I'm thrilled my Foolish dueling partner Rick Munarriz and his wife have discovered restful nights on their Select Comfort (Nasdaq: SCSS ) bed. I am certain that the company makes fabulous beds, and that his family has joined a long list of highly satisfied customers. I just have one question for Rick, though: When will he make his next Select Comfort purchase? With a 20-year limited warranty, Select Comfort sends a pretty clear message about the expected lifespan of its products.
That quality is a double-edged sword. While it means that people are willing to pay the premium price Select Comfort commands, it also means that repeat business happens at a snail's pace. The slow pace of replacement business, and a price tag per bed that can reach in the neighborhood of $4,400, just bolster the key points of my opening article. The market size is limited, growth can't last forever, and rational people will postpone buying unless they feel financially secure enough to cover the cost.
As for Rick's glowing review of the company's financials, I feel compelled to mention the other half of the story. You can achieve a lot of per-shareearnings growth with an aggressive buyback program, generous financing plans, and a strong balance sheet. That kind of growth, however, usually comes at the expense of a company's long-run health. Especially troubling for potential investors: During the first half of 2006, Select Comfort's operating cash flows actually dropped some 70%, from $19.4 million to $5.7 million. Additionally, in the second quarter, receivable levels leapt an eye-popping 74%, on a mere 22% annualized revenue growth.
Alone, each of those trends is troubling. Put them together, and it's an ugly combination that's typically a clear sign of a company struggling to maintain its growth. Unless that trend reverses -- and soon -- investors had better make full use of those ultra-comfortable Select Comfort beds; their sinking investment might otherwise keep them up.