A lot of stocks have been rallying this summer, but only a handful of investments can claim to have outperformed Sleep Number (SNBR -0.35%) since the end of May. The maker of high-tech air-chambered mattresses has more than doubled, up 116% since the start of last month.
I wrote about Sleep Number earlier this month when the stock soared 50% in June. Obviously July has proven to be quite the encore performance.
The clincher to this surprising move is that there haven't been any significant bullish developments to spark the surge. No financial update or noteworthy news has out of the Sleep Number camp in that time, and until earlier this week, no major analyst had rolled out an updated forecast. Let's take a closer look at the the doubling of Sleep Number, which it seems nobody saw coming.
Letting the bedbugs bite
Sleep Number makes a wide range of bedding products, high-end air mattresses with a user-adjusted firmness level. The setting itself is the titular Sleep Number, a number between 5 and 100. The higher the number, the tighter the inflation level. In a clever corporate touch, the bios on the company's investor relations site list the firmness preference of each key executive. It's a way of hoisting the Sleep Number banner, but also a comforting suggestion that all the top hires at the company end and start the day on the product they make. CEO Shelly Ibach, for example, has a Sleep Number of 40.
All the executives are likely sleeping well these days. The stock's ascent is surprising. Sleep Number's last financial update came in late April, and it wasn't very inspiring. Revenue was flat, having declined in four of the six past quarters. The struggle has been real since net sales rose a healthy 18% in 2021.
The initial stumble was out of its control. There was a shortage of the key semiconductor components that help regulate firmness settings and monitor sleep levels in some premium models. Once the supply chain issue was licked, it was consumer demand itself that waned. With fears of a recession rising last year, there just wasn't much of an appetite for big-ticket bedding upgrades. The real estate market cooling off in light of skyrocketing mortgage rates also didn't help the situation.
Image source: Sleep Number.
That brings us to Monday of this week, when Wedbush analyst Seth Basham raised his firm's price target on the shares from $27 to $33. Basham sees some upside to the consensus sales and profit forecasts from his fellow analysts. He sees a possibility of Sleep Number boosting its guidance when it reports its second-quarter results next week.
Basham sees some momentum with Sleep Number rolling out new marketing campaigns and discounting closeout models in anticipation of new models being introduced in the second half of this year. However, he didn't budge from his neutral rating on the shares. A $6 hike to a price target is welcome, but the stock itself has gone from the high teens at the end of May to nearly $40 now. This was not a truly bullish analyst update.
What is behind the move? It's not a short squeeze. Nearly 12% of the outstanding shares are currently sold short, a stubbornly high number but not enough to trigger the stock's more than doubling in the last seven weeks on a lack of material news. If Wall Street were getting more upbeat about the upcoming financial update, you would be seeing more analysts chime in with bullish updates ahead of next Thursday's report. Is a buyout in the works? The shares have been rallying for almost two months now. Real news would've likely come out at this point if that were the case.
Sleep Number will need a big report next week to justify the recent pop. The outlook it initiated in February and reiterated in April calls for a mid-single-digit percentage decline in sales this year. Its profit-per-share forecast for all of 2023 is wide, as low as $1.25 and as high as $2. If Sleep Number wants to continue being this summer's darling of mattress stocks, it will have a lot to prove next week.
