Select Comfort Falls Out of Bed

Select Comfort (Nasdaq: SCSS) shareholders who rolled out of bed this morning, only to find their shares down 14% and selling for $15 a stub, can be forgiven for wondering what the heck happened. Flipping over to Yahoo! Finance, they'd have found nary a word of explanation from the company itself; not a press release in sight.

To learn the source of their waking nightmare, they'd have to search the SEC website for yesterday's 8-K filing, which contained the company's third-quarter business update. Fortunately, it wasn't all bad news.

Just mostly bad
Reviewing the company's "actual business results for the 10-weeks extended through Labor Day, September 3rd," CFO Jim Raabe predicted that Select Comfort would hit only the low end of its own earnings range this year -- $0.87 per share in profit. Worse, for investors subject to the whims of a quarter-by-quarter trading market, Raabe expects to miss analysts' consensus estimate of $0.27 in per-share profit in Q3.

Expect the analysts to revise those numbers posthaste. Unlike Sealy (NYSE: ZZ), where estimates have held firm for the past two months, or Tempur-Pedic (NYSE: TPX), where they've been steadily rising, these numbers are going down. Raabe didn't name an exact number for the analysts to crib, however.

Select Comfort has been frenetically buying up its own shares, repurchasing 2.3 million of them -- 5% of the entire share count. In theory, when a firm removes shares from the market, this should concentrate earnings among the shares that remain, inflating per-share earnings and helping the company beat consensus estimates. But not this time. All the investors' horses, and $37.6 million worth of the investors' money, won't be enough to put Humpty together again.

Meanwhile, on the right side of the bed ...
As I said, the news wasn't all bad. While Raabe admitted that same-store sales turned negative over Labor Day, making it unlikely that comps will be positive this quarter, they do appear likely to come in less negative than in recent quarters. Moreover, gross margin is expected to show "sequential improvement" in Q3. (Translation: They'll be down year over year, but better than last quarter.) By the time the year is over, Select Comfort expects to be grossing at a higher level than the 60.9% margin it achieved last year.

Making the bed
So what are we to make of all this? The profits projections, the share price drop, and all? If we assume Raabe is right about the year-end number (with the year three-quarters over, he should be by now), and consider the18.5% annual profits growth that analysts still expect from the stock over the next five years, I think the stock is valued a bit north of what it trades today. But does that mean Select Comfort is now "cheap?"

Not unless, or until, Select Comfort backs up its words with results on Oct. 24.