My wife and I have never slept better since we bought our Sleep Number bed from Select Comfort (NASDAQ:SCSS) two years ago. Shareholders have also been sleeping tight recently, and first-quarter results should be seductive enough to send them back to bed and into a months-long peaceful sleep.
For the current quarter, revenue growth was 23%, and even with additional stock-based compensation charges, diluted earnings per share expanded by 41%. That marks the fourth straight quarter in which the company has exceeded long-term goals.
After missing guidance badly a couple of years ago, management switched to a new forecasting methodology. Estimates for diluted EPS are now released only on an annual basis, and long-term goals for revenue and earnings growth have been set at 15%-20% and 20%-25%, respectively. Following Warren Buffett's tenet of being approximately right instead of precisely wrong has served the company well.
As the company has previously indicated, it plans to continue heavy investment in an aggressive marketing campaign. To the angst of many investors, the company seemed too focused on the insomniac infomercial crowd with its far-from-exhilarating ads featuring spokeswoman Lindsay Wagner. But over the past several months, new, catchier spots have appeared on both television and radio, and they seem to be working well, since the phrase "Select Comfort" no longer seems to prompt puzzled expressions.
If my anecdotal evidence isn't enough, then you only need to look at recent results from competitors Tempur-Pedic (NASDAQ:TPX) and Sealy (NYSE:ZZ). While these companies have been delivering lukewarm results, Select Comfort has continued to grow its market share.
The one thing investors need to keep an eye on going forward is the rapid expansion of its relationships with retail partners. Sleep Number beds can now be found in 427 retail stores after being available in just 109 in the first quarter of 2005. With the company having less control over a growing number of salespeople, the possibility exists that the brand name could suffer if the products are not marketed properly. The success or failure of these initiatives could determine what approach the company will take in its international expansion plans.
Even though the ride has been smooth for the past six months, you may want to look elsewhere if you get motion sickness from looking at stock charts too often. That's why I'd rather take an owner-investor approach, especially in the world of small caps. I'd rather be more concerned about lifting my face off the pillow each morning with a smile five years from now instead of having Mr. Market determine my daily emotional state.
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Owner-investor John Bluis owns shares of Select Comfort. He does not have any financial interest in any other company mentioned in this article. The Motley Fool is investors writing for investors.
