What happened
Shares of Sleep Number (SNBR -0.35%) dipped as much as 12.5% this week, according to data provided by S&P Global Market Intelligence. The smart mattress and sleep company has been reeling in recent quarters after posting weak results coming out of the pandemic lockdowns. Investors are also likely worried about the company's ability to pay back the large loans on its balance sheet. As of 1:41 p.m. ET on Friday, Aug 18, shares of Sleep Number are down 45% in the past year.
So what
In the second quarter of 2023, Sleep Number posted dismal earnings. Revenue declined 16% year over year in the period to $459 million, driven by consumers switching their spending from consumables to travel and entertainment as the world gets further away from the COVID-19 pandemic. Sleep Number, as a seller of a key household item, is facing a major headwind with this development.
The company still generated an operating profit, if just slightly. Sleep Number posted an operating income of $11 million in Q2, which was down from $50 million a year ago. However, this barely can pay for the company's interest expense, which ran to $10 million in the quarter.
This brings us to Sleep Number's number one concern: debt. At the end of Q2, the company had $484 million in borrowings under its credit facility and close to zero cash, meaning it is going to need to pay back the interest and principal on these loans through the free cash flow it generates. The problem is, the company is burning free cash flow at the moment. In the first six months of 2023, Sleep Number lost $11 million in free cash flow. Last year was no better with an $8 million free-cash-flow loss. These numbers are going to need to be turned around -- and quickly -- if Sleep Number is going to pay back these loans.
Now what
You might think Sleep Number shares are cheap at the moment, currently off 82% from all-time highs. But this balance sheet looks worrisome and could lead to even more trouble for shareholders in upcoming quarters.
Unless you think consumer spending on household items is going to explode in upcoming quarters, which seems unlikely with student loan payments resuming, it is best to avoid Sleep Number stock for your portfolio.
