In this day and age, how many publicly traded companies boast about their prowess in phone sales? Smart-mattress retailer Sleep Number (SNBR -4.42%), for one, is quite proud of its ability to sell over the phone. 

I don't mean to imply that the company is working off an antiquated sales model -- quite the opposite. Phone sales are necessary when you're offering a high-tech version of a product most people buy only once every decade, and especially when your average mattress sells for $4,800. Potential customers want to have their questions answered before making this type of big-ticket, long-term purchase.

I bring this up to demonstrate how keen the company is to convert warm prospects for its premium mattresses into customers. Sleep Number has certainly been converting prospects as of late: It enjoyed a stellar year in 2020 and shares gained 82% as a result. Let's review the organization's current situation and discuss how it can capitalize on its momentum in fiscal 2021 and beyond.

A woman sleeps comfortably in a firm bed.

Image source: Getty Images.

Sleep Number is a direct-to-consumer mattress retailer, with a network of 596 stores that account for 86% of sales; the remainder comes from e-commerce and the phone sales I mention above. As I explained on a recent Motley Fool Industry Focus podcast with my colleague and host Emily Flippen, these stores notch impressive average annual sales of $3 million, and average over $1,000 in sales per square foot.

Sleep Number isn't having trouble moving these mattresses in an era when consumers seem willing to pay a premium to increase their chances for deep and restful sleep. Granted, in the fiscal second quarter of 2020, the company faced COVID-19 sales and supply disruption, and revenue fell by 20% year over year, while it posted a net loss of $0.45 per share.

But Sleep Number enjoyed a record third quarter, and is now projecting a full-year fiscal 2020 net profit of $4 per diluted share, an increase of nearly 50% over the $2.70 it earned in 2019. The company will report on its fourth quarter and year-end results in February.

Sleep Number rebounded in part by doubling its online and phone sales. This category accounted for 13.7% of total revenue in the third quarter, versus 7.3% in the third quarter of 2019. Coupled with controls on administrative expenses, these incremental sales obviously supplied profits well beyond the company's break-even point, as third-quarter net earnings of $51.3 million soared past the $28.1 million in the third quarter of 2019, and brought total net income in the year to date to $77.8 million. 

What's needed to accelerate long-term success

Although this discretionary consumer goods disruptor relied on phone and e-commerce sales to supply incremental revenue this year, the surge of nonretail orders hasn't caused management to second-guess its store expansion strategy. Though curbed by COVID-19, Sleep Number still plans to grow its store base by 4% to 5% annually through 2025.

If a wider store footprint forms the core of the company's growth strategy, two actions over the long term would help complement sales and allow for expansion and stock price appreciation. The first is to be able to maintain the new level of phone and internet sales (14% to 15% of total sales) even after COVID-19 is in the rearview mirror, since this creates the higher flow-through operating profit the company is presently enjoying. 

The second is to monetize the organization's phenomenal sleep database and data analytics capabilities. Sleep Number's 360 line of smart mattresses employs biometric sensors that obtain a plethora of measurements as customers sleep, including motion, rest, breathing, and even nighttime heart rate variability. Customers can download the company's app to obtain personalized daily data on their sleeping habits; they also receive a monthly "sleep report." The company has accumulated a massive amount of data through more than 1 billion recorded sleep sessions.

This is an excellent opportunity for Sleep Number to parlay some of its investments in sleep science into premium features in its app, or perhaps even a subscription service. For example, a new consumer-based research project now underway will seek to understand the relationship of sleep to health trends in the larger population.

CEO Shelly Ibach noted in the company's latest earnings call, "Learnings [from the study] will contribute to insights about the impact of sleep on holistic health as well as inform the development of new products, services, and partnerships to advance the science of sleep."

New products and services derived from this data are the keys to building operating-profit momentum. Adding a premium paid subscription to its data reporting could generate a high-margin revenue stream for Sleep Number. And if it can also retain phone and internet sales at 14% to 15% of revenue, the organization will generate meaningful growth that will likely result in earnings-multiple expansion, rewarding shareholders who grasp its long-term potential today.