A first look at Sleep Number and Lovesac; Visiting Blyde River Canyon
In yesterday's e-mail, I shared why I think the frozen housing market is thawing and analyzed one company I saw at the ICR conference earlier this week that might benefit – Helen of Troy (HELE).
Today, I'd like to share my "first look" analyses of two other companies I saw, also with bombed-out stocks, that might also benefit from a housing recovery.
If either of them catch your eye and you'd like me to take a closer look, please e-mail me here.
1) The shares of high-end mattress maker Sleep Number (SNBR) have been all over the map since it went public 27 years ago. They've gone from a low of 19 cents in December 2009 to a high of nearly $150 in March 2021 (that's a 779-bagger, for those who are counting).
Since that high, the stock is down 92% (coincidentally, the same percentage as Helen of Troy since its own high) to yesterday's close of $11.37 per share:
Not surprisingly, Sleep Number's revenue and net income have also been in freefall in recent years:
Here's the breakdown by quarter from 2019 to the present:
The cash-flow statement is similarly dismal, as the company has been burning cash for three of the past four years:
Sleep Number exacerbated its decline by buying back the most stock at the worst time, as it peaked in 2021:
As a result, its net debt has risen to $939 million, far exceeding its current market cap of $250 million:
The financials are saying that Sleep Number is likely to end up in bankruptcy.
So, why is this stock in any way interesting?
It's because the CEO who took over last April, Linda Findley, engineered an incredible turnaround as CEO of her previous company, meal-kit seller Blue Apron.
When she assumed the job at Blue Apron in 2019, the stock had crashed to around $1. Over the next few years, she improved operations to the point where the stock rose to $5.49 by September 2023. She then sold the company for $13 per share!
An anonymous analyst, ril1212, made a well-articulated bull case for SNBR on Value Investors Club two years ago, when the stock was near today's level:
We are continuing to dumpster dive in the wasteland of high-ticket consumer discretionary businesses that have seen their boom cycles turn into deep cyclical downturns and find ourselves buying another name we were short in 2020/2021. One of the sectors that has experienced the most pain from a unit perspective relative to recent history is mattresses... Now seems like a decent moment to buy SNBR for the cyclical ride higher...
To us, the risk reward is skewed significantly to the upside, our $3.65 mid-cycle estimate still has [earnings before interest and taxes] margins well below normalized levels... an activist and two new board members should ensure the right moves are made on the cost side until the cycle officially turns.
This stock is too speculative for me – I prefer betting on turnarounds with positive earnings and free cash flow ("FCF"), like Helen of Troy. But I wouldn't bet against Findley pulling another rabbit out of her hat!
2) The story is similar, though not as extreme, with furniture maker Lovesac (LOVE)...
Its stock has also been on a (somewhat lesser) wild ride since it went public in 2018. It's now down "only" 83% from its all-time high in mid-2021:
To my surprise, revenues have remained stable. But net income has plunged by 85% since its 2021 peak – although, importantly, it remains positive (I always prefer to bet on turnarounds of profitable companies):
The cash-flow statement is... well... weird. And I don't like the fact that its FCF has turned (slightly) negative:
Similarly, I don't like its trend of rising net debt – though $168 million is a modest amount:
At yesterday's close of $15.99 per share, the company has a market capitalization of $223 million and an enterprise value of $391 million.
Analysts expect the company to earn $1.36 per share in this fiscal year (ending February 1) and $1.96 the following year. So its price-to-earnings ratio is 11.8 times this year's estimates and 8.2 times next year's.
But I think analysts are stretching when they project Lovesac's earnings to grow 44% in the next year. I'd need to get more conviction about the prospects for the business before I bet on the stock turning around.
However, like SNBR, LOVE is likely very levered to a recovery in the housing market, as new homes and new furniture go hand in hand.
Best regards,
Whitney
P.S. Our offices are closed on Monday in observance of Martin Luther King Jr. Day. Look for my next daily e-mail in your inbox on Tuesday, January 20.
P.P.S. Continuing my series on my recent trip to South Africa with my parents...
From Cape Town, in the southwest corner of the country, we flew to the northeast corner and saw the beautiful Blyde River Canyon, the third-largest canyon on earth. The next day, we went on a boat trip on the reservoir in the canyon and then drove to a scenic overlook:
