Bedding Stocks Sleepless; Electronics Retailers Without Spark

Maker of the Sleep Number bed Select Comfort (NASDAQ: SCSS  )  recently sent shudders through the furniture and bedding manufacturing industry when it warned that fourth-quarter sales would miss the mark and that the challenging times would continue into 2014:

Select Comfort Corp...reported that preliminary fourth-quarter 2013 total net sales grew 5% year-over-year to $231 million, with flat company-controlled comparable sales growth. The mid-point of the company's fourth-quarter EPS guidance range of $0.18 to $0.26 assumed low-double-digit growth in total net sales and mid-single-digit growth in company-controlled comparable sales. Through November, company performance was trending consistent with the EPS guidance range, with solid sales results and expense controls. From Cyber Monday through the end of December, however, sales trends fell below internal goals. As a result, the company now expects fourth-quarter EPS to be below the low end of its guidance range.

The sales slowdown following the Thanksgiving holiday reflected a tepid retail holiday shopping season. We expect this challenging environment to continue in 2014 and are planning accordingly," said Shelly Ibach, president and CEO, Select Comfort.

Shares of Select Comfort trade at the low end of Valuentum's fair value range (at the time of this writing), but the research firm is not ready to pull the trigger. Instead of as a price target, Valuentum likes to think of valuation as a range of probable valuation outcomes. As is customary in their process, they like to consider undervalued equities only when their prices begin to move higher, not right after they have fallen abruptly.

This basic tenet to the Valuentum process helps them avoid 'falling knives' (stocks that keep going down) and stocks that may trade below their intrinsic value for extended periods of time as they remain shunned by the market (stocks that generate opportunity cost). Most of the 'Household Durables' industry has been under pressure on the news, including peers Tempur Sealy International (NYSE: TPX  ) and Mattress Firm (NASDAQ: MFRM  ) .

Early January also brought news that home electronics retailer hhgregg  (NYSE: HGG  ) 's fiscal third quarter sales (ended December 31, 2013) fell 11.6% from the same period a year ago. The company's comparable-store sales also decreased by more than 11% as its consumer electronics category plummeted nearly 20% and its computing-and-wireless category fell by nearly 25% (both categories performed well below expectations).

In what Valuentum expected as a result of the shortened holiday shopping season, hhgregg noted that its "holiday sales were significantly affected by increased promotional offerings of televisions and tablet products across a variety of retail formats." This is a red flag for gross margin at peer Best Buy  (NYSE: BBY  ) as the electronics retailer likely sought to match prices to retain market share. Still, hhgregg indicated that the appliance category was healthy, up about 1.5% in the period, indicating that not all areas suffered from promotional activity. Valuentum points to Whirlpool as their favorite appliance-related idea:

Whirlpool possesses tremendous operating leverage, so a small increase in sales will have a large impact on the bottom line. This aspect of its business model coupled with improving operational performance makes (Valuentum) confident that the appliance pure-play has room to the upside (the high end of Valuentum's fair value range for Whirlpool is over $200 per share). Source: Valuentum 

Valuentum's Take                                                                                                                                                                                 Early January brought a bevy of news which suggests that firms in the 'Household Durables' industry may have faced demand pressure and that electronics retailers may have been fighting viciously over market share (hurting gross margins) during the holiday season. Valuentum doesn't hold any firm mentioned in this article in the portfolio of its Best Ideas Newsletter, but the research firm does think both Select Comfort's and hhgregg's performances are important data points. As always, Valuentum's best ideas are included in the Best Ideas portfolio and the Dividend Growth portfolio.


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