Sleep Number set to harvest investment in their 360 Smart Beds

Sleep Number reported strong third quarter results on Wednesday after the stock market closed. Companies generally speak about sales results, but Sleep Number officials were rightfully eager to devote much of their time on the conference call with analysts discussing sales orders in the last seven weeks of the quarter.

During the quarter the Minneapolis-based company finished close-out sales on its old bed models and converted its entire product lineup to its new 360 Smart Beds. Sleep Number started rolling out its new models in the spring of 2017 and September was the first full month of delivering only 360 Smart Beds.

"Now that we are all 360 Smart Beds, It's a new business." Shelly Ibach, Sleep Number's president and chief executive, told analysts on the earnings call.

The 360 Smart Beds include sensors that monitor peoples movements then automatically adjusts firmness, comfort and support and allows users to track their sleep habits.

While net sales for the quarter grew 3 percent to $414.8 million, Ibach was eager to concentrate on sales orders.

"Our business has gained significant momentum since completing the transition to all Sleep Number 360 Smart Beds, including 19% year-over-year sales order growth in the last seven weeks of the third quarter," Ibach said in a statement. "Double-digit sales order growth has continued into October."

Earnings for the quarter were $18.3 million, or 52 cents per share, compared to $25.6 million, or 62 cents per share in the third quarter of 2017.

Because of the order demand at the end of third quarter about a week's worth of deliveries, thus sales, were pushed into the fourth quarter. Adjusting for those delivery shifts and others in the third quarter last year adjusted EPS was 75 cents per share, up 34 percent from adjusted EPS of 56 cents per share in the third quarter a year ago.

While the company faces some headwinds in the fourth quarter and beyond from the impacts of tariffs and increased freight costs they gain important benefits from an all 360 Smart Bed lineup. Transition costs of moving to the new model go away and they can realize efficiencies from their marketing dollars and manufacturing supply chain by concentrating on one model lineup.

Sleep Number's exclusive distribution and products also gives them pricing power which is an important advantage when facing increasing cost pressures.

David Callen, Sleep Number's senior vice president and chief financial officer, summed up his presentation on the quarter's results by looking forward as well. "We are entering our financial harvest after investing more than half a billion to build out the sustainable sleep technology business for the long-term."

Sleep Number reported their results after the market closed Wednesday. On Thursday shares were trading at $35.96 per share, up $5.39 per share of 17.6 percent – making it one of the top performers in the Nasdaq Composite Index.