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This week, shares of the three leading mattress manufacturers, Select Comfort (NASDAQ: SCSS ) , Mattress Firm (NASDAQ: MFRM ) , and Tempur Sealy International (NYSE: TPX ) , fell precipitously as Select Comfort led the way with an over 23% decline. The reason behind the large drop in share price can be attributed to Select Comfort reporting earnings per share (EPS) of $0.36 for its most recent fiscal quarter, as compared to $0.46 during the same quarter a year ago. This was also down from the $0.43 per share that analysts expected.
In another article I wrote on the topic, I outlined why the company saw lackluster earnings and discussed how bad the company's situation really is compared to what Mr. Market is making it out to be. My conclusion was that things aren't great for the company right now, but it is very possible that investors are overreacting to the news and that now may present a buying opportunity for investors who agree (though those who can't handle the risk should not consider investing.) To further discuss the matter, I decided to write another article pitting the company's performance over the past few years up against the performance of its peers in the hope of illustrating which mattress manufacturer will likely be superior moving forward.
Growth! Growth!! Growth!!!
Over the past three years, all three mattress manufacturers have seen attractive growth. You can see this in the table below:
From a revenue perspective, all three performed quite well. Mattress Firm outperformed its peers as it saw its revenue grow 103.6% from $497.3 million in 2010 to $1 billion in 2012. Select Comfort also had explosive (but less impressive) growth, seeing its income grow 54.4% from $605.7 million to $935 million over the same time horizon. Tempur Sealy saw its revenue rise 26.9% from $1.11 billion to $1.4 billion.
Mattress Firm outperformed its peers from a net income perspective as well, rising 13,200% from $0.3 million in $39.9 million as the company was able to gain economies of scale. Likewise, Select Comfort also performed well, seeing its net income rise 147.2% from $31.6 million to $78.1 million. The only loser over this time period appears to be Tempur Sealy, which has been negatively affected by an increase in its selling, general, and administrative expenses as a percentage of its net sales, thereby resulting in a net income decline amounting to 32.1%.
Is growth really all that matters? I think not!
Growth is usually a good sign that business is flourishing, but it's not all that matters. In fact, it's not even the most important determinant of a company's success; margins are. When looking at these three companies, the margins I found most interesting were the net profit and free cash flow margins.
In regard to net profit margin, Select Comfort saw the greatest improvement; its net profit margin rose from 5.2% in 2010 to 8.4% in 2012. Although this is nice to see, its three-year average net profit margin of 7.2% is below Tempur Sealy's 12.4%. However, while Tempur Sealy's average net profit margin has been superior over time, it's worth noting that it dropped to 7.6% in 2012 and has since fallen into negative territory as of the company's most recent fiscal quarter when placed next to the same quarter a year ago. Meanwhile, Mattress Firm has seen its net profit margin jump around quite a bit from a low of 0.1% in 2010 to a high of 4.9% in 2011. The company comes up with a disappointing three-year average of 2.8%, signaling that it's increasing its revenue by undercutting its peers, not necessarily by offering a superior product.
Just as with each company's net profit margin, we see a similar trend from their free cash flow margins. Tempur Sealy came out on top again, boasting a three-year average free cash flow margin of 13.5% (though this metric has declined to 9.9% as of its 2012 fiscal year end.) Select Comfort came in second place with a three-year average of 8.3%, though unlike with its net profit margin its free cash flow margin has been on the decline every year (to a low of 5.2% in 2012) as it invests more heavily in capital expenditures. Coming in last is Mattress Firm's 3.6% average, which can also be attributed to increased capital expenditures.
Based on this analysis, we can conclude that each company has experienced attractive growth but that they all have weaknesses when it comes to profitability. Yes, Mattress Firm has been growing the fastest, but the idea that it is doing so by undercutting its peers and hindering its ability to significantly profit from its sales is somewhat disconcerting. On the other hand we have Select Comfort, which has been increasing its profitability while simultaneously increasing its investments in growth initiatives. Likewise, Tempur Sealy seems to be following the same trend as Select Comfort in regards to higher profitability and investment initiatives. Its decision not to invest a larger portion of its free cash flows may indicate that it's not enjoying the same long-term outlook for the industry, however.
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