World's Scariest Stock: Select Comfort

You think you're getting a good night's sleep, don't you?

You might be if you're sleeping on a Select Comfort (Nasdaq: SCSS  ) Sleep Number Bed -- but not if you're a shareholder.

The company's share price has been on a downward tear since its all-time highs in April 2006. The 57% drop has been due to consistently lowered guidance and performance. While the contrarian investor could argue that perhaps now is the time to invest -- I disagree.

On the surface, the company looks solid, but dig a little more and you'll see deteriorating operating and net margins, a weakened balance sheet, a dismal marketing effort, and an overwhelming product price point. Investors should be wary, because all of this makes Select Comfort a complete nightmare.

Digging deeper
Volatility is part of the market, but the company's negative 57% return looks especially bad when compared with rival bed maker Tempur-Pedic's (NYSE: TPX  ) positive 78% return over the same time frame. This return comparison is startling, but not entirely unwarranted.

Take a look at Select Comfort's recent quarter. Revenue remained relatively flat with a 2.3% increase year over year, but selling, general, and administrative expenses increased 4.3%. No wonder the share price has been getting knocked down -- flat revenues with added expenses is a scary situation for any company. Looking at Select Comfort's margins below, you can see the increase in expenses reflected in both operating and net margins.   

Margins

9/06

12/06

3/07

6/07

9/07

Operating

10.4%

9.8%

9.5%

8.2%

7.6%

Net

6.6%

5.9%

5.7%

4.8%

4.5%

LTM data from Capital IQ, a division of Standard & Poor's.

What's more, the company's once pristine balance sheet is also deteriorating. Using the quick ratio -- a measurement of liquidity to pay the bills, etc. -- the company has a dreary 0.2 quick ratio compared with last year's 0.7 quick ratio (the higher the number, the more the liquidity). Without accounting for the company's future free cash flow, this suggests that the well may be running dry at Select Comfort.    

Management seems to suggest that a majority of liquid assets are being "distributed to shareholders" in the form of share buybacks, but probably not successfully. As my Foolish colleague Rick Munarriz pointed out, the only reason the company showed a recent EPS increase was because of its ill-timed share-buyback program. Fewer shares make those profits seem slightly better. I can't help wondering whether there is a better use for the $37.6 million than for those buybacks in the third quarter.  

A need for more marketing
It could have been used for marketing. Its commercials seem outdated at best; in fact, people don't associate Select Comfort with the Sleep Number Bed, and that's a problem. Brand names are essential, and the company jeopardizes its future by slacking off in advertising. Although, to management's credit, they have identified this weakness and ramped up marketing plans for the fourth quarter.

Without an education on the importance of sleep, it's tough to commit $4,000 or more to buying a bed. And one would have to look for a new bed and examine them thoroughly to even find a Sleep Number Bed. Sealy (NYSE: ZZ  ) makes it easy for customers to find its beds -- they offer their products in places like Costco (Nasdaq: COST  ) and Sears Holdings'  (Nasdaq: SHLD  ) Sears stores. Plus, these beds cost far less than $4,000 and are convenient for customers to consider buying at their own pace.

Sleep on this
Select Comfort will keep you tossing and turning at night if you're a shareholder. Only in your dreams will this company earn 50% annual returns. In the bright light of day the company is losing market share and deteriorating financially. There's no value hidden under these covers.

Think Select Comfort can make a comeback? Let us know in our community intelligence database: CAPS. Right now, Select Comfort has a three-star rating. Sign up for free, and issue a thumbs-down on this stock.

Want to know what other companies give us the frights? You can view the rest of our hair-raising stocks here.


Read/Post Comments (15) | Recommend This Article (27)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 29, 2007, at 4:51 PM, dsw1107 wrote:

    I don't appreciate seeing your free articles kick SCSS whilst I pay HG to keep it on the rec list.

  • Report this Comment On October 29, 2007, at 5:07 PM, C00lrob wrote:

    "Sign-up for free and issue a thumbs-down on this stock." That doesn't amuse, enrich, or educate. How about adding a "Don't Recommend" tab, so that we can express our displeasure at the flippant discussion of a multi-recommended loser?

  • Report this Comment On October 29, 2007, at 6:20 PM, atwclw wrote:

    Wow, I would never have guessed this was the internal situation given what I assumed to be a completely healthy company. It just goes to show that appearance isn't everything- even with nice commercials. The author was right on!

  • Report this Comment On October 29, 2007, at 6:27 PM, bjvogt wrote:

    I agree the company has major marketing issues, but the biggest one I see is the perception of the $4000 bed. We bought one for $1200, and have sent many other happy customers there over the years. I'm sure you could spend that much, but you definitely don't need to.

  • Report this Comment On October 29, 2007, at 7:10 PM, jcalvin2 wrote:

    Its pretty easy to bash a stock when it is down. I'm not sure you stated anything new about this company. I'm not sure why you wrote the article unless you just felt like stating the obvious.

  • Report this Comment On October 29, 2007, at 9:55 PM, musky56 wrote:

    To Fool Mike Kasprzyk,

    Select Comfort is the only four time recommendation of Hidden Gems. I don’t understand why you are bashing the stocks that your company recommended multiple times that Hidden Gems members purchase. Would it not make sense for your company to issue a sell rating before bashing the stock that your company recommended in the first place?

    You own their bed and yet had nothing positive to say about the company. FOR STARTERS, WHY DID YOU BUY A SELECT COMFORT BED IN THE FIRST PLACE?

    This is also the second day in a row that you have personally bashed this stock. Thanks to you, I am now beginning to question the intentions of The Motley Fool and their products.

  • Report this Comment On October 30, 2007, at 12:31 PM, jericson wrote:

    See my comments at: http://4of2.blogspot.com/2007/10/is-select-comfort-scary-sto...

    This website eats ampersands, which makes it hard to bring up Research and Development, if you know what I mean.

  • Report this Comment On October 30, 2007, at 2:48 PM, denverstever wrote:

    I must agree wholeheartedly with the previous poster. I paid for a subscription to Hidden Gems this year (rest assured that I won't in the future). When I purchased Hidden Gems, this stock was your number one recommendation. And, now you say it is a piece of garbage.

    Well, thanks for nothing Motley Fool. I believe that I might probably have done better in the market throwing darts than listening to your "so-called" professional advice.

    What a bunch of hooey !!!

  • Report this Comment On October 30, 2007, at 6:21 PM, jimpiccard wrote:

    There are several quarrels I have with my fellow Fools; but toleranance for differences of opinion is not one of them. I like it that even though one of the Fool's Big Kahunas may be recommending something in a newsletter, that they still allow differeing opinions to be offered under the fool banner- provided there is something to that differing opinion.

    I both sleep on a Sleep Number (#75) bed each night, as well as am a shareholder. I am concerned - not about the bed - but about the business. When things go bad- stock wise- we have to be honest, careful, and especially make sure we try to set our emotions aside as we try to figure out what truly is going on.

    Those above who insist that no thinking or honest debate be allowed at the Fool are like those who felt it was ok for the big investment banks and brokerages to keep hyping stocks just to keep the banking business. Consistency is the hobgoblin of small minds. I want honest analysis, and honest debate. And we get it here.

    Honesty. Analysis. Intelligent Debate. "Good".

    Mindlessly following only one opinion and censuring all others when money is at stake. "Bad".

    Let's be adults here, folks.

  • Report this Comment On November 01, 2007, at 12:55 AM, LurkyLurky wrote:

    Well said, jimpiccard.

  • Report this Comment On November 05, 2007, at 5:00 PM, mjkoenig7 wrote:

    I just can't believe that Select Comfort is fairly valued at about $10/share. To me - despite all the wailing and gnashing of teeth - this is a bargain. The products are sound - the price point is not too high, they have a unique product, and excellent customer service. It's the marketing, stupid. I continue to believe that as soon as they correct this the company's stock will soar. Let the chicken littles bail out - I'll add to my position.

  • Report this Comment On November 17, 2007, at 3:05 PM, butrfy1177 wrote:

    This is quite interesting to read. My sister was actually fired from Select Comfort for taking a week off after the passing of our mother. They treated her with absolutely no sympathy and basically kicked her out the door. I told her, you do not want to work for a company like that. While they "think" they are high and mighty, she will see them fall off their high horses.

  • Report this Comment On July 20, 2008, at 11:57 AM, parkerini wrote:

    The stock price may be low but the company will turn around. They have realized their opportunities and are implementing them. Forty of the stores have already been ramped up into much more attractive showrooms. The advertising is the main problem, and once they get that figured out, the beds will fly out of the stores. If you doubt this company---do one thing only---go into one of their showrooms and try the product out---you will be amazed with the experience and wonder why you ever slept on anything else--and you don't have to spend $4,000---half that price will get you the most popular model. Do more research. Experience the product first hand.

  • Report this Comment On October 26, 2009, at 1:32 PM, jsvanderlaan wrote:

    If you have done business with these people, you will realize whey their stock is not a good pick. They have a propensity to cheat their customer base with bad product and then not stand behind their products. I would definitely stay clear of these people, both as a stock pick and as a consumer.

  • Report this Comment On October 26, 2009, at 1:32 PM, jsvanderlaan wrote:

    If you have done business with these people, you will realize whey their stock is not a good pick. They have a propensity to cheat their customer base with bad product and then not stand behind their products. I would definitely stay clear of these people, both as a stock pick and as a consumer.

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