Bedding company Sleep Number has filed for bankruptcy protection after struggling with consistent sales decline, market share loss and financial strain.
The 40-year-old Minneapolis-based retailer initiated a voluntary Chapter 11 sale process last week to facilitate a merger with Sleep Country Canada. Under the agreement, the Canadian brand is the stalking horse bidder, although the proposed transaction is subject to higher and better offers.
According to GlobalData MD Neil Saunders, Sleep Number has been on a path to failure for some time, given the prolonged sales slide and poor cash flow.
In its most recent quarter, net sales fell 19 per cent to $319 million, and net loss widened to $50 million from $9 million the previous year. The company previously planned to close up to 50 stores and slow down the rate of new store openings and remodels amid poor results.
“The company has found itself in a difficult part of the market due to consumers delaying mattress purchases and shopping around for cheaper options. Even so, Sleep Number’s performance has been materially worse than rivals, and it has lost an excessive amount of market share.
“If the underlying capital structure of the business had been solid, it would have bought Sleep Number more time and space to enact a turnaround. Unfortunately, this was not the case as, even with recent agreements with lenders, the company lacked the liquidity to sustain an ongoing slide in revenue,” Saunders said.
“There is also a point to be made about the business model Sleep Number employed,” he continued. “When the market is robust, having your own stores as a sales channel is sensible and allows share gains to be maximized. However, when the market turns sour, those stores become a burden because their costs are not being covered by the sales volumes they deliver.”
The analyst said the sale of the business is sensible, as it remains a relevant brand with products that have some value. He added that the company needs to be part of a bigger group with more financial firepower and better distribution to survive.
During the Chapter 11 process, business will be as usual at approximately 572 Sleep Number stores and its online channel.
The company expects to secure up to $260 million of debtor-in-possession financing, including up to $65 million in new financing, to support its operations.
