Like any crisis, the coronavirus is creating winners and losers. Some of these are obvious, like the weak travel sector and the strong e-commerce sector. One less obvious winner will be the mattress sector due to a strong housing market and a shift in household spending.
Even before the coronavirus, housing was in a good position due to stable demand driven by low rates and demographics. Housing supply was near low levels due to years of reducedconstruction following the wreckage of the housing bubble.
Into this already bullish mix, the coronavirus led to a surge in demand as people escape the cities for suburbs and rural areas with more space, lower cost of living, and an increase in remote work opportunities.
Strength in housing is evident from recent economic data like mortgage applications and permits which are already back at 90% from pre-coronavirus levels. Anecdotally, reports from Redfin, an online real estate brokerage, show there are bidding wars in many areas, website traffic is above pre-coronavirus levels, and homes are selling above their listed price by an average of 3%.
When people buy new homes, they also tend to buy new mattresses. Another supportive development for mattress stocks is that people are shifting their spending towards upgrading their homes since they are spending more time at home. Additionally, a big chunk of spending on going out, vacations, and other activities have essentially disappeared. Some of it will be redirected towards household goods.
There was concern that the economic uncertainty would negatively affect demand for housing and discretionary items. So far, this is not the case. Job losses have been contained to lower-income groups. During March, April, and May, only 9% of job losses were for the top 25% of earners. Additionally despite the weakness in many economic indicators, fiscal stimulus has ensured that household incomes have remained stable through the initial phase of the crisis.
Sleep Number Corporation (Nasdaq: SNBR)
Sleep Number is known for its innovative products. It currently has a “smart bed” that automatically adjusts the bed’s elevation and firmness. The company has impressive gross margins of 62%. In the first quarter despite 80% of its stores being shut down, it still managed to grow revenues by 11% in the first quarter versus 2019’s first-quarter. This is an indication of the company’s strong online footprint in addition to the resilient demand for mattresses.
Casper Sleep (NYSE: CSPR)
Casper is a primarily, online seller of mattresses. It was a hot startup for many years, but its momentum has stalled as a public company. However, it is perfectly positioned for the current moment. Millennials make up the bulk of new homebuyers, and they are much more comfortable making a major purchase online without seeing or touching the product. This is especially the case since Casper offers 100 days of a free trial on most of its products.
Casper IPO’d in February at $14. It bottomed just under $4, and since then, it’s more than doubled. Like many startups, Casper is focused on gaining market share in the near-term and is expected to lose money over the next couple of years.
Tempur Sealy International (NYSE: TPX)
Like most stocks, Tempur Sealy got crushed during the coronavirus crash, as it declined nearly 80%. Since then, the stock is up 200% and is off 30% from its previous highs. However, the company sports attractive fundamentals. It’s growing sales 19% on a year-over-year basis compared to the 4% of the average stock in the S&P 500. Its gross margins at 19% are also higher than the S&P 500’s 6%.
Despite these stronger fundamentals, it’s cheap relative to the S&P 500. It has a P/E ratio of 17 and a forward P/E of 14.4. Compare this to the S&P 500’s price to earnings ratio of 22 and forward P/E of 21. This makes the stock attractive, in a vacuum, but the looming catalyst of a stronger than expected demand could take the stock back above its previous highs.
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shares were trading at $306.84 per share on Thursday afternoon, up $2.75 (+0.90%). Year-to-date, has declined -3.68%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Patrick Ryan
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles.
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