Sleep Number’s Deceptive Performance | The Motley Fool

Shares of adjustable mattress manufacturer Sleep Number (NASDAQ:SNBR) were awake and alert late last week following the company’s release of its fiscal third quarter earnings. Sleep Number’s stock jumped ahead of its previous day’s close by 11% on Thursday, Oct. 15, and while falling slightly on Friday, it still closed out the week with a 14% gain.

Both top- and bottom-line momentum fueled investors’ enthusiasm. The company reported a year-over-year sales advance of 12% to a quarterly record of $531 million. Operating margin jumped by nearly 500 basis points to 13.1%, as Sleep Number complemented its sales strength by holding operating expenses to a slight increase. As a result, diluted earnings per share increased by 90% against third quarter 2019, to $1.79 per share. 

On the surface, it might appear that Sleep Number is participating in a pandemic-related boost, along with a host of other specialty retailers. But the company’s performance is deceptive; long-term shareholders should peer more deeply into this quarter’s results.

A young woman sleeps peacefully in a comfortable bed.

Image source: Getty Images.

A transition in sales channels

It’s perhaps too easy to construct a narrative around the sleep specialist’s filing that’s predicated on a COVID-19 boost. It’s true that in this extended period of remote work, more of us are focused on wellness purchases as we spend time at home. It’s also true that Sleep Number’s non-store sales are exploding: Online sales leaped 111% over the comparable period in the third quarter.

However, rather than benefiting from a tilt in lifestyle preferences due to the pandemic, Sleep Number may simply be realizing the same sales acceleration it would have experienced without COVID-19, but with a higher mix of online sales. Its sales channel mix may normalize once customers feel more comfortable shopping in stores again, where they can physically try out a mattress before purchasing. This is already happening to some degree: Comparable retail store sales actually rose by 2% against the prior-year period this quarter, after falling 21% in the last sequential quarter.

Comments from CEO Shelly Ibach during last week’s earnings conference call support the conjecture that Sleep Number was set for a strong quarter with or without the impact of COVID-19. Ibach pointed out that the last three months marks the third consecutive year in which Sleep Number has seen double-digit demand growth in the third quarter.

Ibach also observed that the manufacturer has enjoyed an extended demand trend since making the decision three years ago to transition its entire sleep lineup to its “360” model technology-enabled smart beds.

In any event, it’s clear that both operationally and financially, Sleep Number has remained quite resilient during the pandemic. Recent supply chain improvements enabled the company to meet higher e-commerce demand without major hiccups. Even with the crush of online orders, gross margin this quarter improved by 70 basis points to 63.1%.

In addition, the company fully repaid a $75 million term loan this quarter which it had taken earlier this year as a precaution to buffer liquidity at the outset of the