Sleep Number's stock has been cut in half over the past 12 months. Yet the mattress maker's business fundamentals are impressive, and demand for its products remains high. Here's why this stock could shape up to be anything but a snooze.
The dreaded supply chain strikes again
Why has the stock been cut in half? In short, Sleep Number was hit especially hard by global supply chain issues in 2021. In the first half of the year, the company struggled with its foam supply -- an essential component for any mattress seller. And even after it shored up its foam suppliers, the company blamed its delivery issues on the supply shortages of semiconductor chips associated with its smart beds and smart bases.
As a result of the company's supply chain issues, and the subsequent freefall in Sleep Number's stock price, a class action lawsuit has been filed against the mattress seller. Yet the company is proactively trying to solve its biggest headache. According to management, Sleep Number has formed direct relationships with its second-tier and third-tier suppliers, buying semiconductor chips through "higher-cost open-market purchases," and employing new tactics to expedite its shipping of needed supplies, including airfreight.
By traditional value metrics like P/E ratio and free cash flow yield, the stock is underpriced. Sleep Number has a P/E ratio around 9 and a free cash flow yield of 13.6%, compared to the S&P 500's recent averages of roughly 26 and 1.9%, respectively. Furthermore, the company is on track to set records with $2.3 billion in net sales and EPS of $7.25 for 2021.
If Sleep Number is able to meet its that full-year EPS guidance, it will represent a 168% increase from 2019. The main reason why? Besides its consistent revenue growth, the company has an aggressive share repurchase program.
In the past six years, Sleep Number's outstanding share count dropped from 52.1 million to 24.3 million. Just in the first nine months of 2021, the company repurchased $364 million of its stock.
But is buying back shares an effective use of capital? Sleep Number's eight-year streak of steadily lowering its outstanding share count removes the pressure to time its repurchases. And considering the stock is up 158% during that time frame, the majority of those repurchases appear to have created value.
Growth and innovation
Sleep Number isn't relying solely on share buybacks to boost its stock price. The company has been aggressively expanding its storefronts over the past year, adding a net of 48 locations. According to its financials, each Sleep Number store has averaged $3.7 million in sales in the trailing 12 months, up 26% from the same period in the previous year.
Those gains don't owe solely to the economy's recovery from its 2020 lows: Sleep Number's sales per store have risen 29% since Q3 2019. And each store seems to be growing more efficient and lucrative, with average sales per square foot up 21% from the same period two years ago. In Q3, half of the company's stores booked more than $3 million in sales, up from 26% a year ago; 85% exceeded $2 million in sales, up from 64%. The company also doubles its stores as a distributor for the "final mile" with its online sales .
Sleep Number's biggest competitive advantage lies in its product. While its "mattress-in-a-box" competitors like Casper and Purple Innovation are competing to offer ever-lower prices, Sleep Number averages $5,021 per unit -- up 5% from the prior-year period. Unlike its competitors, Sleep Number measures its user's biometrics and aims to improve their sleep quality with its innovative SleepIQ app. Management credits this data-driven technology as a primary reason for the company's record number of referrals and repeat sales growth.
For now, the market has been scared off of Sleep Number's stock, but keep an eye on its earnings report on Feb. 16 for the latest update on its supply chain. If the company has been able to find a reliable semiconductor chip supplier and maintain its progress with its foam supply, expect the stock to once again help investors sleep easily.