This is going to be an unconventional bear argument. I'll start with an admission: The bed I got from Select Comfort (NASDAQ:SCSS) changed my life. I mean it. I'm a skinny, pokey side sleeper, and I was never comfortable on a regular bed. After shelling out big bucks for a Select Comfort bed, I sleep better, I feel better, and even my wife, who thought she had no sleep trouble before, has more energy. We can honestly say that we wouldn't trade it for anything.
We miss it when we're on vacation. We talk about how much we miss it. In fact, I have told people that if they offered me $20,000 for the thing, and I could never have another one, I'd tell them to shove off. There's your endorsement.
Good product, so-so stock
But a great product does not necessarily make for a good stock. Ask the poor folks holding TiVo (NASDAQ:TIVO), Taser International (NASDAQ:TASR), or Krispy Kreme (NYSE:KKD).
I'm not trying to suggest that Select Comfort is headed for a nosedive like any of these, but I certainly don't think it's much of a bargain, either. By my discounted cash flow valuation, using a 12% discount rate, Select Comfort is currently trading at fair value only if I assume 20% growth over the next five years. I consider that estimate to be too aggressive.
To put it another way, for the current $18 a share to look like a bargain, I would have to assume 23% growth in free cash flow for the next five years. Plug in a more reasonable 15% growth rate, and the stock needs to be $13 a share before I see the 20% margin of safety that would encourage me to invest.
Pass the Geritol, gramps
Of course, some might think it's possible for Select Comfort to grow that quickly, but I don't. My major beef with Select Comfort -- and the reason I sold my shares a while back -- is that I think its marketing is terrible. Awful. Boring. Humorless. Short-sighted. As geriatric as its intended audience. Select Comfort uses Lindsay Wagner to pitch its beds. Who's that? I thought so. The Bionic Woman? Ring a bell? Only if you're stuck in a 30-year time warp.
Despite Select Comfort's attempts to educate the public about better sleep, its ham-fisted marketing still brands its products as beds for the old or infirm, as evidenced every time I explain to someone why we own one. ("Oh, sorry to hear about your back. You want my doctor's number?")
I've entertained arguments that this fogey-centric campaign is a smart strategy, that it concentrates on the folks most likely to buy one of these pricey beds: boomers and older. But I think that's bunk.
Boomers may have money, but they can also be stubborn old cheapskates (sorry, Dad) wedded to their lumpy old coil-spring horrors, good sleep be damned. Even if you could persuade them to part with the dough, no one wants to feel as if they're buying a bed because they're an old invalid. Not even an old invalid would want to do that.
Finally, the company's narrow marketing focus is lazy. This bed can change everyone's life. Why not market $2,000 beds to the 20- and 30-somethings who will gladly spend $350 on a single pair of jeans? Make it like Gatorade, Nike (NYSE:NKE) shoes, or plasma TVs. Make it a sexy, must-have life accessory.
Dubious improvement
But Select Comfort isn't rocking the boat. Instead, it just acquired a new anchor. When it recently hired a new marketing guy, it snatched him from another company that's suffering from perceptions of geezeritis, La-Z-Boy (NYSE:LZB). This is a company that has had its own battle with stagnant sales under Doug Collier, which is why I was skeptical of the hire when it happened. I wasn't alone in my appraisal. Our own Matthew Emmert (who has recommended La-Z-Boy for his Income Investor newsletter) was politely enthusiastic about Collier's departure, for reasons similar to mine.
Foolish bottom line
Don't fall in love, Fool. A product and a company are vastly different things. Select Comfort has changed my life with its beds, which are better than anything else out there. But unless this company makes a real investment in better PR, it will remain a niche product at best. Niche products don't drive 25% growth year after year, and unless you see that, I think you'll find Select Comfort has little to offer your portfolio.
Wait! You're not done. This is just a quarter of the Duel! Don't miss W.D. Crotty's bullish argument, Seth's rebuttal, or W.D.'s final word. When you're done, you're still not done. You can vote and let us know who you think won this Duel.
Seth Jayson has a Select Comfort 5000 at home, but at the time of publication, he had no positions in any company mentioned. View his stock holdings and Fool profile here. Select Comfort is a Motley Fool Hidden Gems recommendation. La-Z-Boy is a Motley Fool Income Investor pick. TiVo and Krispy Kreme are Motley Fool Stock Advisor recommendations, and Taser is a Motley Fool Rule Breakers pick. Fool rules are here .
