Sleep Number (SNBR), a retailer of smart mattresses, is trading sharply lower today despite reporting Q1 EPS upside. EPS in Q1 jumped 54% yr/yr to $0.80, which was better than market expectations. Revenue rose 9.7% yr/yr to $426.5 mln, which was slightly below market expectations. SNBR also reaffirmed guidance for FY19, as it continues to expect EPS of $2.25-2.75 and revenue growth of +6-10%, which we compute as $1.62-1.68 bln. Same store comps came in at +5%.
So why is the stock down despite the EPS upside? We think a few things are going on here. While SNBR's revenue miss was small, it was the company's first revenue miss in six quarters. SNBR tends to beat revenue expectations, usually not by large amounts, in the 1-2% range, but a miss here seems to have concerned investors a bit.
There was also some negative commentary on the call last night. SNBR noted that "the overall industry is providing...a fair amount of weakness." The good news is that SNBR also said it was taking market share by "leaning in" during the weakness. SNBR also said it "intends to continue to take share."
SNBR also said that while it expects Q2 operating profit to be up yr/yr, it also expects EPS to be lower. This sounds like it's due to SNBR lapping a one-time tax benefit of $0.08 per share last year so this does not sound like a non-GAAP comparison. Still, this is being viewed negatively.
On the positive side, customer traffic was quite strong in the quarter. This may be a surprise to some investors as many retailers have noted traffic declines, especially at malls. SNBR has overhauled its direct-to-consumer distribution strategy, ending 2018 with a healthy portfolio of 579 stores, 41% more than six years ago. Of note, SNBR has significantly lowered its mall exposure as its store base has shifted from 19% non-mall locations six years ago to 63% at the end of 2018.
In sum, despite the slight revenue miss, the numbers were not really that bad. It seems that a combination of some worrisome comments by management on the call, coupled with a strong move in the stock in recent weeks (+30% since mid-February) is causing investors to lock in some profits here.