Select Comfort Swings Higher, but Will It Continue Going Up?

The mattress industry oddly remains one of the more volatile industries in which to invest. Premium maker and retailer Select Comfort (NASDAQ: SCSS  ) is no exception. While the stock has frequently fluctuated with the market's quick-shifting winds, things are looking great with both industry-level and company-specific tailwinds. In Monday's trading, Select Comfort shares were up into the double-digits due to a relatively strong earnings release that left the market hungry upon last Thursday's close. At first glance, investors may not be too impressed with Select Comfort's latest numbers, but ultimately, this remains one of the strongest players in the mattress game.

Adjustable earnings
Depending on what angle you look from, Select Comfort delivered a respectable and, in some ways, unexpectedly strong quarter. Both top-line and same-store sales ticked up: 7% and 2%, respectively. These are the most compelling numbers for the current state of the business as they show increased demand, which at times has been in question over the past couple of periods.

Where things didn't go so well was below the gross profit line. The success of a mattress business is very closely tied to its efficacy in the marketing and sales department. While there are certainly differences in quality among the mattress makers, the product is still somewhat of a commodity -- brand power drives sales over all else. So, while Select Comfort posted higher sales in a relatively difficult period (extreme weather, etc.), the respective hike in marketing expense was ultimately overshadowing. Operational expenses climbed more than 13%, led by increased sales and marketing.

Management notes that the first half of this year involves a big push for the company's marketing strategies, and thus investors would see larger than normal costs. While it's a bit difficult to know whether or not these efforts are paying off yet, management appears to be satisfied with results, citing improved product mix (high- and low-price-point items), brand awareness, and foot traffic.

Why it sits well with investors
Select Comfort has a few operating advantages that make it a compelling player in the mattress industry. For one, it employs an exclusive distribution network that allows for higher margins and tighter product management. The heavily branded sleep stores are mouthpieces for the company's strategies: directing consumers to new products and building brand awareness with gimmicks, such as The Sleep Number.

In the recent quarter, the company saw its percentage of high-performing, $3-million-plus-grossing stores increase to 11% from 6% one year ago.

Select Comfort is adding more stores (20-30 net new locations this year) and remodeling others, spending $70 million to $80 million in the process throughout this year. With same-store sales showing progress, the money appears to be well spent.

As mentioned above, the mattress industry swings wildly on the public markets, with the slightest evidence of demand drops sending the stocks cascading down and vice versa. Over the past 12 months, Select Comfort has traded as high as $27.55 per share, and with a low end in the mid-$15 per share range. Around $20 today, the stock appears reasonably valued at about 16 times forward earnings, though not particularly cheap. Tempur Sealy, for comparison, trades at a forward ratio of under 15 times, and has similar operating level and industry advantages.

Investors could try to wait for a better entry price, as the wild swings are routine, but timing the market is not a recommended strategy among Fools. Select Comfort is a strong business with a very successful brand presence among mattress makers. With long-term industry tailwinds, the stock deserves a closer look today.

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