Sleep Number cuts costs after sales fall, but it may not be enough

Sleep Number's jaw-dropping fall over the past two years has wiped out more than 90% of the company's shareholder value, prompted layoffs of 500 people and will lead to 40-50 store closings.

Why it matters: The bedmaker is one the Twin Cities' top corporate employers, with hundreds of workers based at its downtown Minneapolis headquarters. Its ability to right the ship is vital to those jobs.

By the numbers:

• Sleep Number's share price on March 1, 2021: $150.
• Sleep Number's share price Nov. 14, 2023: $11.65.

What happened: The company, which declined to comment, lost money last quarter and bowed to some of the demands of an activist investor, Stadium Capital Management. Stadium Capital laid out the missteps it says CEO Shelly Ibach and other company leaders have made.

Details: When bed sales boomed during the early part of the pandemic, the leaders repurchased stock, believing it was worth more than what investors said. Stadium Capital said Sleep Number failed to realize the pandemic boom wouldn't last.

• Once the pandemic ended and the housing market cooled, sales of mattresses declined in part because bed sales are often tied to home purchases, which have slowed due to interest rates.
• Stadium Capital said Sleep Number spent far too much money on research and development. Competitor Tempur Sealy International spends half as much on R&D while generating four times the sales, it said.

Threat level: Seth Basham, analyst for Wedbush Securities, wrote in a report last week that Sleep Number's "bloated" costs and high debt "leaves it with little room to absorb negative demand fluctuations."

What they're saying: "They just guessed wrong," University of Minnesota business and law professor Paul Vaaler told Axios."A lot of CEOs and companies made some bad moves at the end of the pandemic. They're not alone."

What we're watching: How Sleep Number returns to profitability. The good news is that the International Sleep Products Association is forecasting mattress sales to rebound next year as home sales pick up and inflation cools.

Zoom in: Vaaler said the company has several levers it can pull. It could further slow down on new store growth, pump the brakes on advertising and spending, and begin discounting its large inventory of mattresses.

Yes, but: If none of those things do the trick, Vaaler said Sleep Number may have to make changes to its vertically integrated business model, in which it internally controls the development, manufacturing, distribution, and retailing of its beds.

• That could mean franchising Sleep Number stores, outsourcing research and development, or moving manufacturing overseas.

Quick take: All three of those things, especially R&D, were vital to the company's booming sales under the leadership of Ibach.

• Ibach's investment in creating the 360 Smart Bed that adjusts during sleep was a huge winner for the company following its 2017 launch.