Mattress company Sleep Number (SNBR 4.86%) may have caused its shareholders some sleepless nights lately. The stock is down 61% year to date. Investors probably fear this premium brand is due for poor sales in a slowing economy -- a concern that's not totally unfounded.
However, ups and downs are normal for this company and I believe the stock is poised for a rebound in 2023. Here's why now is a great time to give Sleep Number a look if you haven't already.
The cyclicality of mattress sales
Investing in mattress companies is tricky because their sales tend to rise and fall with the health of the economy -- after all, mattresses are large but infrequent purchases that can be held off when household budgets tighten. And the cycle looks like it's trending downward right now. Sleep Number's net sales in 2022's third quarter were down 16% year over year. By comparison, in the same quarter last year, its sales jumped 21% to a record high.
During Sleep Number's long tenure as a public company, its sales have pulled back for a period of time during every U.S. recession, as the chart below shows. However, over the long term, its sales keep trending higher.
SNBR Revenue (TTM) data by YCharts.
Sleep Number's current sales decline isn't entirely a demand problem -- it's also a supply problem. In the Q3 report, management noted that it had roughly a $100 million backlog of orders, largely because it lacked enough semiconductors to make its tech-dependent beds. This problem is resolving itself as the chip shortage recedes.
That said, multiple recent surveys of economists and CEOs show a rising belief that a recession is coming in 2023. So it's entirely possible that demand for Sleep Number could fall further next year as that scenario plays out, affecting sales. This possibility is causing traders to bid down the stock.
What Sleep Number still has going for it
Consumer sentiment is already near record lows even though a recession hasn't happened yet. And how people feel about reality drives consumer behavior as much as (if not more than) reality itself. The following chart isn't perfect, but it does illustrate a strong correlation between consumer sentiment and Sleep Number's sales.
SNBR Revenue (TTM) data by YCharts.
For this reason, it's possible that the fear of recession is already affecting Sleep Number's sales and that an actual recession (should it arrive) will consequently not cause that much more of a decline. After all, sentiment will improve once consumers can see to the other side of a recession. And that could come sooner than later.
Moreover, even if its sales languish for the remainder of 2022 and into 2023, Sleep Number remains profitable. Management is guiding for full-year earnings per share of $1.50 to $2 this year, which gives it a quite reasonable valuation of just 15 to 20 times earnings.
From a price-to-sales ratio standpoint, however, Sleep Number stock is a downright bargain at just 0.3. As the chart below shows, this is the third cheapest its valuation has been in its more than two decades as a public company. The two periods when it sported cheaper valuations came during recessions when sales were falling, like now.
SNBR PS Ratio data by YCharts.
What could go right for Sleep Number in 2023
There are two possible catalysts for Sleep Number stock that should be considered.
First, Sleep Number's management invests profits back into the brand. Its tech-infused mattresses have long tracked sleep metrics and adjusted firmness to an individual's needs. But in October, the company announced its new Climate360 Smart Bed, which takes its sleep technology to a new level by adding all-night automatic temperature adjustments. Moreover, management is updating its app in 2023 as it emphasizes its "smart bed platform."
At worst, I believe upgrading its technology will position Sleep Number as a top brand for when consumer demand for mattresses rebounds at some future point. At best, Sleep Number's upgrades could be the catalysts that reinvigorate its sales in 2023. But either way, management's investments in the brand are good for the business, in my opinion.
Second, Sleep Number repurchases a lot of its stock. One could argue that it has overpaid for shares in the past. But one can't argue with the result; the company's outstanding share count is down by 60% over the past 10 years.
SNBR Average Diluted Shares Outstanding (Quarterly) data by YCharts.
Sleep Number's market capitalization has plunged to just about $650 million due to the market's pessimism. However, it still has $348 million remaining on its share repurchase plan right now, which is approximately 54% of shares outstanding. That's an astounding percentage. But it didn't look extraordinary when the plan was initiated in April 2021 when the company's market capitalization was $3.5 billion.
The drop in stock price is providing a golden repurchase opportunity. If the company's internal data shows improving consumer demand, I wouldn't be surprised if management moves to repurchase a meaningful percentage of its shares in short order to take advantage of the current cheap share price.
In conclusion, the market has thrown out Sleep Number stock in 2022 just like it has in the past -- it fell over 90% in the dot.com bubble and tumbled 99% during the Great Recession. But the business continues to win over customers over the long term as it invests in its technology that helps people sleep better. In my opinion, bearish sentiment around Sleep Number stock is near its cyclical peak, which could position it for a nice rebound in 2023.
