Sleep Number Looks Attractive At $61

After a 25% rise since the beginning of this year, at the current price of around $61 per share, we believe Sleep Number Corp’s stock (NASDAQ: SNBR), a company designing and manufacturing adjustable-firmness mattresses, can continue to grow. This is taking into account the 12% year-over-year (y-o-y) revenue growth in the recent Q3 report (3% y-o-y in the first nine months, due to a 20% y-o-y decline in Q2 revenues as stores were shut) and continued strength in the housing sector. We believe the company could continue to benefit from the extended period of remote work, as people tend to focus on wellness purchases. Sleep Number’s stock grew a robust 64% since the end of 2017. Our dashboard, ‘What Factors Drove 64% Change In Sleep Number Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

Sleep Number’s stock grew around 31% over the past two years, primarily due to an 18% growth in revenues and a strong 76% rise in earnings. An almost 7% increase in net income margin from 4.5% in 2017 to 4.8% in 2019, led to this increase in earnings per share. Higher sales of 360 smart beds drove sales and profits for the company during this period. Sleep Number has a differentiated product in the market known as Sleep Number 360 mattress. This product is sold by the company as the first smart bed and continues to gain popularity for customers seeking a high-tech luxury bedding solution. This bed can adjust its firmness and even elevation based on sleep patterns it actively monitors.

Sleep Number’s P/E multiple declined from 24x at the end of 2017 to 18x by the end of 2019. Currently, this figure stands around 23x, 28% higher than 2019 levels. Going forward, we believe SNBR’s multiple can likely grow to around 25x on the back of its growing omnichannel aspects (online, phone, chats).

How Is Coronavirus Impacting Sleep Number’s Stock?

In Q3, Sleep Number’s operating income grew 78% and earnings skyrocketed 90% y-o-y. In fact, this was the third time in a row that the company exceeded market expectations for earnings by at least 33%. From a financial perspective, the company fully repaid a $75 million loan in Q3 – which it had taken earlier in 2020 to buffer liquidity at the outset of the pandemic. To add to that, Sleep Number is on track to a record of $3 million in average sales per store in fiscal 2020. Also, the company continues to expect 4% to 5% in the annual expansion of its 596 store portfolio through 2025 while growing online and phone sales. The designer, manufacturer, and retailer of smart beds also expects full-year 2020 earnings of $4 per share, representing a 48% jump over 2019.

Sleep Number was doing well before the pandemic and has witnessed strong results from the renewed consumer regard for physical well-being amid the pandemic. The company also expressed confidence in resuming its share repurchase program in Q4, this is despite hitting an all-time high of late. That said, Sleep Number’s stock price at levels of around $61 still provides a buying opportunity for investors willing to be patient. 

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