Definitely a mixed print out of Best Idea Short SNBR. Plenty for both the bulls and the bears to chew on. On one hand the company beat consensus handily. Put up EPS of $2.22 vs the Street at $1.44. To be clear as to how bubbly these results are, pre-covid the company earned $2.70 for the entire YEAR at its peak – and it just reported 82% of that level in a single quarter. The bad news is that it took down 4Q by 34% -- stating that demand is strong but that component shortages are pushing product deliveries into 1Q22. The 4Q guide was always ‘a dream’ – i.e. unachievable – and even if the company had the components we don’t think it would have hit the Street’s expectations.
We recently outlined in our Mattress Industry Black Book (Click Here) that this industry has a severe Cyclical Unit Demand problem. That is, we see mattress unit demand oscillate meaningfully year to year, but over the course of a cycle it grows right in line with a blend of population growth and new household formation. That’s almost exactly 0.6% growth over the course of a cycle. The problem is that we saw unit demand grow by 7% last year, and its looking to be another 6-8% this year. Math is math…and unless the growth paradigm of this industry is turned upside down, we’re going to see a big mean reversion in industry demand over the next 3 years. To put the absolute numbers in context, the number of mattresses consumed went from $38mm to $~45mm annually over just two years. Margins doubled on that outsized demand, and the profit pool went from sub $1.5bn in EBIT dollars for the industry to over $3bn this year. That is completely and utterly unsustainable.
In looking at Sleep Number specifically, it’s about as close to a broken retailer as you can get in looking at the public mattress stocks. Simply put, it has a saturated store base (it sells vertically through its own retail locations) and is incrementally adding stores in demographic areas where people can incrementally not afford to spend $3-$4k on one of SNBR’s premium priced motorized air bag mattresses. So in addition to the negative industry headwinds we’re about to face, SNBR is moving forward with a dilutive growth strategy.
Ultimately, we think that SNBR will mean-revert to earnings of $3-$4 per share over a TAIL duration, at a time when the consensus has the company earnings $8+ in perpetuity. We are often hit with the case that ‘the stock is too cheap’ to short. We don’t buy that for a minute. True, it has rarely, if ever, traded below 12x earnings – but it has also never faced a negative earnings revision cycle to the tune of 50%. It can trade at 8-10x those numbers easily. That gets is to a $30-$40 stock vs the $92 it’s trading after hours.
We’d take advantage of the pop on this quarter and short more SNBR. When this story unravels – which will likely come in 2022 (if we haven’t just seen it start in 4Q) – it’s going to be a fast and violent move. Best Idea Short.
