Big miss and guide-down from Best Idea Short, Sleep Number. We don’t think it’s the last of the downward revision cycle, to be clear, and we’re not covering on the weak stock reaction. The company missed on the top and bottom line, with EPS coming in at $0.09 vs the Street at $0.33 after a massive guide down on the 3Q earnings print midway through 1Q. On the full year guide, management guided to EPS of $5.00-$6.00 vs the Street at $5.77, as consensus revised lower later in the Q with the TPX preannouncement. It’s important to call out that this team’s forecast accuracy is as poor as we’ve seen from any retailer, in any cycle. Over the last four quarters we saw EPS miss by 20%, beat by 55%, miss by 70% and miss by 73%. So can someone explain to me why in the world we should believe the latest downward revision – when we’re coming off 2-years of overconsumption in the mattress space and the mid-point of the guide is still 70% ahead of pre-covid earnings? The answer is simple…it’s not believable.
In the Q&A, management noted that it could see demand down low single digits for the balance of the year and could still potentially pull some levers to hit the bottom end $5.00 per share. But our question is why demand can’t be down 5%? Why not 10%? The reality is that US consumers purchase about 38-39mm mattresses per year – almost like clockwork. That is, until the pandemic. Then with the deurbanization and increased spending on all things Home-related, we saw about 87mm mattresses consumed over a 2-year time period – about 12% higher than an average 2-year period. Keep in mind that the average mattress lasts about 8 to 9 years. These are long-lived assets. The average unit growth over the course of an economic cycle is 0.6% -- a function of population and household formation. So after 2 consecutive years of 7%+ unit growth, we shouldn’t just see a snap back to zero growth, but rather a material decline in unit sales for a year, or a prolonged ‘softer landing’ low single digit decline over a multi-year time period. This company has just started to feel the initial pinch of this demand snap back, and we think there’s much more to come.
We went short SNBR in July with the stock at about $110 and as we dove deeper with our fall 2021 mattress Black Book we said that a $40-$50 stock is in play. After hours, the stock is at about $48. But we think that 1 to 2 year earnings power here is $3.50 to $4.00 – and though people love to talk about ‘historical average multiples’ in the mid-teens, the reality is that a business facing such a prolonged bleed in demand and profitability is worth no more than 10x from where we sit. That still suggests that there’s plenty of downside in the stock from the high $40s.
