Rating Update: Stock Rating Z-unrated (5/21/19)-Sleep Number Corporation (SNBR).

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BUSINESS

Sleep Number Corporation, together with its subsidiaries, provides sleep solutions and services in the United States. It designs, manufactures, markets, retails, and services beds, bases, and bedding accessories under the Sleep Number name. The company also offers adjustable bases under the FlextFit name; and pillows and sheets, as well as other bedding products, including mattresses, box springs, and foundations under the Sleep Number name. The company sells its products directly to consumers through retail, online, and phone, as well as through wholesale. As of December 30, 2017, it operated approximately 556 Sleep Number retail stores in 50 states. The company was formerly known as Select Comfort Corporation and changed its name to Sleep Number Corporation in November 2017. Sleep Number Corporation was founded in 1987 and is headquartered in Minneapolis, Minnesota.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be below the cost of capital, SNBR is expected to continue to be a major Value Eraser.

Sleep Number Corp is currently unrated.

Sleep Number Corp’s targeted value is not available.
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Sleep Number Corp has a Power Rating of 86. (SNBR’s very high Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 14% of companies in the universe.)
Factors contributing to this very high Power Rating include: the recent trend in SNBR’s earnings estimates has been extremely favorable; and recent price action has been extremely favorable. An offsetting factor is is in a slightly weakened position current.

INVESTMENT PROFILE

SNBR’s financial strength is high. Financial strength rating is 84.
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Relative to the S&P 500 Composite, Sleep Number Corporation has slightly more Growth than Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that SNBR is higher risk. High historical profitability is a positive for SNBR. Relative weaknesses include: low forecasted profitability, high financial leverage, and high earnings variability. SNBR’s valuation is high: low dividend yield, moderate P/E ratio, and high price/book ratio. SNBR has unusually low market capitalization.

CURRENT SIGNALS

Sleep Number Corp’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; and falling leverage.

Sleep Number Corp’s current technical position is mixed. The stock price is in a 1.2 month down move. The stock has declined 23.6% from its prior high. The 200 day moving average is in an uptrend. The stock price is below its 200 day moving average.

ALERTS

Important negative changes in Sleep Number Corporation (NASDAQ: SNBR) investment behavior have recently occurred: negative upside/downside volume developed.
Recent small positive changes in fundamentals have benefitted Sleep Number Corporation (NASDAQ: SNBR): significant quarterly earnings acceleration occurred.
The stock is currently unrated.
Sleep Number Corporation (NASDAQ: SNBR) stock enjoyed a major increase of 29.6% on 5/21/19. The shares closed at $0.14. However, exceptionally low trading volume at 44% of normal accompanied the advance. The stock has been exceptionally strong relative to the market over the last nine months and has risen 1.2% during the last week.

CASH FLOW

In 2018, Sleep Number Corp experienced a very significant reduction in cash of -$2.0 million (-56%). Sources of cash were much lower than uses. Cash generated from 2018 EBITDA totalled +$154.4 million. 2018 non-operating sources contributed no cash. Cash taxes consumed -$12.2 million (-8% of EBITDA). Re-investment in the business amounted to -$45.2 million (-29% of EBITDA). On a net basis, debt investors furnished +$169.2 million (+110% of EBITDA) while equity investors withdrew -$268.2 million (-174% of EBITDA).
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Sleep Number Corp’s Non-operating Income, %EBITDA has exhibited a very small overall uptrend over the period. This improvement was accompanied by stability for the Sleep Number Corporation Peer Group. In most years, Sleep Number Corp was in the top quartile and second quartile. Currently, Sleep Number Corp is at the upper quartile at 0% of EBITDA ( $0.0 million).

Sleep Number Corp’s Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Sleep Number Corporation Peer Group. (Since 2016 Cash Taxes, %EBITDA has experienced a very sharp recovery.) In most years, Sleep Number Corp was in the top quartile and third quartile. Currently, Sleep Number Corp is upper quartile at -8% of EBITDA (-$12.2 million).

Sleep Number Corp’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Sleep Number Corporation Peer Group. (Since 2016 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Sleep Number Corp was in the lower quartile and top quartile. Currently, Sleep Number Corp is below median at -29% of EBITDA (-$45.2 million).

Sleep Number Corp’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Sleep Number Corporation Peer Group. (Since 2016 Debt Investors, %EBITDA has accelerated very sharply.) In most years, Sleep Number Corp was in the third quartile and top quartile. Currently, Sleep Number Corp is upper quartile at +110% of EBITDA (+$169.2 million).

Sleep Number Corp’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Sleep Number Corporation Peer Group. In most years, Sleep Number Corp was in the top quartile and lower quartile. Currently, Sleep Number Corp is lower quartile at -174% of EBITDA (-$268.2 million).

Sleep Number Corp’s Change in Cash, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Sleep Number Corporation Peer Group. (Since 2015 Change in Cash, %EBITDA has experienced a very sharp recovery.) In most years, Sleep Number Corp was in the top quartile and lower quartile. Currently, Sleep Number Corp is upper quartile at -1% of EBITDA (-$2.0 million).
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Sleep Number Corp’s Cash, %Revenue has experienced a minor downtrend over the period. This downtrend was accompanied by stability for the Sleep Number Corporation Peer Group. In most years, Sleep Number Corp was in the top quartile and lower quartile. Currently, Sleep Number Corp is lower quartile at +0%.

PROFITABILITY

Sleep Number’s return on equity reached a new post-2009 high in 2019.
Sleep Number’s very strong negative trend in pretax operating return significantly augmented by a very strong negative trend in non-operating factors is a major performance consideration.
The productivity of Sleep Number’s assets declined over the full period 2009-2019: asset turnover has suffered a strong overall downtrend.
Reinforcing this trend, pretax margin has experienced a downtrend that accelerated sharply from the 2012 level.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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Sleep Number’s return on equity is below median (-59.7%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is lower quartile (11.7%) reflecting asset turnover that is above median (2.04X) and lower quartile pretax margin (5.8%).
Tax “keep” rate (income tax management) is at the upper quartile (82.5%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is below median (-6.18X).

GROWTH RATES

Overall, Sleep Number’s growth rate has slowed considerably in recent years.
Sleep Number’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 18.8% per year.

Total asset growth has been 23.3% per year.

Annual E.P.S. growth has been 10.6% per year. (More recently it has been 27.0%.)

Equity growth has been 22.8% per year. (More recently it has been -21.8%.)

Sleep Number’s consensus growth rate forecast (average of Wall Street analysts) is 10.1% — substantially below the average of the historical growth measures.
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Relative to the Sleep Number Corporation Peer Group, Sleep Number Corp’s historical growth measures are generally top quartile. Revenue growth (18.8%) has been upper quartile. Total asset growth (23.3%) has been upper quartile. Equity growth (22.8%) has been upper quartile. E.P.S. growth (10.6%) has been below median.

In agreement with this pattern, consensus growth forecast (10.1%) is at the lower quartile.
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PRICE HISTORY

Over the full time period, Sleep Number’s stock price performance has been volatile and exceptional. Between July, 2008 and May, 2019, Sleep Number’s stock price rose +1623%; relative to the market, this was a +662% gain. Significant price moves during the period: 1) January, 2014 – March, 2015: +111%; 2) September, 2011 – March, 2012: +132%; 3) August, 2010 – June, 2011: +235%; 4) April, 2010 – August, 2010: -53%; 5) June, 2009 – April, 2010: +1248%; and 6) December, 2008 – April, 2009: +304%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 22.8% is substantially above median relative to the S&P 500 Composite.
In addition to being substantially above median relative to S&P 500 Composite, current annual total return performance through April, 2019 of 22.8% is at the upper quartile relative to Sleep Number Corporation Peer Group.

Current 5-year total return performance of 13.6% is above median relative to the S&P 500 Composite.
Through April, 2019, with above median current 5-year total return of 13.6% relative to S&P 500 Composite, Sleep Number Corp’s total return performance is below median relative to Sleep Number Corporation Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, SNBR’s overall valuation is normal. The highest factor, the ratio of enterprise value/assets, is above median. Ratio of enterprise value/earnings before interest and taxes is at median. Price/earnings ratio is near the lower quartile. Ratio of enterprise value/revenue is lower quartile. Price/equity ratio is unavailable.

Relative to Sleep Number Corporation Peer Group, SNBR’s overall valuation is normal. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is slightly above median. Price/earnings ratio is lower quartile. Ratio of enterprise value/assets is lower quartile. Ratio of enterprise value/revenue is at the lower quartile. Price/equity ratio is unavailable.
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Sleep Number Corp has a major value gap compared to the median. For SNBR to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.01X to 1.61X. If SNBR’s ratio of enterprise value/revenue were to rise to 1.61X, its stock price would be higher by $31 to $66.
For SNBR to achieve upper quartile valuation relative to the Sleep Number Corporation Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.01X to 3.11X. If SNBR’s ratio of enterprise value/revenue were to rise to 3.11X, its stock price would increase by $109 from the current level of $34.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be below the cost of capital, SNBR is expected to continue to be a major Value Eraser.
Sleep Number’s current Price Target is not available.
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Sleep Number’s current Price Target is not available.
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PTR’s return on equity forecast is -0.0% — slightly below our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is significantly below the 2017 peak of 64%.

PTR’s growth forecast is 8.0% — in line with our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is significantly below the 2014 peak of 20%.

PTR’s cost of equity forecast is 8.4% — below recent levels. Forecasted cost of equity erratic but little changed between 2010 and 2018. The current forecast is below the 2010 low of 12.9%.
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At Sleep Number’s current price of $34.11, investors are placing -Na on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 6.0% per year, and a return on equity of 4.0% versus a cost of equity of 13.8%.
PTR’s 2020 Price Target of $-Na is based on these forecasts and reflects an estimated value of existing assets of $-Na .

About John Lafferty 37832 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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