Overindebted Out-of-Cash Sleep Number Blames Consumers for Results of Years of Mismanagement. Shares Collapsed 92% from Peak Consensual Hallucination | #daitngscams | #lovescams

This is the kind of chart my pantheon of Imploded Stocks is full of, driven by what I call “consensual hallucination” that then vanished.

By Wolf Richter for WOLF STREET.

Sleep Number Corp, which makes mattresses and sells them at its stores, and spends a gazillion on advertising to entice people to buy them, reported earnings yesterday evening, namely a big loss, falling sales, outlook cuts, earnings cuts, cost cuts, staff cuts, store cuts, and haircuts for shareholders. It first blamed the consumer that “abruptly midway through the quarter,” so on August 15, collapsed, even as retail sales overall boomed in August and September.

But that collapsed consumer was just fake fodder designed to be stuck into headlines in order to manipulate the headlines away from the company-specific debacle that Sleep Number has created for itself.

Reality came out further down, namely in the conference call, when the executives, upon getting nudged ever so politely but repeatedly, pointed at their own misguided strategies, such as suddenly trying to sell its most expensive setup to people when they walked into the store. And when people, who liked the setup, saw the price tag, they revolted. Consumers hate, hate, hate inflation, and they hate being hit over the head by mega-prices, and they’re now steering clear of some of the companies that try to pull that off, and that’s what Sleep Number suddenly discovered.

Stuff happens. Executives trip over their own underwear, and their decisions fall flat and things go downhill. And that’s OK. Sleep Number was a penny stock before, back during the Financial Crisis.

But the reason we’re looking at this company is because the stock [SNBR] is special. Actually it’s not special. It’s emblematic.

Consensual hallucination. Today, Sleep Number shares kathoomphed 30% at the moment, to $11.31. But that big percentage-plunge is so tiny in the overall implosion that it can barely be seen in the chart. Shares peaked on March 15, 2021 at $146.97 at the close, having spiked by 850% in 12 months, which was common back then. And since then, shares have collapsed by 92%, giving up not only the entire 850% spike from the March 2020 low, but more, and are now back at the lowest price since 2011.

This is the kind of chart that my pantheon of Imploded Stocks is full of, documenting a period that will go down in history as the craziest era in the stock market ever that had been driven by what I call “consensual hallucination”:

The Sleep Number stock is an emblem of what went wrong when the Fed and other central banks started printing many trillions over the span of a couple of years, to douse the land in newly created liquidity that needed to find a place to go, and people were working from home and had fun with this stuff, and they traded as if it were a video game, and they ganged up on the social media to hype this stuff, and the result was pure insanity showing up across the stock market.

Then the fun ended and this stuff collapsed, one stock after the other, starting in that infamous February 2021, and stock after stock became part of my pantheon of Imploded Stocks.

So this company has almost no cash, $906,000 at the end of the quarter, which is nothing for a company that size.

And it’s awash in debt. Its entire working capital is borrowed on a line of credit, on which it owed $488 million at the end of Q3.

And that’s why its interest expense doubled, because lines of credit have variable rates, and those rates jumped, and in addition, the amount borrowed on this line of credit also rose by $28 million year-over-year.

In addition:

  • It owes $46 million to its customers who’d prepaid for purchases.
  • It has operating lease obligations of $440 million.
  • It has all kinds of other liabilities.

So it has a negative net worth (shareholder equity) of minus $420 million.

In light of this cliffhanger balance sheet, the earnings report was unwelcome: Revenues dropped 13% to $473 million in Q3, gross profit dropped 11%, total operating expenses dropped 9%, and operating income dropped by half to $5.4 million.

Then came $11 million in interest expenses, which had nearly doubled year-over-year because that’s how higher interest rates and more debt affect earnings.

And so it generated a loss before taxes of $5.6 million, got a tax benefit of $3.3 million, for a net loss of $2.3 million.

Its outlook for the rest of the year darkened further, and it now sees “a loss of up to $0.70 per share, which includes an estimated $10 million or $0.35 per share of restructuring charges to be recorded in the fourth quarter.”

It said it would restructure its operations to cut its expenses by $50 million, on top of the $80 million in expense cuts it promised earlier for 2023. This includes closing “40 to 50 stores by the end of 2024,” slowing new store openings, slowing remodels of old stores, and reducing capital expenditures overall.

Sleep Number is in an awfully mismanaged industry full of fake hype and hoopla. Mattress Firm filed for bankruptcy in 2018 after a slew of scandals and issues; and after its owner Steinhoff International had collapsed in 2017 amid “accounting irregularities,” that then were revealed to be $7.4 billion in fraud.  Foam-mattress and bedding retailer Casper, once a unicorn with mega losses whose shares imploded right after the IPO in February 2020, was acquired by a private equity firm in November 2021 for a fistful of dollars out of my pantheon of Imploded Stocks. In January 2023, mattress maker Serta Simmons Bedding filed for bankruptcy.

Sleep Number has good company.  But my suggestion for its executives is to not invent the collapse of the consumer on August 15, but fess up to years of mismanagement and mistakes, resign, and let someone else try their hands at salvaging this business.

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