In the world of specialty mattresses, two companies stand out for their innovative products: Select Comfort
In a totally unscientific experiment, I asked friends which bed set they thought was more popular: Tempur-Pedic or Sleep Number. The overwhelming response was Sleep Number -- and readers here who have not researched the companies would probably answer the same. The reason lies in the vast difference between the two companies' marketing.
While most people are aware of both companies' products, Select Comfort has an aggressive approach to advertising. Radio/TV ads present celebrity spokespeople -- spokes-sleepers? -- who rave about the product and tell the world their "sleep number" (mattress firmness setting). On a popular morning radio talk show, the hosts give personal endorsements of the mattress and discuss what their "sleep number" was the night before.
Tempur-Pedic, by comparison, does less marketing, mostly in print. In fact, the company only recently launched a larger advertising campaign tied to their newest "Cloud" product line. Tempur-Pedic relies more on word of mouth and in-store demonstrations.
So who sells more mattresses? The companies do not provide unit sales figures, but revenues provide some clues:
|
Company |
FY 2010 Revenue |
|---|---|
| Select Comfort | $606 million |
| Tempur-Pedic | $1,105 million |
Given that both companies' most popular bed sets are priced around $2,000, it appears that Tempur-Pedic is selling almost twice as many beds as Select Comfort.
Fans of either mattress might ignore their company's fundamentals, because its products are cooler than the other side of the pillow. But as long-term investors, we're concerned about stock price appreciation, not the size of the company or our personal belief that its products are great. We need to peek under the covers. A good metric to use when comparing manufacturers like Tempur-Pedic and Select Comfort is operating margin, which accounts for all expenses directly related to sales. Pay close attention to marketing's effect on the bottom line:
| Company | Cost of Goods Sold | Marketing Expenses | Other Expenses | Total Expense | Operating Margin |
|---|---|---|---|---|---|
| Select Comfort | $227 | $270 | $57 | $554 | 8.6% |
| Tempur-Pedic | $550 | $200 | $110 | $860 | 22.2% |
All figures in millions. FY 2010 data.
Marketing expense is killing Select Comfort. Some 45% of the cost of every Sleep Number bed sold goes toward marketing, vs. 18% for Tempur-Pedic. Select Comfort's razor-thin margins mean lower cash flow and the risk of occasional negative earnings reports.
Tempur-Pedic trades at 27 times earnings versus Select Comfort's 23 times. Skeptics might also argue that Select Comfort is in better shape because it has no long-term debt. Plus, it has reasonable free cash flow (10.5% of revenue), although not as healthy as Tempur-Pedic's (15%). Mainstream mattress company Sealy
Remember, though, that if we're taking the long-term view, and stock price is our principal measure of success. If the past is any guide, Tempur-Pedic is a win, with 298% price appreciation over the past five years, compared to a 40% decline for Select Comfort and flat performance for Leggett and Platt
