Select Comfort Gives Investors Sleepless Nights Again

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Once again, Select Comfort (NASDAQ: SCSS  ) is giving investors a reason to stash their money under a mattress instead of investing it in the mattress maker itself.

The company behind the Sleep Number air-chambered beds warned that its holiday sales fell woefully short of its mid-November guidance. Its preliminary read on fourth-quarter net sales is $231 million, a 5% increase over the prior year's period. Comps clocked in flat. 

This wouldn't be so bad if the $0.18 to $0.26 a share in earnings that it was forecasting on Nov. 12 wasn't based on low double-digit growth in net sales with comps at company-controlled stores rising in the mid-single digits. It naturally didn't even come close. Select Comfort isn't providing an initial take on how much it actually earned during the holiday quarter, but it's obviously going to be a lot less than it was originally targeting.

This isn't the first time that Select Comfort has come up short of its own expectations. It seems that a year doesn't go by without a miss or more. We can go back 10 months to find the last time that the shares got slammed on a disappointing business update, and Select Comfort has missed analyst profit estimates in each of the four past quarters. 

Select Comfort offers up that sales began to fall short of internal goals starting on Cyber Monday, but it's not as if premium mattresses are a big part of the holiday gifting process. You don't see too many Sleep Number beds on Santa's sleigh or sitting under a tree. The timing here is merely coincidental since Select Comfort expects the weakness to weigh on the company this year, too. 

"We expect this challenging environment to continue in 2014 and are planning accordingly," CEO Shelly Ibach is quoted as saying in this morning's press release.

Select Comfort remains one of the market's biggest winners since the market bottomed out five years ago. The stock fell as low as $0.19 at the time, and it's been firming up like a Sleep Number setting, heading higher ever since. 

The housing market's revival has been good to mattress makers, but this is still an inconsistent market, where a lot of the growth has come through consolidation. There's a reason Tempur-Pedic joined forces with Sealy to form Tempur Sealy a year ago. It's just easier to realize synergies in a combination. On the retail front, Mattress Firm has spent its two-year tenure as a public company acquiring smaller mattress stores in this highly fragmented niche. Select Comfort has tried to go it alone, preferring to sell its beds through its namesake stores and select retailers. It may not be enough, and this wouldn't be a bad time for it to consider partnering up with a more conventional mattress maker.

Select Comfort isn't the only company that's been riding the coattails of the housing recovery to come undone with a warning this morning. Appliance retailer hhgregg also took a hit after posting a disappointing preliminary report. However, hhgregg's undoing has come mostly from a sharp drop in consumer electronics. Its appliance sales actually grew during the period. 

Mortgage rates will likely continue to rise in 2014 with the Fed easing back on quantitative easing. It remains to be seen if these companies that have fared so well during the housing recovery will hold up if the real estate market cools down. Select Comfort will have more to prove than anybody here, especially the next time that it opens its mouth to provide another forecast to jaded ears that have been burned one too many times lately. 

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Rick Munarriz

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.

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8/28/2015 3:01 PM
SCSS $24.50 Up +0.09 +0.37%
Select Comfort Cor… CAPS Rating: ****