession in 2024, we are targeting approximately 100 basis points of gross margin rate expansion from the cost improvements initiatives I highlighted earlier. We expect the mattress industry to remain under pressure in 2024, and our outlook for the year reflects that assumption. Thus, we continue to prioritize liquidity and paying down debt.
Our third strategic imperative. In the third quarter of 2023, we took steps aimed at enhancing our financial flexibility, including working with our bank group to amend our financial covenants. Reducing our outstanding credit line balance and related financial leverage remain key priorities for us in 2024 and beyond. The actions we have taken to date and have underway are making Sleep Number a stronger, more durable business as we realize additional benefits of our cost management strategy.
In 2024, we expect to generate $60 million to $80 million in positive free cash flow and intend to use this cash to pay down debt. We also expect depreciation to be significantly greater than CapEx with our focus on cash flow generation and paying down debt. We plan to reduce capital expenditures in 2024 by roughly half to approximately $30 million. 2023 was a challenging year.
We have initiated fundamental changes to transform our business and we have more work to do that said, our long term opportunity, supported by our consumer innovation strategy remains strong. Fleet remains one of the areas in which consumers have the most unmet need.
According to the CDC, one-third of US adults report, they usually get less than the recommended amount of sleep, not getting enough sleep is linked with many chronic diseases and conditions, which threaten our nation's health. And in a recent McKenzie future of wellness survey, sleep ranked as one of the highest wellness priorities among consumers who indicated they are looking for data-driven science-backed solutions that empower them to take more control over their health outcomes.
Our competitive advantages, including our connected physical and digital sleep wellness platform, network of millions of smart sleepers, vertically integrated operating model and purpose-driven team member culture uniquely positions Sleep Number to solve the many untapped opportunities related to sleep across the continuum of care.
The foundation of our differentiated long-term value proposition in our smart bed wellness is our Smart Edge wellness platform, which provides an individually customized adjustable and responsive sleep experience by effortlessly. Adjusting to sleepers unique needs. Our Smart Beds help millions of people achieve more restful sleep every night.
In fact, 94% of smart bed sleepers report benefiting from better quality sleep compared with sleeping on a non-smart bed. Our innovative technology, supported by a robust portfolio of over 800 patents and patents pending worldwide is a key differentiator in a consolidating and commoditizing market. These unique assets empower us to protect and take market share even in a difficult environment.
Additionally, our proprietary ecosystem of loyal smart sleepers continues to grow, reaching nearly $3 million at the end of 2023, and their advocacy of our brand is an important element of our future growth. Our innovation road map supports ongoing engagement initiatives with in this ecosystem. For example, in the fourth quarter, we integrated our loyalty rewards program and customer support into the Sleep Number app.
And in 2024 March sleepers will also be able to shop within the app. Our average monthly engagement rate of 80% is best in class for digital products. This high engagement with our sleep wellness platform increases, customer lifetime value and drives lower cost customer acquisition through referrals. Our vertically integrated operating model enables margin efficiency opportunities, which are amplified with scale through our smart bed ecosystem and optimized fulfillment networks in our culture of individuality and well-being reinforced by our team.
Members' dedication to our mission is a vital factor in our successful business model transformation continued innovation and profitable growth. We are prepared for accelerating growth as the mattress industry environment improves. I'm grateful for our team's resilience and strong execution as we work together to build a more sustainable business and capitalize on opportunities to deliver meaningful value for our shareholders.
With that, I'll turn the call over to Francis, who will provide more details on our 2023 financial results and 2024 guidance.

Francis Lee

Thank you, Shelly, and good afternoon. As we closed fiscal year 2023 and have started the new year, our teams have shown agility and diligence as we work to build a more durable operating model and greater financial resilience as we navigated a pullback in demand for the industry.
Over the last couple of years. The important actions we are taking will lead to a stronger foundation for our business, which will enable accelerating profitability as the industry backdrop improves.
In my comments today, I will focus my remarks in three primary areas, one review of our fourth quarter and full year results. Two, progress we have made in our cost restructuring and impacts to our 2024 financial outlook and three key assumptions underlying our 2024 guidance.
Let's move on to a review of our fourth quarter and full year results. Fourth quarter net sales of $430 million were down 14% versus last year. Demand for the quarter was down low single digits and slightly better than our expectations of a mid single digit demand declined year over year.
Changes in backlog drove a majority of the net sales decline. Our fourth-quarter gross margin of 56.6% was up 190 basis points year over year and included the benefit from pricing actions taken over the past 12 months, an improvement in commodity prices. These benefits are partially offset by increased promotional offers aimed at budget and value-conscious consumers and fixed cost deleverage from a year-over-year decline in delivered units.
We also faced year over year gross margin rate pressure related the mix of FlexFit smart adjustable bases as we had the full good, better best assortment of FlexFit smart bases in 2023. In 2022, the smart base portfolio was limited to higher margin product due to semiconductor doctor ships constraints. We were ahead of plan with cost reduction actions in the fourth quarter with operating expenses pre restructuring costs down $24 million year over year.
We are making broad-based cost cuts across the entire business impacting all areas of our operating cost structure. We recorded $16 million of restructuring costs in the quarter versus our original 2023 estimate of $10 million. This included the acceleration of a few store closures late in the quarter. With the advancement of our cost initiatives, we estimate our 2024 restructuring costs will be approximately $12 million. As a reminder, restructuring costs are reported as a separate line item in our financial statements, and we will continue to provide an as-adjusted EPS figure for comparative purposes.
We generated $18 million of EBITDA in the quarter versus $23 million last year, primarily due to the year-over-year net sales decline, partially offset by a higher gross margin rate and year-over-year operating expense reductions.
Our 2023 full year results included net sales of $1.89 billion, down 11% versus prior year with demand down high single digits for the year, our gross margin rate increased 80 basis points for the year. We reduced operating expenses by $85 million or 7% year over year.
Prior to the $16 million of restructuring costs, we reported a full year diluted loss per share of $0.68 and a full year as adjusted loss per share of $0.14. Excluding $16 million of restructuring costs recorded in the fourth quarter, adjusted EBITDA declined 14% to $127 million compared to $148 million last year, driven by the net sales decline, partially offset by higher a higher gross margin rate and ongoing operating expense reductions.
Now let me discuss in a little more detail. The important work we are doing to adjust our cost structure in support of a more durable business model and financial resilience with the change in demand trends in the third quarter, we have been executing accelerated cost reduction actions across the business to strengthen our financial position as we continue to navigate the ongoing challenging demand environment for the mattress industry.
These efforts contributed to the $85 million year-over-year reduction in operating expenses in 2023 and our plans for an additional 40 to $45 million operating expense reduction for 2024. This will result in a two-year cost reduction total of $125 million to $130 million.
Our operational transformation work is progressing with velocity, and we have established operating mechanisms to promote and build sustainable change across the organization. Each initiative we are implementing has been developed with a project projected range of cost improvement and relative risk assessment.
Some of the specific cost actions we have taken include workforce reductions across the organization as we enter 2024 with 25% less team members than in 2021, reducing our cost to serve customers through service simplification programs, adjusting hours outsourcing and increasing digital customer support assets.
Given the down market environment, we also seized the opportunity to reduce our store density in selected markets and accelerate the closing of lower-performing stores with natural lease expirations. This includes closing stores where we had been testing store proximity in selected markets.
In each case, we carefully considered the opportunity to transfer sales to other stores in the same DMA or online to minimize lost sales, while reducing overall fixed store costs and increasing total DMA profit, we expect the net impact of store closures to be about a one point drag to the 2024 net sales growth, and we expect to end 2024 with 25 to 30 fewer stores compared to 2023. We also continue to drive gross margin improvement actions across the business.
These actions include value engineering, material cost reductions and driving additional efficiencies through our manufacturing and home delivery network. We expect to grow our gross margin rate by approximately 100 basis points in 2024. As we move into 2025, we expect to realize additional cost savings as we annualize 2024 cost actions.
Now let me turn to 2024. As Shelly mentioned, we built our 2024 plans on the assumption that the industry does not experience any material recovery from 2024 despite having experienced two years of recessionary demand levels. While the mattress industry is likely at bottoming levels, we feel it is prudent to plan our cost structure on the basis of no improvement in demand levels this year.
For our 2024 outlook, we are providing adjusted EBITDA as a primary guidance metric as we transform our business to a more durable business operating model, we see adjusted EBITDA as the best way to communicate our performance and the earnings power of our business. Adjusted EBITDA is a key metric we are using to track our transformation progress and in particular cash generation to pay down debt.
Let me unpack some of the specific assumptions included in our 2024 outlook. The outlook assumes net sales are down mid-single digits for the year with a low single digit demand decline. Our net sales guidance assumes three percentage points of headwind from year-over-year backlog changes and one percentage point from net store closures.
We expect net sales to be down high single digits in the first half of the year based on tougher comparisons, followed by low single-digit growth for the back half of the year, we expect the majority of approximately 100 basis points of gross margin rate expansion in 2024 to be in the back half of the year. Key drivers include further reductions in our material costs through product value engineering and ongoing supplier negotiations.
We are also expecting benefit from further optimization of our fulfillment network, including facility closures and using temporary labor where it makes sense. Headwinds for the year include fixed cost deleverage from slightly declining delivered units for the year.
We expect operating expenses to be down $40 million to $45 million versus last year with the cost savings spread across the P&L, we are estimating restructuring costs of approximately $12 million to be incurred in 2024 with approximately $10 million of the costs falling in Q1, we expect an interest rate of approximately $45 million for the year. The above assumptions support our adjusted EBITDA outlook range for the year of $125 million to $145 million.
We remain intently focused on liquidity and balance sheet strength and expect to meet our liquidity needs for 2024 from operating cash flow in our existing credit facility, we expect to generate $90 million to $110 million of operating cash flow with $30 million of planned capital expenditures.
This results in $60 million to $80 million of free cash flow for the year, which we intend to use to pay down our credit line for working capital changes are expected to be a source of cash in 2024 versus a significant use of cash. The last two years. We expect noncash charges to be a combined 90 million or similar to 2023 levels.
We also want to provide some clarity regarding our first quarter 2024 performance expectations. We are expecting net sales to be down approximately 10% versus the prior year's quarter, including three to four points of headwind from year over year backlog changes, we expect first quarter adjusted EBITDA to be just over $30 million. Our outlook for 2024 provides appropriate clearance against the revised bank covenants put in place last quarter. The new bank agreement and related covenants have provided increased flexibility to enable us to restructure the business and navigate the demand environment.
In 2024, we expect our debt to EBITDA leverage to peak in Q2 of this year and ended the year below 3.75 times under our covenant levels. As the industry recovers, we see a significant opportunity for our business to accelerate by building a more durable operating model with greater financial resilience. We are transforming our business to deliver profitability and free cash flows across the highs and lows of the mattress industry cycle we are at a cycle low right now and expect to generate $60 million to 80 million of free cash flow this year as we continue to benefit from the cost optimization initiatives underway, we expect our gross margin rate to return to 60%-plus and low double digit EBITDA margins as industry unit trends return to more normalized levels.
With that, Lisa, please open the line for questions.

Question and Answer Session

Operator

Thank you, sir. (Operator Instructions) Bobby Griffin, Raymond James.

Bobby Griffin

Good afternoon, everybody. Thanks for taking my questions. And actually all the details of the details given on around the moving parts for 2024. And so I guess first, when we spoke last, we were talking about some of the store closures to strengthen the store portfolio and maybe you've done a few so far. So can you can you give us a little detail what you're seeing on recapture rates as you're closing some of these stores Yes, Bobby, thanks for the question.

Shelly Ibach

You first is it's early on that. But what we have is a very detailed store transfer strategy to be able to capture those sales and expect approximately 45% to 50% of the sales to transfer. We focus on the total DMA and positive profitability for the DMA. And we've we have a lot of historical experience on store transfer. And then over the years as we've been executing our portfolio to try to keep a very current retail strategy and of stores and online, we look at the DMAs. We we locate stores. We understand how to capture that consumer and digitally and pull her through and develop relationships and so on where we're bullish on what we can do here and therefore expect only one point of pressure due to due to our net stores this year.

Bobby Griffin

Okay. That's helpful. And I guess selling maybe to kind of step back and talk a little bit on 4Q and some of the changes you've got put into place.

Shelly Ibach

I mean, pretty notable change in where the demand was. I think we ended 3Q running down low double digit and in 4Q running down low single digits. So can we talk about the progression and what you saw as we kind of move some of the advertising or different initiatives because that is a pretty sizable change against some comparisons that are roughly about the same last year.

Bobby Griffin

Yes, thanks.

Shelly Ibach

Thanks, Bobby. You know, we did make better progress in both generating demand and reducing costs than we had expected in the fourth quarter. Regarding demand, it was about strengthening our competitive positioning. We had a low on single digit decline for the quarter, pretty consistent performance across the the three months. And and we, you know, we took many actions integrated actions in the back half and have they at the end of September and heading into October, which is focused on messaging, media selling process and promotions. And these the integrated work led to improved brand metrics and also traffic and media ROI. And in there, therefore our demand performance.

Bobby Griffin

How is on I mean, how is the demand trended so far in 2024 on, you know, there's been a lot of comments out there that the industry unfortunately took a step back in January with some winter weather as well as February. So just curious if you can kind of tell us how things are trending year to date for you, sir?

Francis Lee

This is this speaks to the highly reactive consumer that that I spoke about in my prepared remarks. You're right know, it's been widely reported that January demand trends for the mattress industry were very challenging, including the weather impact, but it was also a pullback in spending across the category and we saw that from the consumer and probably tied to purchasing power of purchasing power.
And we were also impacted by these same factors in January and had a double digit decline in January, February has returned to a low single digit decline for us, including a low single digit growth over the President's weekend, which I think is probably a little better than what I'm hearing for the industry. We're forecasting Q1 demand to be down mid single digits with Q1 net sales down 10% year over year. And then in the back half of the year, we expect a low single digit growth as we lap easier compares, particularly against Q.

Bobby Griffin

Okay. I appreciate that detail, and I'll jump back in the queue. And turn it over to others. But thank you and best of luck here.

Operator

Brad Thomas, KeyBanc Capital Markets.

Brad Thomas

Good afternoon. Thanks for taking my question on Shelley, I was wondering if you could just talk a little bit about and some of the product and promotional strategies you think might be most effective for you own in this current backdrop. What, if anything, you're planning to do from a product standpoint and how much of the line might be changing after this year?

Shelly Ibach

Hey, Brad, I think you know, I'll start with our consumer innovation strategy, which and reshape really what consumers should be expecting out of their bed. We know we see our smart bed, our smart bed platform continuing to set pace for this category and certainly for the consumer. And we continue to have value added solutions that not only deliver the highest quality fleet.
As you know, our platform also has the opportunity with digital innovation to solve many untapped opportunities in the future around sleep and the continuum of care. So and we continue to focus on setting pace there, and we'll compete aggressively in this marketplace to to win the consumer with delivering the highest quality sleep, as you asked specifically about some of the messaging and promotion strategy that's resonating in now.
We still are operating with a scrutinizing consumer in the marketplace, and we worked on a lot of took a lot of actions in the third and fourth quarter, too be able to refine our messaging to be able to reach this consumer breakthrough with a strong value equation. And again, we're liking what we're seeing.
And I think, you know, as weak as we completed here in the month of February and and over the President's weekend, we're seeing the advancement of our work from Q4 and new to effectively reach the consumer. And specifically, this is one of the advantages around our vertical model where we're able to integrate our plans and look at total variable margin, inclusive of promotional dollars financing in media investments in and structure our promotion promote promotional plan accordingly, being able to manage discounts in a way that drives higher mix, which we're seeing as well as attach and an overall focus on optimizing our variable margin and still delivering media efficiency in a challenged environment.

Brad Thomas

That's helpful. Shelly, and just to follow up on that come, I don't know that we can totally tell as we look through some of the items you disclosed because there's some issues with comparability and M&A. But a are you ticked down a little bit from where it's been the last several quarters on gross margins up, the comparisons will play into it and then you mentioned the units going positive against all of this maybe implies that that you've got a bit more promotional here, is that accurate as you get more promotional and is that going to be a strategy and push on more in 2024 to drive the business?

Shelly Ibach

Yes. Thanks for asking those. Additional specific questions you we did in queue for you. You can see that in our RARU. And then as you noted, units were positive and offset that. And that for us, even though ARU. was up and we were a few hundred below what where we were forecasting and we've continued to iterate and really happy with the progression.
And since that time and right on, you know what we would expect right now in February and and for the President's weekend where you know where you'd have seen some, you know, some good movement in ARU. and at the same time, you know, having heavy units fairly flattish.
So and you know, it's advancing in and, you know, if you look at I think specifically for the President's weekend. If you look at our discounts, you may look at it by model and say, oh, the discounts are higher, but that was designed to drive mix up. So again, a fully loaded variable margin using discounts to drive mix using financing differently, we look at discounts and financing as a total bucket. We we actually have year over year reduction in dollars and in some of the favorability and in the variable margin.

Brad Thomas

That's very helpful. Shelly, thank you so much, and I'll turn it over others.

Shelly Ibach

Thanks.

Operator

And we'll go back to Bobby Griffin, Raymond James.

Bobby Griffin

For you guys, especially back in here on Shelly, just just to clarify, the positive unit comment in 4Q, is that on a demand basis?

Shelly Ibach

So excluding the moving parts with the backlog year over year yet demand basis. Thank you. Thank you for clarifying that. Comment here about are you in demand and and our current performance here in the quarter is all demand related?

Bobby Griffin

Okay. That's helpful. On in front of the data, is the backlog comparison on largely just a 1Q and or 1Q issue? Or is it going to impact all the quarters in 2024?

Francis Lee

Hey, Bobby, thanks for asking. We have on the backlog, a comparison will largely impact the front half of the year and be weighted toward Q1, certainly at '24.
And then I wanted to circle back. I think, Bobby, now the other thing that you did on the first half of the year. We're probably looking at about, as Shelly said, a three to four point drag on net sales growth year over year with the backlog changes the back half of the year. It's probably less than a point the way we see it now.
Okay. Due just pure backlog cadence, I guess you have your backlog headwinds exclusively really focused on the first half of the year.

Bobby Griffin

Okay. And then the second part is that part of the reason the gross margin progression is kind of different than maybe you would have expected with all the expansion in 2H? Or is there some other things going on inside gross margins that are impacting the timing throughout the year?

Francis Lee

I think the underlying gross margin shifts will be largely to the timing of some of these cost initiatives that we're putting in place through the work and the programs that we put them putting in for our cost improvement, profitability improvement overall, I'll say that I've been here for several months now. And as the new CFO, one of my top priorities is to build a more durable operating model. And we've left no stone unturned as we look across all elements of our cost structure and with gross margin and the initiatives we're putting in place some of those will take hold in the second half of the year and be annualizing and could you see even more benefit in 2025.

Bobby Griffin

Okay. And then I guess, lastly, for me is just you guys are part tightening up on CapEx to drive cash flow and pay down debt. And that obviously is the right strategy. Just curious, what is it and pull it out of CapEx to see it go down to 30 million or some of the historical rates. What are we deferring in, you know, things like that?

Francis Lee

Yes, our CapEx is around $30 million this year. It's about half of what it's been in the last couple of years. In addition to store closures, we're also being more thoughtful about store openings, and we're focusing the rest of that CapEx on some critical tech spend for our key systems I would add. So it's really a slow down a slow down of of newer expansion and a slow down of some of our assets infrastructure.

Bobby Griffin

Okay. That's helpful that I was looking for. I appreciate you guys. Let me ask some additional questions and best of luck in Q1.

Francis Lee

Thank you.

Operator

At this time, there are no further questions. So I'll hand the call back to you.

Dave Schwantes

As does management team for any additional or closing remarks, thank you for joining us today, and we look forward to discussing our first quarter 2024 performance with you in April, Sleep well and dream big.

Operator

And again, everyone, that does conclude this conference. Thank you for your participation.