SNBR came out and missed just about every number in its (‘easy’) COVID comp quarter. The list of companies that will fall under that bucket of missing the easy comp during this upcoming earnings season will be very short. Top Line came in at $484mm vs estimates of $511mm, and EPS was $0.88 vs estimates of $1.10. Management said on the call that supply chain constraints are holding back sales and gross margin as they had two suppliers that had a production constraint problem and one supplier with a labor constraint problem. While supply chain issues are becoming a normal occurrence for retailers the more interesting aspect is the lack of color the company gave on these issues when the problems are expected to impact Q3 as well. The conference call was one of the more underwhelming management displays we’ve heard in a while.
Looking ahead, management gave very loose guidance only saying that Q3 EPS will be 50% above 2019 levels and Q4 sales and EPS will be "exceptional". Peeling back the onion on that Q3 number, it actually means that SNBR guided DOWN the upcoming quarter. At the moment we are writing this note estimates are at $1.65 while the company expects EPS to be closer to $1.45 according to guidance. Here is the conundrum for SNBR, it then guided UP the full year EPS number. Previously guidance was "at least $6.50" but now guidance is "at least $7.25". So if it just missed Q2 and guided down Q3 that means they are expecting one big Q4. Prior to this print, expectations were for $1.47 in EPS, but now it set the Q4 bar at $2.45, which compares to pre-covid Q4 EPS of just $0.82. Did COVID really benefit this business by 200%? The reason the company believes in a big Q4 is because management is now executing a pricing initiative across all products. The company announced $100mm in annualized pricing increases which translates to a 4-5% AUR increase. SNBR expects this pricing increase to offset any possible headwind that could come including consumer elasticity, inflation and more supply chain issues. From where we sit it seems like a lot of hope in that guide. We don’t invest in hope.
The bull case we hear on this name (literally – its pervasive on the buy-side and in the twittersphere) is that the stock should trade on 15x the guided EPS number, and therefore downside is limited. Our question for the bulls is why does SNBR deserve that multiple on peak earnings? As demand and sales growth exit peak levels then the multiple should come down, in our opinion. The better question is why won't this name trade on 10-12x EPS? At the moment the company's best aspect is its stock repo, management purchased over $275mm in stock in 1H and has $500mm remaining on the repo authorization. However this seems like a case of buying when a company could, not when it should. That’s a theme that is all too common in retail right now, as marginal companies that are seeing a surge in post-pandemic cash flow are buying back stock simply because they can. Doesn’t mean it’s the best use of capital and/or the highest ROI.
At the end of the day, we think that SNBR is currently printing peak earnings estimates, and financial returns. We’re seeing price increases and investments in supply chain in the core product at the peak of the cycle, and the company is leaning on store growth (mistake with the fleet currently pushing 650 stores) and share repo when the demand peak has passed, and competitive pressures from upstart brands are building. We view SNBR as a secular loser in a category that at best tracks growth in GDP over a TAIL duration. In fact, we’re modeling next year earnings to be down 25%, and see no reason why we don’t see a 10-12x multiple on that earnings level. In the end, we think that this is a $75 stock, and that the after-market sell-off is just the beginning.
For the original note on our SNBR short CLICK HERE.
