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1 Stock That Will Give You a Good Night's Sleep

By Rick Munarriz - Apr 23, 2020 at 9:15AM

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A better-than-expected quarter sends Sleep Number shares higher.

It's been a challenging few weeks for Sleep Number (SNBR 0.65%) investors, but it didn't let the bed bugs bite when it mattered the most. Shares of the company behind the air-chambered beds with adjustable firmness settings raced higher early on Thursday after it posted blowout financial results. 

Net sales rose 11% to $472.6 million, matching the top-line percentage gain it delivered for all of 2019. An encouraging 7% increase in comps combined with a 5% uptick in new stores helped deliver the better-than-expected net sales performance. Margins widened to the point where operating profit soared 61% and net income rose 54% to hit $39.1 million. Aggressive share buybacks over the past year helped earnings on a per-share basis skyrocket 70% to $1.36. Analysts were way off here, expected earnings to actually decline to $0.72 a share, with a negligible 1% uptick in net sales. 

A couple on a Sleep Number 360 bed with an elevated split platform. She is sleeping. He is awake.

Image source: Sleep Number.

It's not a dream

Sleep Number's monster quarter is a welcome surprise, and it delivered these strong double-digit gains on both ends of the income statement despite having most of its showrooms closed during the final two weeks of the period in response to the COVID-19 outbreak. Roughly 80% of its 611 showrooms were closed by the end of March. 

Offering a distinctive product helps. The Sleep Number 360 -- billed by the company as the world's first smart bed -- continues to gain in popularity for folks seeking a high-tech luxury bedding solution. Sleep Number adapts to sleeping and even snoring levels during the night using intelligent biometrics, adjusting the firmness and in some cases elevation of the bed to optimize the sleeping experience. 

One can argue that mattresses will hold up well during the coronavirus interruption, especially as folks spending more time at home prioritize products that improve their home life. In reality, Sleep Number will take a hit, especially with most of its locations shuttered. It expects the impact to be largely contained within the current quarter, and that's not a bad thing since this is historically its quietest quarter. 

April has been interesting. A quarter of its sales have come from its open stores. Another quarter of its net sales are still going through the 80% of its stores that are closed, operating with a pared-back workforce that is now working remotely. The other half of its net sales are stemming from online, live chat, and phone sales. Sleep Number also noted that orders have improved as April played out, a good indicator that the shelter-at-home phase of this pandemic is pushing mattress replacements to the front burner of budgeted items.

Sleep Number isn't offering guidance at this point, but it wouldn't be a surprise if analysts are aiming too low again. The company that once traded as Select Comfort did indicate it expects sales to pick up during the second half of this year, but obviously priorities may change if the pandemic or the eventual recession deepens.

Four years ago, Sleep Number set a lofty goal of earning $2.75 a share in 2019. It fell slightly short -- earning just $2.70 a share -- but after Wednesday's head-turning performance, its trailing profit is clocking in at $3.23 a share. Stock buybacks have helped prop up the pace of earnings growth on a per-share basis, but it's still a testament to a milestone that was achieved just a quarter later than its original timeline.  

This has been a wild ride for investors. Sleep Number stock hit an all-time high in mid-February the day after it posted strong fourth-quarter results, only to shed 75% of its peak value when it bottomed out earlier this month. The coronavirus noise scared investors, but now we're starting to see that Sleep Number was able to pass its initial test of this tricky climate.

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