Sleep Number (SNBR)

Bedding manufacturer and retailer Sleep Number (NASDAQ:SNBR) missed Wall Street’s revenue expectations in Q3 CY2025, with sales falling 19.6% year on year to $342.9 million. The company’s full-year revenue guidance of $1.4 billion at the midpoint came in 2.8% below analysts’ estimates. Its GAAP loss of $1.73 per share was significantly below analysts’ consensus estimates.

Company Overview

Known for mattresses that can be adjusted with regards to firmness, Sleep Number (NASDAQ:SNBR) manufactures and sells its own brand of bedding products such as mattresses, bed frames, and pillows.

Furniture retailers understand that ‘home is where the heart is’ but that no home is complete without that comfy sofa to kick back on or a dreamy bed to rest in. These stores focus on providing not only what is practically needed in a house but also aesthetics, style, and charm in the form of tables, lamps, and mirrors. Decades ago, it was thought that furniture would resist e-commerce because of the logistical challenges of shipping large furniture, but now you can buy a mattress online and get it in a box a few days later; so just like other retailers, furniture stores need to adapt to new realities and consumer behaviors.

Bedding and mattress competitors include Tempur Sealy (NYSE:TPX), Leggett & Platt (NYSE:LEG), and Purple Innovation (NASDAQ:PRPL).

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $1.44 billion in revenue over the past 12 months, Sleep Number is a small retailer, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with suppliers.

As you can see below, Sleep Number’s revenue declined by 2.4% per year over the last six years (we compare to 2019 to normalize for COVID-19 impacts) as it closed stores and observed lower sales at existing, established locations.

This quarter, Sleep Number missed Wall Street’s estimates and reported a rather uninspiring 19.6% year-on-year revenue decline, generating $342.9 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 1.2% over the next 12 months. While this projection indicates its newer products will fuel better top-line performance, it is still below average for the sector.

Number of Stores

Sleep Number operated 611 locations in the latest quarter. Over the last two years, the company has generally closed its stores, averaging 3.3% annual declines.

When a retailer shutters stores, it usually means that brick-and-mortar demand is less than supply, and it is responding by closing underperforming locations to improve profitability.

Same-Store Sales

The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales provides a deeper understanding of this issue because it measures organic growth at brick-and-mortar shops for at least a year.

Sleep Number’s demand has been shrinking over the last two years as its same-store sales have averaged 3% annual declines. This performance isn’t ideal, and Sleep Number is attempting to boost same-store sales by closing stores (fewer locations sometimes lead to higher same-store sales).

In the latest quarter, Sleep Number’s same-store sales fell by 20% year on year. This decrease represents a further deceleration from its historical levels. We hope the business can get back on track.

We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate product differentiation, negotiating leverage, and pricing power.

Sleep Number has best-in-class unit economics for a retailer, enabling it to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an elite 59.4% gross margin over the last two years. That means Sleep Number only paid its suppliers $40.64 for every $100 in revenue.

In Q3, Sleep Number produced a 59.9% gross profit margin, in line with the same quarter last year. On a wider time horizon, Sleep Number’s full-year margin has been trending up over the past 12 months, increasing by 1.3 percentage points. If this move continues, it could suggest the company has less pressure to discount products and is realizing better unit economics due to stable or shrinking input costs (such as labor and freight expenses to transport goods).

Despite the consumer retail industry’s secular decline, unprofitable public companies are few and far between. Unfortunately, Sleep Number was one of them over the last two years as its high expenses contributed to an average operating margin of negative 1.1%.

Looking at the trend in its profitability, Sleep Number’s operating margin decreased by 2.5 percentage points over the last year. Sleep Number’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

Sleep Number’s operating margin was negative 11.8% this quarter. The company's consistent lack of profits raise a flag.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Sleep Number’s demanding reinvestments have consumed many resources over the last two years, contributing to an average free cash flow margin of negative 1.9%. This means it lit $1.87 of cash on fire for every $100 in revenue.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Sleep Number’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 16.3%, slightly better than typical consumer retail business.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Sleep Number’s $940.5 million of debt exceeds the $1.26 million of cash on its balance sheet. Furthermore, its 11× net-debt-to-EBITDA ratio (based on its EBITDA of $85.06 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Sleep Number could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Sleep Number can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

We struggled to find many positives in these results. Same-store sales cratered this quarter. Its full-year EBITDA guidance missed and its revenue fell short of Wall Street’s estimates. Overall, this was a very bad quarter. The stock traded down 30.1% to $3.86 immediately following the results.

Updated: December 3, 2025 at 9:57 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Sleep Number.

Sleep Number doesn’t pass our quality test. To kick things off, its revenue has declined over the last three years. And while its admirable gross margins are a wonderful starting point for the overall profitability of the business, the downside is its declining EPS over the last three years makes it a less attractive asset to the public markets. On top of that, its operating margins reveal poor profitability compared to other retailers.

Sleep Number’s EV-to-EBITDA ratio based on the next 12 months is 2x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $5.50 on the company (compared to the current share price of $6.52), implying they don’t see much short-term potential in Sleep Number.