Sleep Number’s stock could see a massive bump, but analysts see risks ahead

The move came despite some notes of caution from the company with Chief Executive Shelly Ibach saying demand is expected to remain pressured in 2024.

On a call with analysts, Ibach noted the macroeconomic challenges that weighed in 2023 had persisted, namely subdued consumer sentiment, slower new-home purchases and continued high interest rates.

“Additionally, consumer purchasing power continues its steady downward trend,” she told analysts, according to a FactSet transcript.

Chief Financial Officer Francis K. Lee said sales are expected to fall 10% in the first quarter from the same period in 2023 after bad weather in January kept shoppers away from stores.

Sleep Number’s sales fell by a double-digit percentage in January before returning to a low single-digit decline in February, boosted by strong sales over the Presidents Day holiday weekend, said Ibach. The company expects low single-digit growth in the second half and will benefit from easier comparisons to the year-earlier period in the third quarter.

Rivals Tempur-Sealy International Inc.
TPX,
+2.23%
and Wayfair Inc. have reported similar trends for their mattress sales in the first quarter.

Read now: Tempur Sealy International Earnings Drop on North America Hit, Expects Further Pressure Ahead

Wedbush analysts reiterated their neutral rating on the stock, but raised their 12-month price target to $13.50 from $12.00. Wedbush is “still waiting for a better sleep score,” they wrote in a note.

“We look positively on the company’s improved focus on profitability and cash generation that will go toward paying down debt in fiscal 2024,” wrote analysts led by Seth Basham. “However, we estimate Sleep Number finishes the year only barely below its 3.75x net debt/EBITDAR covenant, leaving little room for error.”

Sleep Number is in the midst of a restructuring that saw it reduce costs by $85 million last year. The company is planning to cut operating costs by an additional $40 million to $45 million this year. It’s also working to bolster its balance sheet and streamline its cost structure and is working with banks to amend financial covenants.

“Additionally, sharper messaging appears to be helping Sleep Number, but risks remain that higher year-over-year discounting is doing more to win over consumers, raising the potential for demand declines if SNBR pulls back on incentives,” the analysts wrote. “We wait to see more evidence that Sleep Number can stem market share declines before getting more positive.”

Raymond James agreed and reiterated its market perform rating on the stock. Analysts led by Bobby Griffin said Sleep Number has a unique product portfolio.

“In addition, the company’s vertically integrated retail model offers selling advantages (control over the entire selling process) versus traditional bedding peers, especially as health & sleep technology gain more focus,” they wrote in a note.

The cost-cutting program is a welcome move to boost profitability and flow through once industry demand returns, they said.

But with demand still under pressure and the company’s high leverage, “we prefer to remain on the sidelines, awaiting an indication of more stable demand and improving leverage,” they wrote.

The company lost $15 million, or 68 cents a share, in the fourth quarter, contrasting with earnings of $37 million, or $1.60 a share, in the year-ago period. Adjusted for one-time items, including restructuring costs recorded in the quarter, the company lost 58 cents a share. Analysts polled by FactSet expected a loss of 88 cents a share.

Sales fell 14% to $430 million, with demand down by low single digits year over year, the company said. That was above FactSet consensus of sales of $421 million.

The stock is down 63% in the last 12 months, while the S&P 500
SPX
has gained 27%.