Sleep Number Rides Digital Demand To Record Q1 Results

Since Sleep Number transformed its entire product line to digitized “360 smart beds” three years ago, the chain of 600 bedding stores has been steadily growing sales and consumer converts to its platform. Add the pandemic’s at-home lifestyle changes and a few rounds of stimulus checks to fill consumers’ wallets, and Sleep Number wakes up in 2021 with its best quarter ever.

Officially, the Minnesota-based retailer saw its sales rise 20 percent to $568 million for the three months ending April 3, led by a 116 percent increase in its online sales. With price increases and strong demand growth, almost two-thirds of Sleep Number’s top-line sales dropped to its bottom, leaving it with a gross profit of $356 million, up 18 percent from a year ago.

“Our digital ecosystem is enabling Sleep Number to efficiently acquire new customers. We are optimizing digital content that is tailored by the audience and platform in real time for efficiency and scale, and our results include highly qualified digital traffic growth of over 40 percent in the quarter and record levels of conversion,” CEO Shelly Ibach told investors and analysts on the company’s conference call.

In short, Ibach said, “our sell-from-anywhere model directly aligns with how customers want to shop — in-store, online or by phone — and delivers a seamless, value-added experience across all touchpoints.”

That Foam Problem

The only nightmare in an otherwise dreamy quarter was the fact that Sleep Number’s record results — which crushed analysts’ expectations by more than a $1.00 per share — would have been even better had it not been for “foam supply constraints” that shifted more than $50 million of deliveries into the second quarter.

“Q1 demand drove the highest quarterly sales in company history,” Sleep Number CFO David Callen said on the call. “This accelerated demand, combined with temporary foam and chemical supply constraints, resulted in [roughly two weeks worth of] deliveries shifting out of the first quarter. However, foam production is now expected to normalize by the end of Q2.”

Even so, Callen said the average sales per store rose 9 percent to almost $3.2 million, while the average revenue per mattress unit topped $5,000 for the first time, up from $4,884 in 2020.

That said, the portion of revenue that Sleep Number does online is still just 14 percent of total sales — a figure that, while growing rapidly, is well below the highly profitable digital sales rates that have been posted by many other national retail chains.

Looking Ahead

Callen also said the mattress retailer is expecting approximately $25 million of pressure on gross margin for the balance of the year due to higher-than-expected commodity, labor and logistical costs, but is confident that the company could offset $20 million of that hit through targeted price increases and efficiency gains. All in, Sleep Number told investors that it is raising its full-year earnings target to $6.50 per share, up $0.50 from the previous forecast made just two months ago.

“Raising 2021 guidance reflects the strength of our first-quarter performance and underscores the value inherent in the convergence of our growing sleep innovation leadership, pioneering ‘360 smart beds,’ digital ecosystems and lifelong customer relationships,” Ibach said, adding that “more sleep data leads to better consumer insights and advancement of sleep health innovations.”

Sleep Number’s stock has slid about 15 percent over the past month after rising almost 500 percent in the past 12 months, leaving the company with a market value of $3.1 billion.