Is Wall Street Sleeping On This Stock?

While the mattress industry as a whole has suffered from weakening demand, premium mattress maker Sleep Number (NASDAQ: SNBR) is up 8% for the year.

That follows a disappointing 12-months, however, which led to a share price decline of 21% and triggered a substantial restructuring effort.

Thereafter, Sleep Number beat revenue expectations by 2.08% and earnings estimates by 34% in Q4 2023. So will the turnaround continue and should you add Sleep Number to your portfolio?

Why Did Sleep Number Stock Rise?

While the company’s first quarter of 2024 earnings weren’t quite as positive as the final quarter of 2023, it was enough for retail investors to view it as a continuation of Q4 2023’s positive trend.

Sleep Number shares were trading as much as 53% higher on the April earnings news. Though SNBR has sold off a bit since then, the stock is still 40% higher than where it sat pre-earnings.

That may be surprising considering revenues of $470.45 million in Q1 represented an 11% drop year-over-year. It was also 0.81% lower than analysts expected.

Even though Sleep Number swung to a net loss of $7.48 million after a 2023 net profit of $11.47 million, the loss was much slimmer than what analysts had expected. Diluted earnings per share of -$0.33 beat analysts’ estimates by 113.5%.

The company has undertaken a massive restructuring effort that included laying off around 7% of its workforce over the past five years and cutting expenses.

In the first quarter, Sleep Number said those efforts reduced operating expenses by $24 million year-over-year. The company also increased free cash flow by $21 million from the same quarter last year.

While both revenue and earnings declined from last year, many saw the earnings as an end to the company’s free-fall. Two solid quarters, coupled with the fact that Sleep Number leadership reiterated its guidance for 2024, was enough to reassure investors.

Will Sleep Number Stock Keep Going Up?

The post-earnings rally seemed to be justified given how far the stock had previously fallen. After all, SNBR is around 90% lower than its 2021 high. The main concern is if Sleep Number can keep up the pace in this environment.

It doesn’t recognize revenue until its mattresses are delivered, so there’s lag time between when a mattress is ordered and when the sale is recorded. For now, it remains unclear whether the increased revenue is due to persistent demand or a momentary blip.

Also concerning is the company’s reliance on debt. Revolving debt of $540 million increased by $80 million in 2023. Sleep Number does plan to continue with its restructuring efforts, however. The company hopes to improve on its 58.7% gross margin by closing 30 of its 672 retail stores this year.

Wall Street’s View 

Though retail investors have been willing to buy into the resurgence of the mattress industry, Wall Street is mostly still sleeping on Sleep Number. Five analysts have rated the stock and the consensus is a uniform Hold.

The highest forecast for SNBR is $13.50 per share, which translates to a 13% decline over the next 12 months. The lowest forecast estimates fair value to sit nearer $13 per share, also signifying the potential for a correction of 16.2%. Analysts attributed their low expectations to the razor-thin tightrope Sleep Number is walking.

“We look positively on the company’s improved focus on profitability and cash generation that will go toward paying down debt in fiscal 2024,” wrote Wedbush analyst Seth Basham. “However, we estimate Sleep Number finishes the year only barely below its 3.75X net debt/EBITDAR covenant, leaving little room for error.”

Though the analysts are bearish, there are reasons to believe Sleep Number can turn things around. Chief among them is the stock has been sold off to such an extent that its current price-to-sales value is just 0.2x.

That puts Sleep Number well below long-time competitor Tempur Sealy and upstart Purple Innovation, which have P/S multiples of 1.9x and 0.3x, respectively. With a market capitalization of just $346 million, there seems to be plenty of room for Sleep Number to rise.

Is Sleep Number a Good Stock?

Sleep Number is a risky stock to own because it is laden with high debt levels and short-term obligations exceed liquid assets.

Furthering the woes is the fact that the company has not been profitable over the past 12 months. Those concerns coupled with high EBIT valuation multiples have triggered analysts to lower their earnings estimates for the upcoming period.

Perhaps of greatest concern is that free cash flow yield is low and so even with a rock bottom price-to-sales ratio, Sleep Number remains under serious financial pressure.

For these reasons, the share price has suffered in recent years and it hasn’t helped that management has consistently reported revenues shy of estimates.

There were signs of life at the end of 2023 and a stabilization in the first quarter. Whether SNBR will rise depends on if the mattress industry uptick has staying power or not. Unfortunately for SNBR holders, there still could be hard times ahead, according to recent comments from the company’s leadership.

“Consumers’ purchasing power is limited due to elevated interest rates and record-high credit card debt,” said Shelly Ibach, Chair, President, and Chief Executive at Sleep Number said. “As a result, consumers continue to scrutinize their spending and make near-term decisions based primarily on need, price and perceived value, and they are deferring higher ticket durable purchases.”

The bottom line is for now Sleep Number exhibits one of the main concerns that Peter Lynch points to in buying a company and that is balance sheet risk. A perfect storm of easing macroeconomic conditions and shorting up the balance sheet is needed before all but the most adventurous investors will find the reward to risk compelling.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.