Don’t Sleep On This Bedtime Stock

The impact of a sleep deficit goes far beyond feeling a bit drowsy during the day. Getting less than seven hours of sleep regularly can contribute to weight gain and obesity, high blood pressure, diabetes, stroke and heart disease. Lack of sleep is also associated with depression, reduced immune function, increased pain, more errors, more accidents and impaired performance at work or school.

Unfortunately, insufficient sleep is a common problem. One study found that two-thirds of Americans have at least one night a month that they don’t sleep well and 11 percent say they never get a good night’s sleep. Another study demonstrated that one out of three Americans is operating with a sleep deficit.

Sleep Number Corporation recognizes the health hazards of sleeplessness and its sole mission is to improve lives by individualizing sleep experiences. That’s something everyone needs. With such a large addressable market, Sleep Number stock should be a smart buy, right? Here’s what you need to know.

Not Just A Stodgy Mattress Company

Sleep Number doesn’t just make mattresses. All sorts of companies do that. Every furniture showroom in the world has a selection of products from industry leaders like Serta and Sealy Tempur-Pedic. However, Sleep Number differentiates itself from the competition by transforming traditional mattresses into a customized oasis of comfort through the integration of smart technology.

Specifically, Sleep Number owns the Sleep Number and Sleep Number 360 brands. The first has been available since 1988. “Sleep Number” refers to the mattress firmness, which can be adjusted separately on each side to improve sleep for those who share a bed.

Then, in 2017, Sleep Number launched something new: the Sleep Number 360 mattress. This innovative system integrates Sleep Number mattresses with Sleep Number’s proprietary SleepIQ technology operating system.

Each Sleep Number 360 bed adjusts to the needs of the user and more importantly, the beds offer detailed data on the quality and quantity of sleep that users experience. The technology is capable of capturing more than 13 billion biometric data points each night and it gives actionable analysis to encourage better sleep.

Sleep Number 360 technology adjusts automatically to ensure deep sleep and it collects massive amounts of sleep-related data. This gave Sleep Number a unique opportunity to contribute information to the larger sleep deficit problem.

In partnership with a variety of doctors, clinicians, researchers and institutions—including the Mayo Clinic—Sleep Number is participating in one of the most comprehensive sleep studies ever conducted. Its goal? To better understand how sleep affects overall health and well-being, then take action to improve sleep for people everywhere.

Double-Digit Demand Growth

Sleep Number doesn’t rely on third parties to sell Sleep Number beds. Nearly 100 percent of sales are direct-to-consumer via its website and its 625 retail stores. Last quarter’s results were announced, and revenue growth was one of the highlights.

Sleep Number delivered $640 million in net sales, which represents a growth of 21 percent year-over-year and an increase of 35 percent over the same period the year prior. Management pointed out that this is the fourth consecutive quarter of double-digit demand growth, which demonstrates consumers’ newfound concern with the quality and quantity of sleep.

Margins Going Up?

Other important numbers from the Sleep Number’s financials include a four percent increase in third-quarter operating income for a total of $72 million. This is a record for Sleep Number and it represents an 86 percent increase over the same period in the prior annual period. Year-to-date operating income also went up substantially—a total of 62 percent year-over-year. That bodes well for full-year results.

Meanwhile, the company reported that year-to-date net operating profit came in at 10.6 percent, which represents an increase of 200 basis points from the previous year. More importantly, this figure is an increase of 430 basis points over the same period.

Earnings Growth

Improvements in earnings per share generated the most excitement among investors and analysts. Diluted earnings per share increased by 24 percent for a total of $2.22. Year-to-date earnings per share came in at $5.63, which represents an increase of 106 percent year-over-year and an increase of 199 percent.

Finally, Sleep Number reported that year-to-date operating cash flows totaled $293 million and the trailing twelve-month return on invested capital (ROIC) was greater than 34 percent.

Growth: Sleep Number Creating A Digital Ecosystem

The most interesting aspect of Sleep Number’s financials isn’t its year-over-year growth in sales. After all, the third quarter of 2020 marked the point when the economic recovery began gaining momentum, so most companies saw significant improvements when comparing 2021 to 2020 results. However, unlike many of its peers, Sleep Number didn’t just grow year-over-year. It also saw impressive gains over its 2019 results.

Sleep Number Corp. President, Chief Executive Officer and Director Shelly Radue Ibach credited the company’s user growth to a unique product and a carefully managed customer engagement strategy. Sleep Number has a comprehensive digital ecosystem that contributes to constant and ever-increasing demand.

In the third-quarter earnings call, Ibach said:

We continuously advance key initiatives and use multiple levers within our proven strategy for consistent demand creation. Our digital ecosystem drives relevance and engagement, which leads to lifelong brand relationships. Automation and personalization are also improving the quality of our customers’ experience, which builds trust. Both new and existing customers are actively engaged at record levels.

Overall, Sleep Number boasts that it has improved more than 13 million lives. Considering its top-line growth, there is every reason to believe that number will continue to increase.

Sleep Number Market Share Expanding

In terms of market share, Sleep Number is gaining traction against the industry leaders. Based on quarterly results, Sleep Number currently holds approximately 8.64 of the market. Meanwhile, Sealy has dropped to just 15 percent and the other mattress brands in the top five have also seen substantial declines.

That’s good news for Sleep Number shareholders, as the US bed and mattress market is valued at roughly $13.1 billion for 2022. From 2017 through 2022, the bed and mattress market has grown by an average of 1.9 percent per year. If that number stays true the coming decade, there is increased opportunity for Sleep Number to profit—and that is likely to push the price of Sleep Number stock up.

Will Sleep Number Squeeze Out The Competition?

Generally speaking, barriers to entry are low in the mattress business, as evidenced by the crowded marketplace. It doesn’t cost much to make a mattress—at least one that lacks a technological component—so any mattress company can achieve relatively high margins. That attracts entrepreneurs and innovators. So-called “bed-in-a-box” startups like Casper and Leesa are gaining popularity and their direct-to-consumer model—similar to Sleep Number’s—keeps prices down by eliminating third-party showrooms.

Fortunately, Sleep Number has something other mattress companies can’t easily duplicate: sleep-specific technology. The SleepIQ platform brings an entirely new element to the manufacture of mattresses—one that creates a significant moat. Sleep Number calls this competitive position “the intersection of well-being and technology.”

Certainly, there are plenty of consumers who don’t want automated beds—yet—but then again, based on Sleep Number’s sales, there are many who do. A good night’s sleep is taking on higher priority as consumers focus on health and wellness, which puts Sleep Number in the right place at the right time to profit.

Aside from the quality and special features of Sleep Number’s products, the company is maintaining a competitive edge on the Environmental, Social and Governance (ESG) side. Certainly, Sleep Number isn’t the only mattress company to make ESG a priority, but in the current climate, failure to do so is a serious handicap.

Among other steps that Sleep Number has taken, it has joined the Nations Global Compact. This is a pledge to incorporate ten key principles into the company’s culture, strategy and daily operations, including direct action to protect human rights, promote fair labor conditions, reduce environmental impact and prioritize anti-corruption. Together, principles of the Nations Global Compact serve to advance the broader sustainability goals set forth by the United Nations.

Sleep Number has already started tracking and analyzing metrics related to energy and water usage, waste and similar and the company has created initial goals to reduce consumption. Recycling more discarded mattresses is the next big step, as mattress waste has been referred to as a “global environmental nightmare.” In the US alone, 18.2 million mattresses are thrown away every year, but there are less than 60 mattress recycling facilities in operation.

Despite those sobering statistics, Sleep Number has made great strides in reducing the number of mattresses that make it to landfills. Of the customers who purchase a Sleep Number bed, 30 percent take advantage of Sleep Number’s free haul-away service and at this time, 60 percent of those used mattresses are recycled.

Will Sleep Number Stock Go Up?

Sleep Number has a market cap under $2 billion. However, several models suggest that Sleep Number is undervalued.

Sleep Number stock is currently trading relatively close to its 52-week low, but a more accurate valuation might put share prices closer to $108.

After all, the company is showing strong profits and strong growth. In addition, management has been buying up shares aggressively, which is an indication that prices are on their way up.

Sleep Number Risk Factors

One of the biggest risks facing Sleep Number today is the ongoing disruption to the global supply chain. Issues with freight service strained the company’s ability to meet consumer demand and the shortage of semiconductors and other critical components of the Sleep Number 360 technology added to the problem.

While the company did a masterful job of maneuvering through these obstacles in 2021, it is unclear whether it will be able to deliver on orders promptly if these supply chain issues continue for an extended period. In the near term, there is some concern that next quarter’s results will be muted because bed deliveries expected for the fourth quarter will have to be pushed to first-quarter 2022.

From a risk perspective, it’s also worth mentioning that Sleep Number could face competition in the coming years. After all, the mattress market has always been crowded. While Sleep Number offers a differentiated product today, it stands to reason that Serta or Sealy Tempur-Pedic might launch their version at some point, given the overwhelming consumer demand. That isn’t a big risk to Sleep Number stock right now, but it could impact share prices in the medium- to long term.

Sleep Number Guidance

During the last Sleep Number earnings call, management was optimistic about full-year results. The target earnings per diluted share are $7.25 for the year, which is an impressive increase over 2020’s $4.60. It is also just about three times earnings per diluted share a couple of years ago, which demonstrates the company’s rapid growth trajectory.

For 2022, business leaders indicated that they expect demand to continue growing at a solid pace—perhaps mid- to high-single-digits. Among other drivers, Sleep Number will focus on advancing existing and new digital ecosystem initiatives, as well as adding between 40 and 50 new stores.

Is Sleep Number Stock a Buy?

Analysts estimate that Sleep Number stock could be priced between $84 and $140 over the next 12 months and discounted cash flow forecast valuation models put its per-share price at $108.35. If accurate, investors who buy Sleep Number stock now have an upside potential of almost 50 percent. That’s a win no matter what’s in your portfolio, which makes Sleep Number stock a buy.