A ten bagger in your sleep? (Part II): Sleep Number Company $SNBR vs Purple Innovation $PRPL

Things are starting to move pretty quickly in this frothy market. When I wrote about Purple Innovation (PRPL) on August 2nd, the price was $0.80, and it has since rallied to $1.04 in about two weeks. Also, for those of you who took the plunge with PRPL, management updated their executive compensation plan so that their stock options vest immediately if they are fired without cause.

It looks like they are preparing their golden parachutes for a merger or a sale. In my writeup two weeks ago, I didn’t put a high likelihood that they would sell the company, due to Coliseum’s 47% ownership and approximately $4.50 per share cost basis. But if management is changing rules to gild their exit, then odds of a sale are much higher than I had believed. Either the offer is really good, or Coliseum is reaching year 5-7 of their investment and will take an exit even at a loss to their cost basis. Alternatively, there could be a deal for some sort of strategic partnership which changes control, 50% ownership, but allows for PRPL to stay publicly traded.

I did start a position in PRPL, but it looks like that capital will be recycled sooner rather than later. Which is a shame because I wanted to hold on for enough years to get that 5x to 10x return that is possible when they are in 20,000 showrooms and the economy is booming from rate cuts. I am emotionally preparing myself to have my multibagger yanked away from me prematurely.

But the recent momentum in the market isn’t limited only to Purple, it looks like the mattress sector generally has caught the attention of Wall Street. It appears that US mattress revenue, especially specialty mattress revenue, is much more resilient to economic slowdowns than other aspects of the furniture market. Both in the Great Recession and in the post-Covid durable goods pull-forward, mattress sales collapsed less and rebounded faster than other types of furniture. This is due to mattresses being more of a necessity than a luxury, wearing out more quickly than wooden furniture, and a better availability of financing options for mattresses versus other types of furniture financing.

I had planned for Part 2 of this series to be about Sleep Number Company (SNBR) when the price was still $7.52, and not $10.68 as it is today. These markets are moving pretty fast, which is why I have been focusing more on buying stocks that have collapsed on an overreaction to earnings. But it probably isn’t terrible to chase something that has already left the launchpad, that’s what the technical crowd does and they are being rewarded for it in this environment with a larger percentage of commodity trading algorithms causing the momentum factor to be a permanent aspect of the marketplace.

Sleep Number has trailing twelve month revenues of $1.5 billion, and a peak of $2.2 billion from 2021. Purple has trailing twelve month revenues of $450 million and a peak of $730 million also in 2021. Sleep Number’s revenue has held up better than Purple’s over this time, and Sleep Number’s price to sales ratio of 0.16x is lower than Purple’s 0.25x. Sleep Number’s peak price to sales ratio of 2.05x is even better than Purple’s peak of 1.87x. So purely by the numbers, Sleep Number might even be a better opportunity than Purple.

The big difference is that Purple has the more clearly defined actions for their turnaround strategy with new partnerships from Mattress Firm and an unknown partner, probably Ashley’s Furniture. That is a clear path to add 20,000 show rooms by 2026 off of their lower base revenue.

The other big difference is the mattresses themselves. Purple has a patented hyper-elastic polymer that was designed for the medical industry, specifically reducing bed sores and making things comfortable for burn victims. Sleep Number’s claim to fame is that the softness or firmness of the two halves of the bed can be independently adjusted when couples disagree about how they prefer to sleep.

For both companies, the highest end model can cost around $6,000 for a king size bed, so they both occupy the same luxury niche for the K-shaped economy thesis. Purple might have a disadvantage catering to overweight individuals, but might have an advantage catering to the baby boomers as they enter extreme old-age and have a greater concern about bed sores. Sleep Number has an advantage in brand recognition after years of more consistent advertising.

Sleep Number has a much higher debt burden than Purple. Purple has about $100 million of debt, most of that a PIK, held by the 47% shareholder Coliseum Capital. Sleep Number has $563 million of borrowings under a revolving credit facility, with room to draw an additional $101 million on the facility, but not with room on the debt covenant, which they are just butting up against. The weighted average interest rate on the facility is 7.9%, which I assume means SOFR + 3.5%, as revolvers are almost always floating rate.

Sleep Number has a new CEO who started in April of this year, Linda Findley, formerly of Blue Apron. On the Q1 2025 earnings call, she outlined her plan going forward with Sleep Number, which includes a 21% reduction in corporate management roles. Another aspect of the plan going forward is a $80 to $100 million of cost reduction, with research and marketing budgets heavily targeted. While I am a huge advocate of cutting General and Administrative expenses, I am somewhat suspicious that those cost cutting initiatives could improve profitability in the short run, but hurt market share in the long run.

Findley appointed a new chief marketing officer, Amber Minson, to lead a data-driven marketing strategy, and is searching for a new CFO as it appears Findley squeezed out the old one. I am cautiously optimistic, but with reservations, about this new leadership team. They have experience in the faster-moving world of tech, Linda Findley initiated her leadership of SNBR with an inside purchase of $750,000 at $7.19 per share, and even the interim CFO bought $100,000 worth as well. However, Blue Apron had been a melting ice cube since the IPO in 2017. Linda Findley started in 2019 and emphasized cost cutting to improve margins, the success of which is hard to judge because competition ramped up over that time period, and Blue Apron stopped growing.

Under both Findley and Minson, Blue Apron dramatically changed the marketing strategy, but with a much smaller budget. Influencers were a part of the new strategy, as well as traditional marketing channels. Here is an example of the Findley / Minson Blue Apron marketing material:

Here is the revenue and gross profit of Blue Apron for the relevant years:

2019: $454.87 Million Revenue, $175.73 Million Gross Profit, -$61 Million Net Loss

2020: $460.61 Million Revenue, $177.68 Million Gross Profit, -$46 Million Net Loss

2021: $470.38 Million Revenue, $168.61 Million Gross Profit, -$88 Million Net Loss

2022: $458.47 Million Revenue, $153.89 Million Gross Profit, -$109 Million Net Loss

2023: $424.92 Million Revenue, $154.44 Million Gross Profit, -$111 Million Net Loss

Does this new leadership team have what it takes to run Sleep Number? My jury is hung. But I do believe the mattress industry will enjoy macro tailwinds, and I am in favor of axing excess corporate management. On the Q2 earnings call, the cost savings strategy was updated to target $130 million of annual cost reductions. My gut reaction is to date Sleep Number for a return to a more reasonable price to sales ratio, but not to marry it in the hopes of a year over year growth trajectory.

A company undergoing an enormous transition is a bit like Forest Gump’s box of chocolates. It might be the case that we don’t know what we are going to get, but the likely outcomes are a little bit more narrow. The leadership team did stabilize Blue Apron during the years it faced increased competition, but their tenure can hardly be hailed as a smashing success. I believe I can expect this management team to stop the bleeding and to return SNBR to profitability and pay down debt. That outcome should cause a multiple rerating off of these lows.

Between Purple Innovation and Sleep Number, I have a clear favorite, and it is Purple. I prefer that management team’s strategy, the steps they have taken to implement their strategy are much farther along, and there is already evidence of positive results. Sleep Number’s transition is still very early, and there is much less evidence to measure them by. But it is very likely that Purple will get yanked away from me before it can reach my target multiple expansion, meanwhile, macro tailwinds will probably turn Sleep Number into a success, possibly despite the new management team and not because of it.

While I might have my reservations on Sleep Number, hedge fund Stadium Capital Management, with 11% ownership of SNBR had this to say in a 13D filing:

“During 2023 and 2024, the Reporting Persons expressed their deep concerns about the Issuer's corporate governance and operational leadership, privately at first, and publicly after being left with no other choice. The Issuer has since made significant changes to its Board and leadership team. With a smaller and more effective Board, and with the hiring of the Issuer's new CEO, Linda Findley, the Reporting Persons believe the Issuer is now positioned for operational success and appropriately focused on unlocking the massive potential for shareholder value creation. The Reporting Persons have met extensively with Ms. Findley and her new team over the last several months and are deeply impressed by Ms. Findley, her strategy and the turnaround actions the Issuer has taken under her leadership. Ms. Findley and the newly configured team are executing with sharp focus and an urgency appropriate for the situation. The turnaround of the Issuer is well underway. The Reporting Persons have always admired the Issuer's differentiated products, powerful distribution channel strategy and loyal customer base. The Reporting Persons now believe the Issuer is set to exploit these real advantages. The Reporting Persons fully support Ms. Findley and her team and look forward to working constructively with her and the improved Board.”

Also, M Partners Fund just announced that they increased their stake in Sleep Number from 6.78% to 9.94%, just below the immediate reporting threshold so that they could take the usual 45 days to report the trade. I think it’s safe to say that the professionals also believe that Findley can cut costs and manage the debt burden.

The consensus for Q3 2025 is for revenues of $364 million and earnings per share of $0.16. The twitter personality Convexititties, CFA, who was early on calling attention to SNBR, has a detailed model posted on his timeline with target revenues of $390 million and earnings per share of $0.40. A return to positive GAAP net income would be a huge catalyst for the stock, but is possibly already being priced in with the recent share price rally from $7.52 to $10.68. Still, today’s market feels like a market where momentum will be rewarded.

Unless Sleep Number returns to a growth trajectory, the prior peak price to sales ratio of 2.0x is probably off the table. But there is a lot of room for multiple expansion from 0.16x price to sales to 0.5x or even 1.0x. At 0.5x price to sales and revenues flat at $1.5 billion, SNBR’s share price would be $32. At 1.0x price to sales and revenues of $1.8 billion, down from the peak but benefitting from rate cuts, SNBR’s share price would be $79. It remains to be seen if this management team has what it takes to reach 1.5x price to sales and revenues of $2.2 billion, which would imply a share price of $145.

Sleep Number (SNBR) $10.68: $79 by the end of 2027