Sleep Number's Urgent Turnaround in a Slowing Mattress Market

Sleep Number's third-quarter 2025 results painted a stark picture, underscoring significant operational headwinds. Revenue plummeted 19.6% year-over-year to $343 million, while the company reported a loss of $1.73 per share, missing analyst expectations of a modest $0.15 profit. This disappointing performance triggered a sharp 27.8% decline in its stock price.

The financial pressure was compounded by a contraction in gross margins. Margins fell to 59.9%, marking a 93-basis-point decline from the prior year period. Management attributed this margin erosion primarily to sustained competitive pressures in the mattress market and broader macroeconomic challenges affecting consumer spending. These factors weighed heavily on both top-line growth and profitability.

Industry context reinforces the severity of Sleep Number's challenges. The broader U.S. mattress market is projected to contract significantly in 2025, falling 5.5% in units and 3.5% in shipment value year-over-year. While a rebound is forecast for 2026, with units expected to rise 3% and values 5%, Sleep Number's current performance appears to be deteriorating faster than the overall market trend, intensifying concerns about its near-term trajectory. The company's turnaround plan hinges on a 2026 product refresh focused on affordability and broader appeal, alongside a revised bank agreement and $115 million in cost reductions.

Turnaround Mechanics & Competitive Edge

Sleep Number's 2026 turnaround hinges on a multi-pronged strategy addressing recent market headwinds. The company suffered a sharp 19.6% sales drop in Q3 2025 and saw gross margins fall 93 basis points, triggering a 27.8% stock decline. Management's response centers on a product refresh focused on affordability to counter the mattress industry's 3.5% shipment value contraction. This initiative is underpinned by $115 million in cost reductions and a revised bank agreement providing critical liquidity runway according to the earnings call transcript. Analysts remain cautious, noting persistent risks from aggressive competition and ongoing consumer spending shifts, though management expresses confidence in stabilizing sales and executing the turnaround.

Sleep Number's core technology-its adjustable air-chamber beds-offers distinct advantages over Tempur-Pedic's fixed memory foam designs.

. The p5 Smart Bed allows personalized firmness settings (1-100 scale), making it particularly appealing to couples with differing comfort preferences. This adaptability is a key differentiator against Tempur-Pedic's consistent, medium-firm (6.5/10) experience. However, this innovation comes at a premium; Sleep Number's high-end models cost approximately $5,000 more than Tempur-Pedic's luxury options. The affordability refresh aims to lower this barrier, but execution risk remains high. Successfully scaling the smart bed's value proposition to broader, value-conscious segments while maintaining margins is unproven and could strain resources.

The strategy faces significant competitive and macroeconomic challenges. Sleep Number's position in the premium segment became vulnerable as the broader mattress market entered a contraction phase, projected to decline 5.5% in units and 3.5% in value in 2025. While a modest rebound is forecast for 2026 (+3% in units, +5% in value), consumer demand is expected to remain highly price-sensitive. Sleep Number's ability to regain share hinges on convincing customers that its adaptability justifies the higher cost, especially against Tempur-Pedic's established brand loyalty and fixed-firmness appeal. The success of the affordability-focused product refresh in restoring growth momentum remains the pivotal test for the turnaround plan.

Market Position & Competitive Dynamics

Sleep Number sits in the midst of a growing but crowded mattress market. The specific mattress segment is forecast to expand modestly, reaching $12.3 billion by 2033, up from $9.13 billion in 2024, growing at a 3.37% compound annual rate. However, Sleep Number's 2024 revenue of $1.72 billion places it significantly behind mass-market retailers dominating the broader $27.4 billion U.S. bed and mattress industry according to industry analysis. This segment is highly competitive, with players like Serta, Tempur Sealy, and Casper vying for shelf space, while Walmart and Costco leverage their pricing power, squeezing profit margins across the board.

Despite the growth potential, Sleep Number's market share within the mattress segment remains modest compared to these mass retailers. Its higher-end positioning faces constant pressure from retailers that can offer lower prices, especially amid rising costs for imported materials like foam and steel, which threaten already thin profit margins, currently around 0.8% for Sleep Number. The company's reliance on premium features and brand differentiation becomes crucial but also introduces execution risks. Successfully scaling smart technology integration and sustainable product lines is vital for growth. Yet, translating these innovations into widespread consumer adoption while managing supply chain volatility and raw material costs remains a significant challenge. The path to capturing a larger share hinges on overcoming these frictions.

Risk Framework & Catalyst Assessment

Sleep Number's turnaround ambitions face significant headwinds that could derail expectations. Rising interest rates threaten the core driver of mattress demand: discretionary durable goods spending. While the broader U.S. mattress market is projected to grow steadily, this growth assumes stable borrowing costs. Higher rates could dampen consumer willingness or ability to purchase big-ticket items like premium sleep systems, directly impacting Sleep Number's top line when its new products launch. The company's 2026 product refresh success hinges critically on achieving a penetration rate acceleration beyond the broader industry's recovery pace. Current industry narratives emphasize growth from e-commerce expansion and premiumization, but lack concrete data on Sleep Number's current market share or the specific penetration gains needed to justify its valuation. Achieving this requires not just product appeal, but overcoming entrenched competition from mass retailers like Walmart and Costco, which wield significant pricing power. Furthermore, Sleep Number's thin 0.8% profit margin in 2024 creates immense vulnerability to input cost inflation, particularly tariffs on key imported materials like foam and steel. Even modest tariff increases could erode margins quickly, a risk amplified by ongoing supply chain volatility. These factors collectively suggest the path to margin improvement envisioned by some analysts is far more complex and uncertain than surface-level optimism suggests.

These challenges are not theoretical. The mattress industry's recent 3.7% revenue growth to $27.4 billion in 2025 masks significant cost pressures. Tariffs on imported inputs directly conflict with Sleep Number's need to maintain profitability while competing on price with retailers and other brands. While product innovation and online sales are strategic priorities, their success is contingent on navigating interest rate sensitivity and achieving exceptional market share gains. The 3.37% market CAGR projection provides a baseline, but the actual performance gap between Sleep Number and its competitors will determine if the company can translate market growth into sustainable profits. Without clear evidence of a distinct strategy to overcome pricing pressure and tariff impacts, the margin improvement thesis remains exposed to significant risk.