Why Select Comfort's Shares Dropped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of specialty mattress manufacturer Select Comfort (Nasdaq: SCSS  ) were causing investors to toss and turn as they fell as much as 11% in intraday trading after the company reported first-quarter results.

So what: In an interesting twist, Select Comfort managed to beat analysts' estimates on both the top and bottom lines, but shares still fell. For the first quarter, the company tallied total sales of $262 million versus the estimated $234 million. Earnings per share were $0.45, easily above the $0.40 average estimate from Wall Street.

The concern may be that while the company notched solid growth, both gross and operating margins fell as the company's cost of sales climbed. Investors may worry that higher costs could crimp future growth.

Now what: Based on the company's projection of earnings per share of $1.38-$1.46 for all of 2012, investors are paying a reasonably high price for Select Comfort's shares. Recent growth, including the 35% year-over-year jump in net income in the first quarter, makes a rich price seem more reasonable, but it will also keep investors on edge if there are signs that growth will stall out -- an issue that's hit the company in the past.

That said, the first quarter looks pretty darn good and it makes me wonder whether investors are overreacting here.

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Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


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  • Report this Comment On April 19, 2012, at 4:39 PM, gaurav9 wrote:

    I surely think Matt, investors are over reacting. It went down to $31.30 just to close at $33.68, that tells something.

    Gross Margins dropped from 63.8 to 62.6 and thats not bad. Whats also important is, they increased the guidance to 1.38- 1.46 for the year and they also mentioned buyback, even if modest.

  • Report this Comment On April 20, 2012, at 2:17 PM, Hope4Change2012 wrote:

    My two cents, I think it tanked yesterday because it has basically gone straight up for 3-6 months now and was overdue for a pullback and some profit-taking.

    I think it is down big again today in concert with TPX which is falling 20+% after their earnings.

    It is the same profit machine it was 2 days ago and will probably be back in the green on Monday after people get a good weekend's rest.

  • Report this Comment On April 23, 2012, at 7:21 PM, Hope4Change2012 wrote:

    Did I call it or did I call it, back up 4.5% today...and the overall market was way down. Green pastures ahead.

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