Shares of Select Comfort (NASDAQ:SNBR) dropped by 19% because of its cloudy fourth-quarter earnings outlook. With this decline, Select Comfort now trades 40% off of its 52-week high. Should investors stay away from Select Comfort because of its sluggish outlook, or does the recent drop make Select Comfort a better investment opportunity than Tempur Sealy International (NYSE:TPX) and Mattress Firm Holding Corporation (NASDAQ: MFRM)?

Product innovations could lead Select Comfort's growth
In the third quarter, Select Comfort did not deliver a satisfactory financial performance. Although net sales increased by 7% to $264 million, same-store sales were down 1% and earnings per share dropped by 22%. Thus, Select Comfort's sales growth came mainly from new store additions. Select Comfort expects to have around 435 to 445 stores by the end of 2013. Recently, Select Comfort announced that it expects around $231 million in revenue, 5% more than it delivered in the same period last year, with flat comparable sales growth at company-controlled stores. Its fourth-quarter EPS might come in at the mid-point of the $0.18-$0.26 guidance range. 

Looking forward, Select Comfort's potential growth lies in the area of product innovations. In the middle of October, it introduced the new Performance Series with advanced DualAir technology, which will become the core platform of the company's entire product line. Consumers can also enjoy contouring support and soft cushioning comfort for pressure relief with the PlushFit foam. The company will start to introduce new and transformational products in the first quarter of the next fiscal year, leveraging its R&D investment and the acquisition of Comfortaire. 

Tempur Sealy and Mattress Firm have better operating performances
Both Tempur Sealy and Mattress Firm have managed to improve their operating results. In the third quarter, Mattress Firm's revenue grew by 17%, whereas its bottom line rose 44.8% to $18.1 million. If the cost of its ongoing ERP implementation project was excluded, Mattress Firm's adjusted EPS would reach $0.55 per share, 18.1% growth from last year's adjusted EPS. 

Tempur Sealy also delivered solid earnings results in its most recent quarter. It reported EPS of $0.73, far above analysts' estimates of $0.68. Tempur Sealy also enjoyed 111.4% sales growth and 2,110% net income growth. This significant growth in Tempur Sealy's operating results was mainly due to the acquisition of the Sealy business in 2013. 

What makes investors feel safe about Select Comfort is its strong balance sheet. As of September 2013, it had $226 million in stockholders' equity, $139 million in cash, and no debt. In contrast, Tempur Sealy has quite a weak balance sheet, with a lot of leverage. While Tempur Sealy had only $83 million in equity, it had $1.82 billion in long-term debt. Tempur Sealy's EBITDA (earnings before interest, taxes, depreciation and amortization) is only $278 million, so it has a net debt/EBITDA ratio of 6.23. Indeed, Tempur increased its debt level significantly to finance the purchase of Sealy and assume Sealy's existing debt. Mattress Firm also employs some leverage in its operations. With a trailing-twelve-month EBITDA of $126 million, its leverage ratio is much more reasonable at 1.67. 

What is the best buy now?
In terms of valuation, investors might get excited the most about Select Comfort as it has the lowest EBITDA multiple of the three at 8.12. Mattress Firm has a valuation a bit higher at 12.17 while Tempur Sealy has the highest EBITDA multiple of the three at 15.76. With a debt-free, strong balance sheet, Select Comfort has little downside risk for investors. Despite its sluggish outlook, I personally think Select Comfort is the best pick among the three as it has the most conservative capital structure and the lowest valuation. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.