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Are Sleep Number Stock Investors in for a Rude Awakening?

By Rick Munarriz - Feb 10, 2021 at 11:45AM

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The smart-bed maker is riding high these days, but a big earnings report is just around the corner.

Mattress stocks aren't always sleepy investments. Shares of Sleep Number (SNBR -3.19%) have soared 114% since the company posted blowout third-quarter results nearly four months ago. It will wrap up its fiscal year with next week's fourth-quarter numbers, and at least one Wall Street pro is concerned heading into next Wednesday's report. 

Seth Basham at Wedbush is jacking up his price target on the stock from $52 to $120, but this isn't as bullish a move as it may seem. The stock cracked the $120 ceiling on Monday, hitting another all-time high on Tuesday. Basham's running alongside the stock, but he's sticking with his neutral rating on Sleep Number. He's surprised to see the shares more than doubling since its last earnings call. Even a fellow Wall Street pro downgrading the stock last week isn't slowing its ascent. Will Sleep Number earn these upticks? We'll find out next week.

A couple sleeping on a Sleep Number bed with a tablet monitoring sleep.

Image source: Sleep Number.

Sleep no more

Sleep Number hasn't just been a big winner since its better-than-expected third quarter. The stock has skyrocketed 556% since bottoming out in mid-March with the rest of the market. This may seem like an extreme burst for a stock that only saw net sales climb 12% in its latest quarter, and some are skeptical that the good times will last.

Basham at Wedbush points out that Sleep Number -- with just 13% of its outstanding float currently sold short -- isn't necessarily squeezing the naysayers. Where is all this bullishness coming from? Some analysts are getting nervous. Last week it was Curtis Nagle at BofA boosting his price target from $73 to $88, but also downgrading Sleep Number from neutral to underperform. He had upgraded the stock back in November, but he's bearish again now with the stock's rapid ascent. 

We're a week away from a pivotal earnings report, but don't assume that cautious analyst moves heading into the earnings release are a bad thing. Sleep Number has rallied by eating Wall Street pros for breakfast. Through the first three quarters of 2020 it landed 89%, 33%, and 69% above analyst profit targets, respectively. 

Even the third quarter that may seem tame by top-line growth standards is a lot better than it seems at first glance. Sleep Number's 12% increase in net sales was barely ahead of the 9% uptick Wall Street was modeling, but there's a lot of success in that pre-teen increase. We're talking about an 11% spike in comps. This was online and phone sales more than doubling as an outlet for customers hesitant to head into one of its stores. More importantly, operating income and earnings soared 78% and 90%, respectively. 

Sleep Number raised the bar for its air-chambered mattresses when it introduced what it bills as the industry's first smart bed. The Sleep Number 360 monitors sleep quality and it can seamlessly adjust firmness settings and in some models elevation levels when someone is getting restless. 

Back in October Sleep Number was calling for $4 in earnings for 2020, a refreshing 48% increase in a pandemic year. We're spending more time at home, so naturally our bedding is going to get a lot of upgrade attention. 

Analysts are trying to catch up to Sleep Number, and it's not just the unimpressed analysts who still have to concede higher price targets. The $1.44 a share in earnings that Wall Street now forecasts for next week's quarter is 76% ahead of where Sleep Number was for the prior year's fourth quarter. If that sounds like a lot, just remember that Sleep Number landed 69% higher than where the pros were parked last time. 

Momentum is on Sleep Number's side. Obviously that will all go away if it doesn't beat expectations again and offer rosy guidance for 2021. However, betting against Sleep Number has been a horrible call over the last 11 months. My money's still riding on Sleep Number as a growth stock that's giving short-sellers nightmares.  

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