- Sleep Number gained considerable exposure during the pandemic and has durable advantages in its business.
- Management is shareholder friendly and has aggressively repurchased shares, thereby contributing to strong total returns.
- I also highlight the valuation, balance sheet, outlook, and risks worth considering.
If someone told you that a stock would see a 571% return over a 5-year period, you would probably think that they were referring to a technology company. The bedding company Sleep Number (NASDAQ:SNBR) would likely rank fairly low on the average person’s list. However, this is exactly the return that this stock has produced over this time frame. In this article, I evaluate what gives Sleep Number some durable advantages and what makes it a buy at present, so let’s get started.
Why Sleep Number Is A Buy
Most people in America have probably seen commercials on TV for Sleep Number beds. This company has provided bedding solutions over 13 million people. What makes SNBR unique is its proprietary SleepIQ technology, which has data on over 9 billion hours of sleep data to provide individualized sleep insights, and its 360 degrees smart beds provide adjustable and personalized comfort.
The pandemic last year and the ensuing work from home environment have resulted in many people getting more sleep. This is especially true considering the time savings in the morning and evenings that office workers have realized from not having to commute to their place of employment. People who live in large metropolitan cities have gotten an outsized benefit from this trend, as they are the ones who spend the most time in traffic.
While some may argue that the days of working at home are short-lived once the vaccine becomes widely administered, I believe the future of work may be a hybrid environment, thereby giving workers the flexibility and freedom to balance working from home with an in-office presence. This is supported by recent statements such as the one by the CEO of Raytheon (RTX) who envisions a hybrid work environment in a post-pandemic world.
This bodes well for the future of Sleep Number, as it has gained a significant amount of consumer exposure and awareness over the past 12 months. This is demonstrated by SNBR’s strong fourth quarter to close out 2020, with sales growing by 29% YoY, and operating income growing by 92% YoY, when the benefit of the extra week during Q4’20 is excluded.
This was the result of robust multi-channel sales through both in-store and online. Incremental online sales result in a margin boost for the company since it’s digitally generated and doesn’t require an in-store visit. SNBR’s digital investments combined with cost cuts contributed a 340 bps operating margin benefit on a YoY basis.
Looking forward, I see continued growth for the aforementioned reason of hybrid work environment, in which consumers spend more hours at home compared to pre-pandemic and shift their spending habits accordingly, towards home furnishings. Plus, SNBR’s full transition to smart beds should continue generate revenue growth in the teens, as noted by management during the recent conference call:
“Our breakthrough performance is being driven by our revolutionary 360 smart beds and investments, which sustainably leverage our competitive advantages. As consumers increasingly prioritize their health and well-being and recognize its link to quality fleet demand for our revolutionary 360 smart beds has accelerated. Since transitioning to all smart beds in Q3 2018, 10 quarters ago demand for our beds has grown an average of 12%.”
Meanwhile, SNBR maintains a sound balance sheet, with a net debt to EBITDAR ratio of 2.2x, which is below the 3.0x level that I prefer to see and below the company’s target of 2.5-3.0x. As such, I see continuation of SNBR’s total return story, which includes aggressive share buybacks.
SNBR has returned more than $1B in cash to shareholders over the past six years, including $190M spent on buybacks during the fourth quarter alone. As seen below, SNBR’s share count has been reduced by 45% over the past 5 years, and buybacks will be further supported by $247M in remaining authorization on the share repurchase program.
(Source: Seeking Alpha)
Admittedly, SNBR is not cheap at the current price of $129 and a forward PE of 21.2. However, I find the valuation to be reasonable, considering the total return story, and robust forward growth estimates. As seen below, SNBR’s forward PE falls to 16.9 based on 2023 forward estimates.
Plus, SNBR has a history of beating analyst expectations. As seen below, SNBR’s earnings have beat estimates in all of prior 8 quarters, with the latest fourth quarter earnings beating by 48%.
Lastly, Seeking Alpha’s Quant gives SNBR a Very Bullish rating, with an “A” for Profitability and Revisions, which reflects the above observation on earnings beats and upward analyst revisions as a result of that.
Risks to Consider
No investment is risk free, and it’s worth noting that SNBR is subject to risk from supply chain disruptions should there be a resurgence of COVID. In addition, while share buybacks are good for investors, I would like to see SNBR retain more cash on the balance sheet for financial emergencies. As January this year, SNBR had $4.2M in cash on hand, which I find to be low. Lastly, competition is always a concern, as a competitor could come up with a rival technology to that of SNBR’s. These are risks worth considering.
Sleep Number has largely benefitted from consumers investing more towards at-home living during the pandemic. I see this trend continuing, as many companies plan to adopt a hybrid work model in a post-pandemic environment. Its full transition to smart beds has served it well, with strong growth over the past 3 years, and I don’t see that slowing down anytime soon.
Admittedly, SNBR is not cheap. However, I find the valuation to be reasonable based on forward growth estimates and its track record of earnings beats. As such, I see the recent dip in SNBR’s share price from the $150-level as a buying opportunity for total return focused, long-term investors.
This article was written by
I am Gen Alpha. I have more than 14 years of investment experience, and an MBA in Finance. I focus on stocks that are more defensive in nature, with a medium- to long-term horizon.I provide high-yield, dividend growth investment ideas in the investing group Hoya Capital Income Builder. The group helps investors achieve dependable monthly income, portfolio diversification, and inflation hedging. It provides investment research on REITs, ETFs, closed-end funds, preferreds, and dividend champions across asset classes. It offers income-focused portfolios targeting dividend yields up to 10%. Learn more.
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