What a time it’s been for Sleep Number. In the past six months alone, the company’s stock price has increased by a massive 64.8%, reaching $15.03 per share. This run-up might have investors contemplating their next move.
Is now the time to buy Sleep Number, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.Despite the momentum, we're sitting this one out for now. Here are three reasons why there are better opportunities than SNBR and a stock we'd rather own.
Why Is Sleep Number Not Exciting?
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.
1. Flat Same-Store Sales Indicate Weak Demand
Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Sleep Number’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat.
2. Less Negotiating Power with Suppliers
Sleep Number is a small retailer, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
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 $16.27 million of cash over the last year, and its $917.7 million of debt exceeds the $1.59 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.
Final Judgment
Sleep Number isn’t a terrible business, but it doesn’t pass our quality test. After the recent rally, the stock trades at 24.5× forward price-to-earnings (or $15.03 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. Let us point you toward Meta, a top digital advertising platform riding the creator economy.
Stocks We Like More Than Sleep Number
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