After beating consensus analyst earnings forecasts for seven quarters in a row, Sleep Number bed-maker Select Comfort (NASDAQ:SCSS) finally skipped a beat and just "met" earnings last quarter. Will it get back in bed with Wall Street in Q4 2006? We'll find out on Wednesday.

What analysts say:

  • Buy, sell, or waffle? Fourteen analysts follow Select Comfort, with four recommending buys and the rest recommending holds.
  • Revenues. On average, they're looking for 5% quarterly sales growth, to $198 million.
  • Earnings. Profits are predicted to slide 36%, to $0.18 per share.

What management says:
One month shy of the fourth quarter's end, Select Comfort investors were rudely awakened to the crash of an earnings warning. According to CEO Bill McLaughlin, the firm is seeing a "closer correlation in our business with [downward] housing industry trends... [and] we don't expect an immediate reversal in current trends." Confiding that its same-store sales had declined 9% year over year through the first eight weeks of the quarter, and that firmwide sales were up just 6%, McLaughlin preemptively ratcheted back earnings expectations to $0.80 and $0.87 per diluted share for the year. For those who last checked in at the Q3 earnings report, that's about 12% less than the $0.95 to $0.97 range that Select Comfort was bandying about back in October.

The good news is that McLaughlin assured that his team has "moved quickly to revamp our December sales and marketing programs to drive traffic." So there is some hope that matters improved in the last month of the quarter. Longer-term, though, he suggests that "these initiatives will require at least a quarter or two to take effect" in order to achieve the firm's "long-term sales growth targets of between 15 and 20 percent and earnings growth of between 20 and 25 percent" in fiscal 2007.

What management does:
Additional good news may be found in McLaughlin's assertion that even as he tried to salvage December's sales, he was "protecting product margins." Those margins, as shown below, have been growing for more than a year at both the operating and net margin levels.

Margins

7/05

10/05

12/05

4/06

7/06

9/06

Gross

59.5%

59.4%

59.4%

59.8%

60.5%

61.2%

Operating

8.9%

9.4%

10.1%

10.4%

10.7%

11.2%

Net

5.6%

5.9%

6.3%

6.4%

6.5%

6.5%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
While remaining bullish overall on the stock, Motley Fool Hidden Gems co-advisor Tom Gardner highlighted a couple of problems with the company in his latest semiannual review of all stocks in the Gems portfolio. Specifically, he thinks the company offers: "too many bed models, too many numbers," and warns that this defect cedes to rival Tempur-Pedic (NYSE:TPX) the advantage of a simpler product, easier to explain to potential buyers. This may be contributing to the weak sales of Q4, which were in turn foreshadowed by "softer than expected" sales in the last three weeks of Q3.

But do the earnings warning and the deficiencies in marketing mean that Tom is losing faith in Select Comfort? You can find out for yourself by reading the semiannual review -- full access to which comes with a free month-long trial to Hidden Gems.

Competitors:

  • Sealy (NYSE:ZZ)

For more on who's sleeping well in the bedding industry, check out:

Fool contributor Rich Smith does not own shares of any company named above.