As its chip supply issues worsened, mattress maker Sleep Number's (NASDAQ: SNBR) Q4 earnings significantly missed the company's guidance, briefly sending its shares to a new 52-week low. And with no solution in sight, there are three reasons why Sleep Number shareholders should be concerned.
Supply chain issues are getting worse
What began as a dreamy 2021 for Sleep Number quickly devolved into an ongoing nightmare. After its stock hit an all-time high in March, the mattress company revealed that it had been struggling with foam supply, resulting in backorders. The lack of foam not only led to a class action lawsuit, but also bled into the third quarter, when management revealed it had been solved, only to have new supply issues with semiconductor chips and "other electronic components."
Now, management revealed that the fourth quarter posed its most challenging supply chain struggles yet. And in even worse news, the company has seen an increase in delays in the first quarter of 2022, with 40% of its products expected to take either six or 11 weeks to deliver.
As a result of its strained supply chains, Sleep Number missed its revenue and earnings-per-share guidance by about $110 million and $1.09, respectively. The company claims to have moved $150 million in net sales to Q1 2022 because "a large well-known global electronic supplier delivered one component too late in December." Additionally, the mattress company's envious gross margins declined from 62.7% in Q4 2020 to 56.9% in Q4 2021 despite its average revenue per smart bed unit growing by $400 during that time period. That means Sleep Number hasn't been able to increase prices fast enough to make up for the rising costs of making its smart beds.
Sleep Number's capital allocation may be worsening its supply chain woes. The company historically keeps very little cash on its balance sheet, instead aggressively buying back its own shares. Sleep Number has cut its outstanding share count from 46.9 million to 23.8 million in the past five years, juicing its 41% EPS compound annual growth rate in the process. In 2021 alone, the company repurchased $382 million of its stock. Whether share buybacks are a good use of capital or not is up for debate, but Sleep Number's strategy has historically left the company with next to nothing in cash or cash equivalents on its balance sheet -- it ended 2021 with just over $2.3 million. As a result of Sleep Number's limited cash, the company may have been unable to execute its previously stated Q3 earnings call plan of buying semiconductor chips through "higher-cost open-market purchases," and employing new tactics to expedite its shipping of needed supplies, including airfreight. Notably, none of those strategies were mentioned in Sleep Number's fourth-quarter report or earnings call.
How can Sleep Number stock wake up?
By most metrics, Sleep Number is a value stock, and despite its supply chain crisis, the company is expanding. Sleep Number opened 46 net new stores in 2021 and plans to open 35 net new stores in 2022. With each store expected to produce $4 million in net sales -- up from $3.6 million in 2022 -- the company is effectively guiding for $2.7 billion in net sales, resulting in a roughly 23% increase from $2.18 billion in 2021. Still, once you factor in the price hikes for its smart beds, that only equates to about 7% growth in unit sales.
Additionally, CEO Shelley Ibach confirmed that the company intends to monetize the health and wellness part of the business with a paid subscription program -- satisfying a desperate need to diversify its revenue in the face of its supply chain problems. While Ibach didn't give a time frame or price point for its subscription, the company claims to have over 2 million "sleep connected smart sleepers" for its SleepIQ app, which features insights into "one's sleep health trends with actionable and personalized recommendations."
What's next for Sleep Number
Sleep Number's stock has been volatile since reporting its fourth-quarter earnings, with the stock briefly down as much as 14% when trading opened on Feb. 24. Look for news on the global supply of semiconductor chips or wait for Sleep Number's next earnings report to see whether its supply chain issues have shown any signs of improvement. Until then, Sleep Number shareholders shouldn't expect to get a good night's rest.