If You're Searching For Tech-Like Returns, Then Consider Sleep Number

Summary

• 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.

Photo by ra2studio/iStock via Getty Images

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.

Investor Takeaway

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.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.

Comments

[abdulmoiz1254]

I sold it in the uppers 80s and regretted as it creeped to 130+

Now it's nearer to my exit
But i still thing double digits are enough ..more than that is a hard mattress to sell

[mb1099]

@abdulmoiz1254 At 17x this year's expected EPS and this year's EPS growth rate of 37% I think this is an entry point. If you believe that the company has a pretty decent moat from their DTC strategy and proprietary data-driven digital Smart Bed (which will drive sustainable growth as management has repeatedly emphasized) it is actually an amazing entry point. Particularly considering this is the quintessential CANSLIM stock and management has taken out over 40 percent of the outstanding share count in the last five years at prices way below today's level.

[abdulmoiz1254]

@mb1099
I am tempted, specially knowing that the estimates are too low and they beat big

I entered at ~58 on oct 14 a day before their earnings ..and sold them in the 80s

Regrets

[mb1099]

@abdulmoiz1254 Now may be as good a time as any. I really think they're going to smash the current '21 EPS expectations of $6.75...More like $7.50-8.00 in my opinion. The current estimates/guidance builds in negative year over year comps in the second half of '21. The management is really executing (just look at the actual v estimated results the last couple years) and has taken out around 40% of outstanding shares in the last five years! My recent visit to a SNBR store confirmed my thesis.

[Bruce Bohannon]

Interesting Business. Product demand is too elastic for me to own SNBR. Thanks for the work here.

[thatbaw]

Overall I prefer Tempur Sealy (TPX) over Sleep Number (SNBR) over the long term (mainly as a brand, but as a stock too). However, does anyone else think that TPX only having 38 direct to consumer stores compares to SMBR’s 579 will dramatically impact TPX over time? It seems like TPX mainly sells its products out of businesses like Mattress Firm, Mattress Gallery, etc.....& I’m concerned about slot of retail stores like this. Any thoughts or advice?

[Gary Kohler]

Just an observation: Historically SNBR has had a 16 percent operating margin. It got as low as 6% as they were investing in technology and brand development through massive advertising. But in the last 2 quarters op income has risen to over 12 percent and could be back on its way to 16%. As they have 62%+ gross margins, rising above 12% doesn't seem far fetched. But the analysts that cover the stock are effectively looking for op income to fall back to 10% this year. That seems unlikely to me. Longer term, I don't see why, with discipline, management can't get operating income closer to 20% without any gross margin expansion.

[RJMC]

I have owned several sleep number beds over last 20 years or so. My family and I liked all of them. This past year I purchased a Purple and it’s is a better bed imo. Purple pillow is awesome too. Long PRPL.

[DanB1978]

Now that almost everyone has upgraded to a new bed, where do you expect this increased demand to come from? Yes, a good product but your timing is bad. The stock would be a poor investment at this point.

[Seeking more alpha than you]

@DanB1978 I disagree with you and think that you are wrong.

[DanB1978]

@Seeking more alpha than you Wrong about them having a good product, the product cycle, or the stock being a poor investment at this point?

[Seeking more alpha than you]

@DanB1978 I think you're wrong in saying "now that almost everyone has upgraded to a new bed." Only a teeny tiny fraction of the population has upgraded to a new bed. If you have data that suggests otherwise, I'd love to see it.

[Buyandhold 2012]

I haven't checked out Sleep Number, so I don't know whether or not it's a buy.

But it sure has done well over the last 10 years.

It has kicked the butt of many of those fancy pants high tech stocks.

[stevie2003]

I trimmed down my position recently. I will purchase more at 115ish price. I think it will come in a little more before powering its way back to 150. In recent months ut has been erratic. Up 4 to 5 % three days in a row and bang down 8 or the next, and visa versa. That kind of action I can live without. At the end of the day... don't bet against SNBR. Great company, great stock.

[greg2222]

I had one of the original sleep number beds 20 years ago. It was good then!
I have now gone through 3-4 standard beds and none of them is as comfortable.
My guess is the next one I buy will be a sleep number. In the mean time I own the stock for comfort!