Somnigroup (SGI)

Bedding manufacturer Somnigroup (NYSE:SGI) missed Wall Street’s revenue expectations in Q1 CY2025, but sales rose 34.9% year on year to $1.60 billion. Its non-GAAP profit of $0.49 per share was 5.1% above analysts’ consensus estimates.

Company Overview

Established through the merger of Tempur-Pedic and Sealy in 2012, Somnigroup (NYSE:SGI) is a bedding manufacturer known for its innovative memory foam mattresses and sleep products

A healthy housing market is good for furniture demand as more consumers are buying, renting, moving, and renovating. On the other hand, periods of economic weakness or high interest rates discourage home sales and can squelch demand. In addition, home furnishing companies must contend with shifting consumer preferences such as the growing propensity to buy goods online, including big things like mattresses and sofas that were once thought to be immune from e-commerce competition.

Somnigroup's primary competitors include Sleep Number (NASDAQ:SNBR), Purple (NASDAQ:PRPL), and private company Casper Sleep.

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Somnigroup grew its sales at a 10.6% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.

We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or trend. Somnigroup’s recent performance shows its demand has slowed as its annualized revenue growth of 4.6% over the last two years was below its five-year trend.

We can dig further into the company’s revenue dynamics by analyzing its most important segments, Wholesale and Direct, which are 43.5% and 56.5% of revenue. Over the last two years, Somnigroup’s Wholesale revenue (sales to retailers) averaged 3.4% year-on-year declines. On the other hand, its Direct revenue (sales made directly to consumers) averaged 29.2% growth.

This quarter, Somnigroup pulled off a wonderful 34.9% year-on-year revenue growth rate, but its $1.60 billion of revenue fell short of Wall Street’s rosy estimates.

Looking ahead, sell-side analysts expect revenue to grow 48.8% over the next 12 months, an improvement versus the last two years. This projection is eye-popping and indicates its newer products and services will spur better top-line performance.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Somnigroup’s operating margin has been trending down over the last 12 months, but it still averaged 10.8% over the last two years, decent for a consumer discretionary business. This shows it generally does a decent job managing its expenses.

This quarter, Somnigroup’s breakeven margin was down 10.2 percentage points year on year. This contraction shows it was less efficient because its expenses grew faster than its revenue.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Somnigroup’s EPS grew at a remarkable 16.2% compounded annual growth rate over the last five years, higher than its 10.6% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t expand.

In Q1, Somnigroup reported EPS at $0.49, down from $0.50 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 5.1%. Over the next 12 months, Wall Street expects Somnigroup’s full-year EPS of $2.54 to grow 13%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Somnigroup has shown mediocre cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 9.6%, subpar for a consumer discretionary business.

Somnigroup’s free cash flow clocked in at $82.4 million in Q1, equivalent to a 5.1% margin. The company’s cash profitability regressed as it was 3.2 percentage points lower than 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.

Over the next year, analysts’ consensus estimates show they’re expecting Somnigroup’s free cash flow margin of 10.3% for the last 12 months to remain the same.

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).

Although Somnigroup hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked. Its five-year average ROIC was 17.6%, higher than most consumer discretionary businesses.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Somnigroup’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

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.

Somnigroup’s $6.94 billion of debt exceeds the $111.1 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $973.5 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. Somnigroup 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 Somnigroup can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

It was encouraging to see Somnigroup beat analysts’ EPS expectations this quarter. On the other hand, its full-year EPS guidance missed significantly and its revenue fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 5.9% to $57.03 immediately after reporting.

Updated: May 22, 2025 at 10:53 PM EDT

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 Somnigroup.

Somnigroup’s business quality ultimately falls short of our standards. To begin with, its revenue growth was uninspiring over the last five years. And while Somnigroup’s remarkable EPS growth over the last five years shows its profits are trickling down to shareholders, its Forecasted free cash flow margin for next year suggests the company will fail to improve its cash conversion.

Somnigroup’s P/E ratio based on the next 12 months is 22.4x. Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $70.50 on the company (compared to the current share price of $64.18).

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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