What happened

Shares of mattress company Sleep Number (SNBR -3.58%) surged on Thursday, after the company's financial results for the second quarter of 2022 beat analysts' expectations. As of 11:15 a.m. ET today, Sleep Number stock was up 13%.

So what

For the second quarter, Sleep Number generated net sales of $549 million, up 13% year over year. For perspective, this wasn't an easy feat considering net sales were up 70% year over year in the same quarter last year. And with higher sales came higher profitability. Second-quarter diluted earnings per share (EPS) of $1.54 were up a whopping 75% from last year.

It appears that investors were happy to see Sleep Number surpass expectations even though there's a headwind blowing in the second half of 2022.

Now what

I'm personally surprised to see Sleep Number stock up today. The stock market is forward-looking. And as previously alluded to, Sleep Number has some challenges ahead. Management actually lowered its full-year EPS guidance to a range of $3 to $4. Based on the previous guidance range, this is a sharp reduction of 20% to 50%.

Sleep Number's profit margins are getting squeezed in part due to higher material costs from inflation. Moreover, consumer demand for its mattresses is going down, and the company is making up for this by working through its backlog of orders. Because of all this, management has decided to pause share repurchases, a key component in the stock's performance over the last decade. 

Having said all of this, Sleep Number historically has had some cyclicality in its sales. Therefore, seeing a pullback in demand and a hit to profitability isn't an urgent concern for shareholders. It's happened before, and the company recovered each time.

Moreover, with Sleep Number stock trading at a price-to-sales ratio of less than half of its trailing sales, it seems the market is already pricing this company at a discount. And this could limit further downside if management successfully navigates challenges in the second half of the year.