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Select Comfort Shares Tank: Is It Time to Invest?

Michael B. Lewis
January 28, 2013

Typically, it's the disruptive tech stocks that swing like Tarzan on the exchanges, but for whatever reason, mattress companies do the same thing. It would appear that mattress manufacturing and selling is a rather boring, stable business, but if you take a look at the charts for the top companies, they look like a panoramic photo of the Himalayas. For this earnings season, two of the hottest mattress sellers both saw top lines soar, but while one's stock followed suit, the other one crashed. What happened with Select Comfort (NASDAQ: SCSS), and should investors be worried?

The rundown
In the final quarter of 2012, Select Comfort made some great progress. Net sales were up a very healthy 17% to a company record of $221 million. That did nothing, though, to assuage the concerns of Wall Street analysts, who were expecting a higher EPS -- $0.32 vs. the actual $0.22. What caused the drop in bottom-line earnings? Marketing malfunctions and other big-time spending. According to company management, Select Comfort increased its media spending and exposure in October. This appears to have been costly and, all in all, a failed experiment. Though they're not broken down specifically, sales and marketing accounted for 46.3% of the company's net sales compared to 43.8% the year before. That equates to a more than $19 million increase. Investors should expect the marketing expenses to correct for the next quarter.

The company is also in the midst of overhauling product lines and attempting to appeal to a larger customer base. This means heavy research and development expens