Sleep Number Supply Constraints Mar Second-Quarter Sales

Supply chain issues are still keeping Sleep Number up at night, with the company reporting second-quarter profit and sales below Wall Street’s expectations as component shortages and issues with suppliers slowed deliveries.

Customer delivery windows were extended in late May to four to six weeks, though President and CEO Shelly Ibach said Sleep Number has “made significant progress” in addressing component shortages, which has brought the delivery window to three weeks.

Deliveries were particularly affected in June and July, Chief Financial Officer David Callen said, with COVID-related labor shortages impacting a tier one supplier and “limited output” from two third tier suppliers because of unspecified issues that have now been resolved.

Consumer demand, while not necessarily a problem, has also stretched the Minneapolis-based company’s obstacle-ridden supply chain to its limit. Over the last 12 quarters — since the company transformed its entire product line to digitized “360 smart beds” — Sleep Number has seen 18 percent average demand growth. Ibach said consumer demand has exceeded the company’s expectations.

Second-quarter net sales grew 70 percent year-over-year, to approximately $484 million, and 36 percent compared to 2019. Net sales year to date have increased 39 percent compared with last year and are up 35 percent versus the first half of 2019.

Callen assured investors and analysts that Sleep Number was prepared to meet consumer demand for the remainder of the year, though deliveries will still be somewhat limited in the third quarter because of additional equipment that needs to be installed at a tier one supplier. He declined to say how many Sleep Number beds have been delivered this year or what the company’s backlog is.

“Our teams and suppliers are working rapidly to more than double production output and deliver capacity to support continued market share gain,” Callen said, including the expansion of its home delivery workforce and increasing the number of assembly and delivery distribution centers.

Digital Capabilities

Ibach said online and phone sales now make up 13 percent of total sales — up from 7 percent two years ago but down slightly from the previous quarter.

The company’s retail locations, however, are now bringing in an average of $3.5 million in sales per store over a trailing 12-month period, up 27 percent from two years ago. This average may be slightly unbalanced, however, as nearly 30 stores bring in more than $6 million annually.

Sleep Number plans to open 15 new stores by the end of the year, which will bring its store total to approximately 650.

“We’re excited about the level of productivity that we’re driving in our stores and online,” Ibach said. “And we look at that in total as one of the benefits of exclusive direct-to-consumer distribution.”

The CEO said Sleep Number is also extending its digital capabilities across its supply chain in order to strengthen fulfillment responsiveness, reliability and data analytics.

Looking Forward

Despite supply issues, though, Sleep Number remains optimistic about the second half of the year and is once again raising its full-year earnings target to $7.25 per share — up $0.75 from the forecast it made at the end of the first quarter and up $1.25 from the projection made at the start of the year.

Callen said, though, that the company expected $50 million of incremental cost pressures because of inflation and component shortages, some of which will be offset by nearly $100 million in price increases.

“We feel really well positioned to be able to support our accelerating demand in the months and quarters and years to come,” Ibach said.

Sleep Number stock has fallen over 17 percent since the end of the first quarter. The company has $2.7 billion market value, down by nearly half a billion dollars since April.