What a brutal six months it’s been for Sleep Number. The stock has dropped 67% and now trades at $1.69, rattling many shareholders. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Sleep Number, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Sleep Number Will Underperform?
Even though the stock has become cheaper, we don't have much confidence in Sleep Number. Here are three reasons we avoid SNBR and a stock we'd rather own.
1. Flat Same-Store Sales Indicate Weak Demand
Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Sleep Number’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Sleep Number, its EPS declined by 44% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Sleep Number burned through $23.66 million of cash over the last year, and its $953.6 million of debt exceeds the $1.48 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Sleep Number’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Sleep Number until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We see the value of companies helping consumers, but in the case of Sleep Number, we’re out. After the recent drawdown, the stock trades at 10.1× forward EV-to-EBITDA (or $1.69 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at a top digital advertising platform riding the creator economy.
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