Counting Cheap at Select Comfort

Is the nightmare finally over at Select Comfort (NASDAQ:SCSS)? Shares inched higher yesterday after a better-than-expected fourth-quarter report. The maker of the Sleep Number air-chamber mattress also provided a profit outlook for the year ahead that slightly beats analyst targets.

For the quarter that ended in December, Select Comfort posted earnings of $0.20 a share -- $0.25, before an asset impairment charge -- on a 6% uptick in net sales. It had earned $0.28 per share a year earlier, yet Wall Street expected only $0.17 per share in profitability.

Gross margins improved during the period, but operating margins took a hit. Even more troublingly, comps at Select Comfort's namesake stores fell a sharp 9% for the period.

Is the Sleep Number Bed's popularity waning? Given that the company's ad budget inched 5% higher over the period, something clearly isn't right. Select Comfort has switched to a new creative agency, so let's see whether the new marketing slant kicking off later this quarter can help nudge the company in the right direction.

The mattress industry has been resiliently recession-resistant over the years, but Select Comfort's unique product has it marching to a different beat than more conventional rivals such as Sealy (NYSE:ZZ), Serta, and to a lesser extent, Tempur-Pedic (NYSE:TPX). Until recently, the difference translated into market-share gains on huge upticks in same-store sales. Can Select Comfort bounce back?

The company certainly thinks so. For 2007, it expects sales to grow 12% to 15% higher. Net margins should expand, with earnings per share climbing 20% to 28%. That prices the company at a reasonable 17 to 19 times forward earnings.

Meanwhile, Select Comfort has been opening new stores and reaching out to new third-party distributors. These days, you can buy a Sleep Number system through QVC, Sears Holdings' (NASDAQ:SHLD) Lands' End, or even Winnebago (NYSE:WGO), with its RV beds. However, for the company to nail its ambitious growth targets, it's going to have to win the battle against those slip-sliding comps. Then -- and only then -- will investors be able to sleep through the night.

Follow the steps of Select Comfort's recent downfall:

• Dueling Fools took a look at both sides of Select Comfort in October.
• Two weeks later, the company posted third-quarter results.
• A month later, the company warned that it would come up short for the quarter.

Select Comfort is one of the many active recommendations in the Motley Fool Hidden Gems newsletter service. Discover which other small companies Tom Gardner and his team are focused on with a free 30-day trial subscription.

Longtime Fool contributor Rick Munarriz swears by his Sleep Number Bed. His number? 35. He owns shares in Select Comfort, but in no other companies mentioned in this article. He is a member of the Rule Breakers newsletter team. The Fool has a disclosure policy.