Sleep Number (SNBR)

Bedding manufacturer and retailer Sleep Number (NASDAQ:SNBR) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 16.4% year on year to $393.3 million. Its GAAP loss of $0.38 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).

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $1.61 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 struggled to increase demand as its $1.61 billion of sales for the trailing 12 months was close to its revenue six years ago (we compare to 2019 to normalize for COVID-19 impacts). This was mainly because 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 16.4% year-on-year revenue decline, generating $393.3 million of revenue.

Looking ahead, sell-side analysts expect revenue to decline by 1.2% over the next 12 months, a slight deceleration versus the last six years. This projection is underwhelming and suggests its products will face some demand challenges.

Number of Stores

A retailer’s store count influences how much it can sell and how quickly revenue can grow.

Sleep Number operated 637 locations in the latest quarter. Over the last two years, the company has generally closed its stores, averaging 1.8% 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 is an industry measure of whether revenue is growing at those existing stores and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Sleep Number’s demand has been shrinking over the last two years as its same-store sales have averaged 1.9% 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 16% year on year. This decrease represents a further deceleration from its historical levels. We hope the business can get back on track.

Gross profit margins are an important measure of a retailer’s pricing power, product differentiation, and negotiating leverage.

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 58.8% gross margin over the last two years. That means for every $100 in revenue, only $41.17 went towards paying for inventory, transportation, and distribution.

In Q1, Sleep Number produced a 61.2% gross profit margin, up 2.5 percentage points year on year and exceeding analysts’ estimates by 2.5%. Sleep Number’s full-year margin has also been trending up over the past 12 months, increasing by 2.7 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).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Sleep Number was roughly breakeven when averaging the last two years of quarterly operating profits, inadequate for a consumer retail business. This result is surprising given its high gross margin as a starting point.

On the plus side, Sleep Number’s operating margin rose by 1.1 percentage points over the last year.

In Q1, Sleep Number’s breakeven margin was in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sleep Number’s full-year EPS turned negative over the last five years. In a mature sector such as consumer retail, we tend to steer our readers away from companies with falling EPS because it could imply changing secular trends and preferences. If the tide turns unexpectedly, Sleep Number’s low margin of safety could leave its stock price susceptible to large downswings.

In Q1, Sleep Number reported EPS at negative $0.31, down from $0.03 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects Sleep Number to improve its earnings losses. Analysts forecast its full-year EPS of negative $0.63 will advance to negative $0.52.

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 2.1%. This means it lit $2.12 of cash on fire for every $100 in revenue.

Taking a step back, we can see that Sleep Number failed to improve its margin over the last year. Its unexciting margin and trend likely have shareholders hoping for a change.

Sleep Number burned through $7.23 million of cash in Q1, equivalent to a negative 1.8% margin. The company’s cash flow turned negative after being positive in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Sleep Number hasn’t been the highest-quality company lately because of its poor revenue and EPS performance, it historically found a few growth initiatives that worked. Its five-year average ROIC was 20.2%, higher than most consumer retail businesses.

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 burned through $28.02 million of cash over the last year, and its $934.6 million of debt exceeds the $1.69 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Sleep Number’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Sleep Number until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We enjoyed seeing Sleep Number beat analysts’ gross margin expectations this quarter. On the other hand, its EBITDA missed significantly and its EPS fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 7.4% to $7.21 immediately after reporting.

Updated: May 22, 2025 at 10:37 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

We cheer for all companies serving everyday consumers, but in the case of Sleep Number, we’ll be cheering from the sidelines. To begin with, its revenue growth was weak over the last six years, and analysts expect its demand to deteriorate over the next 12 months. And while its admirable gross margins are a wonderful starting point for the overall profitability of the business, the downside is its operating margins reveal poor profitability compared to other retailers. On top of that, its brand caters to a niche market.

Sleep Number’s EV-to-EBITDA ratio based on the next 12 months is 2x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $6.50 on the company (compared to the current share price of $9.69), implying they don’t see much short-term potential in Sleep Number.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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