Your Sleep Number Is Going Down

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I love my Sleep Number Bed. It's my investment in the company that made it that is keeping me tossing and turning at night. Last night's disappointing quarter -- the third in a row at Select Comfort (Nasdaq: SCSS) -- isn't going to make me sleep any easier. Revenues inched just 2% higher to $216.5 million for the first quarter. Net income fell by 9% to $10.7 million but was flat on a per-share basis at $0.21 after an aggressive share buyback.

Going from baaaaa to worse -- that was me counting sheep for cinematic impact -- comps at Select Comfort stores plunged 11% lower. That was after same-store sales had fallen 9% lower in the fourth quarter.

Gross margins improved slightly, but that won't last. The company expects gross margins to dip slightly over the next two quarters as it implements nationally mandated fire-retardant materials into its air chambers.

What's that? The mattress that I bought last year can catch on fire? There goes my good night's sleep. OK, I'm exaggerating, though maybe the improved Sleep Number product will "ignite" the welcome upgrade process on behalf of existing owners.

If not, the company is hoping that a rough first half of 2007 will give way to a more vibrant second half. So despite the softness, Select Comfort is holding firm to its earlier guidance for all of 2007. Revenues will still grow by 12% to 15% this year. Earnings per diluted share should grow by roughly 20% to come in between $1.02 to $1.09 per share.

Let's hope so, because Select Comfort seems to be the only one losing air here. Rival Tempur-Pedic (NYSE: TPX) actually boosted its 2007 profit guidance last week, and conventional mattress makers like Sealy (NYSE: ZZ) tend to be pretty steady in good times and bad. Even retailer Bed, Bath & Beyond (Nasdaq: BBBY) came through with a 5.2% spike in comps this past quarter.

Select Comfort is counting sheep -- badly bruised ones -- on its own. Sure, the dip in comps comes after years of huge store-level gains. That's not easy to sustain or maintain. If the company delivers on its promises for healthy profit gains in the second half of the year, scooping up Select Comfort here in the teens will be a huge bargain. I get it. I do. I just hope that I don't have to cry myself to sleep if the company is wrong later this year. That's not why I bought my Sleep Number mattress or the company that made it.

Select Comfort has been recommended to Hidden Gems subscribers since the spring of 2004. Bed, Bath & Beyond is a Motley Fool Stock Advisor and Inside Value newsletter recommendation.

Longtime Fool contributor Rick Munarriz thinks that a good night's sleep is even better than a balanced breakfast to start the day off right. He does own shares in Select Comfort. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.