Misleading performance of Sleep Number | The motley madman
Adjustable mattress manufacturer actions Sleep number (NASDAQ: SNBR) were awake and alert late last week after the company released its third quarter tax results. Sleep Number stock jumped 11% from its close the previous day on Thursday, October 15, and although it edged down on Friday, it still ended the week with a gain of 14%.
The momentum on both sales and bottom lines fueled investor enthusiasm. The company reported a 12% year-over-year sales increase to a quarterly record of $ 531 million. Operating margin jumped almost 500 basis points at 13.1%, Sleep Number supplementing the strength of its sales by keeping operating expenses at a slight increase. As a result, diluted earnings per share increased 90% from the third quarter of 2019, to $ 1.79 per share.
At first glance, it may appear that Sleep Number is participating in a pandemic-related boost, along with a host of other specialty retailers. But the performance of the company is misleading; long-term shareholders should take a closer look at this quarter’s results.
A transition in sales channels
It may be too easy to build a narrative around the sleep specialist’s case that relies on a COVID-19 boost. It is true that in this extended period of remote working, more of us are focusing on wellness shopping while spending time at home. It’s also true that Sleep Number’s out-of-store sales are exploding: online sales jumped 111% from the comparable third quarter period.
However, rather than benefit from a tilt in lifestyle preferences due to the pandemic, Sleep Number may simply achieve the same acceleration in sales that it would have experienced without COVID-19, but with a higher mix of sales. in line. Its sales channel mix could normalize once customers again feel more comfortable shopping in stores, where they can physically try on a mattress before purchasing it. This is already happening to some extent: same-store retail sales actually grew 2% year-over-year this quarter, after falling 21% in the last sequential quarter.
Comments from CEO Shelly Ibach over the past week earnings conference call corroborate the conjecture that Sleep Number has been set for a strong quarter with or without the impact of COVID-19. Ibach pointed out that the past three months mark the third consecutive year that Sleep Number has seen double-digit demand growth in the third quarter.
Ibach also observed that the manufacturer has benefited from a broad demand trend since making the decision three years ago to migrate its entire range of sleep beds to its “360” smart bed model.
In any event, it is clear that both operationally and financially, Sleep Number has remained fairly resilient during the pandemic. Recent supply chain improvements have allowed the company to meet higher demand for e-commerce without major issues. Even with the rush of online orders, Gross margin this quarter improved by 70 basis points to 63.1%.
In addition, the company fully repaid this quarter a $ 75 million term loan it had taken out earlier this year as a precautionary measure to amortize cash at the start of the pandemic. From a financial standpoint, Sleep Number has surpassed its worst estimated pandemic impact.
What this means for future performance
It’s tempting to view Sleep Number’s acceleration in sales and earnings as just a single, isolated phenomenon triggered by a pandemic, especially in light of its increased online sales this year. But it is a better result for shareholders if the consumer discretionary The specialist is simply making sales as part of a multi-year demand trend, as its numbers seem to indicate. This decreases the risk of a post-COVID crisis.
On the contrary, management doubles the channel that has anchored the long-term success of the company. Even with the shelter-in-place closures and orders at the start of the year, Sleep Number is on track to average a record $ 3 million in average sales per store in fiscal 2020. Management said it would continue to expand its base to 596 stores. at a rate of 4% to 5% per annum until 2025, although it invests in higher online and telephone sales during the same period.
Shareholders should therefore not be fooled: Sales were likely intended for rapid growth this quarter, regardless of the economic environment, and management is allocating resources to ensure that Sleep Number continues to move its smart mattresses in response. to strong long-term demand.
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