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Sleep Number Hides $102 Million Off Balance Sheet, Understates Liabilities by $72.4 Million
Mattress maker’s liabilities are artificially low due to an inflated discounted rate.
May 4, 2022
In its latest quarterly filing, Sleep Number (SNBR), a mattress maker, disclosed it discounts operating leases by 6.0%. This rate is significantly higher than the 2.2% interest rate the company pays on its credit facility and its bedding peers, which report the following discount rates in recent filings:

—MFRM: 11.3%
—TPX: 4%
—LEG: 2.7%
—CULP: 2.39%
—BIG: 4.3%

Using an inflated discount rate hide’s a firm’s true liabilities from investors.

Sleep Number reports $493.9 million in future operating lease obligations. The present value of those obligations, according to Sleep Number, is $412.5 million. However, the footnotes reveal $102 million in not yet commenced future lease obligations Sleep Number doesn’t include on its balance sheet. Under an accounting loophole, companies can omit from the balance sheet leases that haven’t started.

If we add this liability back and use the blended average discount rate for Sleep Number’s peer group— 4.93%— we calculate a lease liability of $484.9 million. It means Sleep Number is understating the present value of its lease liabilities by approximately $72.4 million, or 14.9% of its future operational lease obligations and 5.2% of total liabilities.
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