What started out as a good night's sleep got rocky for Select Comfort (NASDAQ:SCSS) in 2006 as healthy comps caved in to weak trends and healthy competition from other mattress specialists like Sealy (NYSE:ZZ) and Tempur-Pedic (NYSE:TPX).
Let's look back to see how events rocked shareholders' slumber.
In the first quarter, the company behind the Sleep Number beds lapped market expectations. Sales were up 23% on a whopping 18% improvement in comps at the store level. Earnings per share climbed 41% higher. Things were going so well for Select Comfort that, a week later, the company declared a 3-for-2 stock split.
Still, there were a few warning signs. The company was broadening its breach through rapid store expansion and third-party distributors, and that had fellow Fool John Bluis ringing a cautionary tone.
"The one thing investors need to keep an eye on going forward is the rapid expansion of its relationships with retail partners," he wrote at the time. "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."
In the second quarter, Select Comfort continued its winning ways. Sales were up a healthy 22% as comps surged 16% higher. Another period of healthy margins produced a 46% spurt in earnings-per-share growth. It was the sixth consecutive quarter in which the mattress maker's bottom-line results had trounced Wall Street projections.
However, the stock was trading 30% below its springtime highs at the time. General market weakness and concerns that higher gas prices and a weak housing market would affect the company prevailed despite stellar results that indicated otherwise.
In the third quarter, Select Comfort began showing signs of mortality. The results were decent, with the sales and earnings-per-share growth clocking in 18% and 25%, respectively. The problem was that the company simply met analyst expectations. "Yesterday's third-quarter report was about as close as you could get to a disappointing quarter," I wrote at the time.
However, just a few weeks earlier, it seemed as if the company was coming down to Earth. In a mid-quarter update leading up to the report, the company indicated that it was still on track to meet its full-year goals, yet it was ramping up its share-buyback efforts to make sure it nailed its bottom-line figure. In other words, things weren't all that rosy if it had to reduce the number of shares outstanding to divide its net income into to make things work.
Any lingering doubts were cemented into certainty on Nov. 30, when Select Comfort warned that it would miss its fourth-quarter numbers, and badly. Comps were off a staggering 9%. That was a stark reversal from a company that had produced same-store sales growth of 15% or better in each of the four previous years. The weakness would also batter profitability, with the company expecting to post a significant dip in earnings for the period.
But what does the future hold? Well, our Motley Fool CAPS community members have something to say about that. Just take a look at how the overall sentiment stacks up:
|
CAPS Rating |
4-Star |
|---|---|
|
Total Bulls |
2,535 |
|
Total Bear |
91 |
|
Bull Ratio |
97% |
|
Bear Ratio |
3% |
You can see that the majority of CAPS players are still bullish on Select Comfort. Despite the recent weakness, Select Comfort remains a 4-star stock. Trading in Select Comfort has been lumpier than its air-chambered beds, yet the stock is surprisingly trading marginally higher than it was at this point a year ago.
In fact, this is what one player had to say about Select Comfort's prospects earlier this month:
"Despite major drop in stock price, this company still has a unique spot in the market: their beds are the only ones firmly identified in consumers' mind. The others are all interchangeable. That gives them a platform from which to recover -- I suspect dramatically. At current prices, I sense an opportunity for pleasant dreams in 07."
-- CosmoFool706
Is CosmoFool right? After so many years of pumping out 15% gains at the store level and even headier bottom line growth, a breather was understandable. The concern here is that this may be more than just a quarterly blip. Home-improvement chains like Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) that once seemed immune to housing slumps ultimately buckled.
History is on Select Comfort's side, though. The all-weather mattress replacement market still makes up the lion's share (70%) of demand in this niche. When Sealy went public, it noted a study by the International Sleep Products Association that claimed that the bedding market has risen at an annualized clip of 6.3% since 1984, with just one down year.
However, Select Comfort sells a premium product, so it's naive to believe that the company will be immune to any economic weakness. I love my Sleep Number bed. I'm proud to be an investor, too. Does that mean that I'm not going to toss and turn as I sweat out the next few challenging quarters?
Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.
If you're excited by what's been happening at Select Comfort, you can see what other companied have been recommended by Hidden Gems which picked Select Comfort in the spring of 2004 and has beaten the market by an average of 25% since its inception.
Longtime Fool contributor Rick Munarriz thinks that a good night's sleep is better than a balanced breakfast to start the day off right. He does own shares in Select Comfort. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. Home Depot is an Inside Value recommendation.
