10-Minute Investment Autopsy No. 20: Sleep Number (SNBR)
When innovation isn’t enough.
If you haven’t read the guide to the 10-Minute Investment Autopsy series, you can find it here.
The Original Thesis
Who: Jim Larkins
When: September 2013
What: Sleep Number (ticker: SNBR)
The Thesis:
Unique product concept that addresses a key sleep-related problem, which is partners who don’t like the same kind of mattress
Vertically integrated model with manufacturing and distribution via their own stores providing superior margins
Healthy cash flows that can be used to self-fund growth
Temporary execution problems around media advertising
Sleep Number mattresses address a premium segment of the market which is taking share and therefore growing faster than the industry
Additional store potential provides another avenue for growth, leading to 5%-6% square footage growth
Potential for new product rollouts
Thinks the company can grow profits at 20% per year for the next 2 years, then low-teens after that
Shares are inexpensive at 15x Jim’s 2015 estimate of $2 in EPS and he thinks that the multiple should expand to 17x-18x
These are the highlights of Sleep Number’s then-recent financials up to the point when Jim was presenting his thesis:
This is the stock chart up to the time when Jim presented his thesis:
Pause here. Think through the thesis and the facts and decide what you agree with, what you disagree with and whether you would invest based on the information available.
What Happened (Just the Facts)
Over the 5 years following Jim’s 2013 interview, Sleep Number’s stock produced an annualized total return of 12% vs. 14% for the S&P 500
There is a lot more to the case:
The Autopsy - the reasons for what happened
The Lessons that you can apply to your own investing
Discussion Questions for you to think about and discuss with other thoughtful investors in the weekly case thread