Some Sleep Number Corporation (NASDAQ:SNBR) Shareholders Look For Exit As Shares Take 28% Pounding

Sleep Number Corporation (NASDAQ:SNBR) shares have had a horrible month, losing 28% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 47% share price drop.

Although its price has dipped substantially, it's still not a stretch to say that Sleep Number's price-to-sales (or "P/S") ratio of 0.1x right now seems quite "middle-of-the-road" compared to the Specialty Retail industry in the United States, where the median P/S ratio is around 0.4x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Sleep Number

How Has Sleep Number Performed Recently?

While the industry has experienced revenue growth lately, Sleep Number's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Sleep Number.

How Is Sleep Number's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Sleep Number's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 13% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 6.2% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 1.6% per annum during the coming three years according to the five analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 5.6% each year, which is noticeably more attractive.

With this in mind, we find it intriguing that Sleep Number's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

Sleep Number's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

When you consider that Sleep Number's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Sleep Number (2 are significant!) that you should be aware of before investing here.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com