Shares of mattress company Sleep Number (NASDAQ: SNBR) dropped today, and the reason might not be immediately apparent. U.S. gross domestic product (GDP) grew more than expected in the third quarter, and this could actually have negative ramifications for the company. That's why the stock was down 10% for the day.
What does GDP have to do with Sleep Number?
Sleep Number is a premium mattress company. Because it is a premium product, its mattresses tend to be priced higher than average. This higher cost of ownership means most consumers finance their purchases from Sleep Number -- 53% of net sales in 2022 were financed by just one company: Sleep Number's partner Synchrony Financial.
Many economists were starting to predict that the Federal Reserve would stop raising interest rates. However, with U.S. GDP growing faster than expected, the Federal Reserve might choose to raise interest rates at least once more to cool things down.
Here's the problem for Sleep Number and other companies that rely on consumer financing for sales: Higher interest rates increase monthly payments. And this could push the company's mattresses outside many consumers' budgets. It appears this is what the market is thinking about and why Sleep Number stock fell today.
Also a concern is, perhaps, Sleep Number's debt load. Higher rates have resulted in higher interest expenses for the company.
SNBR Total Long-Term Debt (Quarterly) data by YCharts.
How tough is the road ahead?
Sleep Number manufactures its mattresses after receiving orders. So, right now, it's working through a backlog of orders. This interesting aspect means there's a slight lag between the current economic reality and the company's financial results. Therefore, it's actually possible that it could hit its financial targets even if the Federal Reserve makes another move.
For 2023, Sleep Number expects sales to fall by a single-digit percentage and for the company to earn $100 million in operating cash flow. If it can hit those numbers, the stock looks attractively priced for the long term, considering its market capitalization is only $381 million.
That said, higher interest rates could have a bigger impact on Sleep Number's business eventually. And that's something for shareholders to monitor.
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Synchrony Financial is an advertising partner of The Ascent, a Motley Fool company. Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends Sleep Number. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
