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Buy Sleep Number, Sell Casper?

By Rick Munarriz - Feb 20, 2020 at 10:50AM

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A hot IPO is cooling down just as a once-cold specialty mattress maker is heating up.

If you're dismissing mattresses as a sleepy industry (pun intended), you may want to check out Sleep Number (SNBR 1.22%) and Casper Sleep (CSPR). Sleep Number is the company behind the namesake adjustable air-chambered beds that reported another blowout quarter on Wednesday afternoon. Casper Sleep is a fast-growing consumer-direct mattress seller that went public earlier this month.

Despite the hype, Casper Sleep has been a dud as a debutante. Earlier this year, Casper was expected to price its offering between $17 and $19. It had to settle for $12 two weeks ago, and even that was apparently too high. It's a broken IPO, a handful of pennies away from trading in the single digits.

Sleep Number is thankfully going the other way for its shareholders. The company that until just a couple of years ago traded as Select Comfort is trading at all-time highs. There is nothing in this week's latest financial update to make one think that the stock won't continue heading higher in the near term.

A couple sleeping on a Sleep Number bed with a tablet showing the adjustable firmness setting.

A Sleep Number bed with the adjustable settings on a tablet. Image source: Sleep Number.

Sleep no more

Net sales rose 7% to $441.2 million in Sleep Number's fourth quarter, its weakest year-over-year gain in more than a year. But there's more to that number than meets the eye. There was an extra week of deliveries in the prior year, so the adjusted top-line increase would be a heartier 14%. Analysts who were fully aware of the year-over-year hurdle had been targeting net sales to climb by less than 4%. 

Casper is growing faster. Revenue has risen 20% through the first three quarters of 2019, nearly double the 11% top-line gain that Sleep Number served up for all of last year. But Casper's lack of profitability -- and no clear timetable for it to operate in the black -- make Sleep Number the smart investing play.

Sleep Number earned $0.82 a share in the fourth quarter, barely above the $0.81 it posted a year earlier but well above the $0.58 a share it would've earned without the extra week of deliveries during the holiday-containing quarter of 2018. Wall Street pros were settling for net income of just $0.75 a share. Taking a look at all of 2019 (to silence the folks shaking their heads at the "adjusted" metrics), earnings per share rose 41% to $2.70.

It's been four years since Sleep Number set what seemed like a ridiculous goal of earning $2.75 a share in 2019. It fell short by pocket change, but in that time it has backed 9% compound annual net sales growth with a scintillating 29% compound annual growth rate in EPS. It's now eyeing a profit of $3.10 a share in 2020, translating to a reasonable forward P/E in the high teens.    

Good luck slapping any kind of earnings multiple on Casper. Its annual losses are only widening, and the marketing costs required to stand out among traditional mattress makers make it highly unlikely to turn the corner of profitability before Rip Van Winkle wakes up. 

Sleep Number also has a differentiated product on the market. There's nothing wrong with Casper, Purple, or any of the other consumer-direct mattresses on the market, but Sleep Number's air beds with adjustable firmness settings are in a league of their own. The Sleep Number 360 that it introduced a couple of years ago is gaining traction with sleepyheads everywhere. It's billed as the first smart bed because it uses intelligent biometrics to adjust firmness and elevation when it picks up on indicators that may disrupt a good night's rest. 

There will come a time when Casper stock falls to the point where it's a good enough value to offset its shortcomings, something at the heart of investing in IPOs when the rookies rumble. For now, Sleep Number is the one doing everything right by both its customers and shareholders. 

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Sleep Comfort Corporation Stock Quote
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