What a brutal six months it’s been for Sleep Number. The stock has dropped 67.2% and now trades at $2.19, rattling many shareholders. This might have investors contemplating their next move.
Is there a buying opportunity in Sleep Number, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Sleep Number Will Underperform?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons there are better opportunities than SNBR and a stock we'd rather own.
1. Flat Same-Store Sales Indicate Weak Demand
Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.
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
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Sleep Number, its EPS declined by 41.7% 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 $17.69 million of cash over the last year, and its $942.5 million of debt exceeds the $1.69 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 cheer for all companies serving everyday consumers, but in the case of Sleep Number, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 11.5× forward EV-to-EBITDA (or $2.19 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. Let us point you toward the most entrenched endpoint security platform on the market.
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