You think you're getting a good night's sleep, don't you?

You might be if you're sleeping on a Select Comfort (NASDAQ:SCSS) Sleep Number Bed -- but not if you're a shareholder.

The company's share price has been on a downward tear since its all-time highs in April 2006. The 57% drop has been due to consistently lowered guidance and performance. While the contrarian investor could argue that perhaps now is the time to invest -- I disagree.

On the surface, the company looks solid, but dig a little more and you'll see deteriorating operating and net margins, a weakened balance sheet, a dismal marketing effort, and an overwhelming product price point. Investors should be wary, because all of this makes Select Comfort a complete nightmare.

Digging deeper
Volatility is part of the market, but the company's negative 57% return looks especially bad when compared with rival bed maker Tempur-Pedic's (NYSE:TPX) positive 78% return over the same time frame. This return comparison is startling, but not entirely unwarranted.

Take a look at Select Comfort's recent quarter. Revenue remained relatively flat with a 2.3% increase year over year, but selling, general, and administrative expenses increased 4.3%. No wonder the share price has been getting knocked down -- flat revenues with added expenses is a scary situation for any company. Looking at Select Comfort's margins below, you can see the increase in expenses reflected in both operating and net margins.   

Margins

9/06

12/06

3/07

6/07

9/07

Operating

10.4%

9.8%

9.5%

8.2%

7.6%

Net

6.6%

5.9%

5.7%

4.8%

4.5%

LTM data from Capital IQ, a division of Standard & Poor's.

What's more, the company's once pristine balance sheet is also deteriorating. Using the quick ratio -- a measurement of liquidity to pay the bills, etc. -- the company has a dreary 0.2 quick ratio compared with last year's 0.7 quick ratio (the higher the number, the more the liquidity). Without accounting for the company's future free cash flow, this suggests that the well may be running dry at Select Comfort.    

Management seems to suggest that a majority of liquid assets are being "distributed to shareholders" in the form of share buybacks, but probably not successfully. As my Foolish colleague Rick Munarriz pointed out, the only reason the company showed a recent EPS increase was because of its ill-timed share-buyback program. Fewer shares make those profits seem slightly better. I can't help wondering whether there is a better use for the $37.6 million than for those buybacks in the third quarter.  

A need for more marketing
It could have been used for marketing. Its commercials seem outdated at best; in fact, people don't associate Select Comfort with the Sleep Number Bed, and that's a problem. Brand names are essential, and the company jeopardizes its future by slacking off in advertising. Although, to management's credit, they have identified this weakness and ramped up marketing plans for the fourth quarter.

Without an education on the importance of sleep, it's tough to commit $4,000 or more to buying a bed. And one would have to look for a new bed and examine them thoroughly to even find a Sleep Number Bed. Sealy (NYSE:ZZ) makes it easy for customers to find its beds -- they offer their products in places like Costco (NASDAQ:COST) and Sears Holdings(NASDAQ:SHLD) Sears stores. Plus, these beds cost far less than $4,000 and are convenient for customers to consider buying at their own pace.

Sleep on this
Select Comfort will keep you tossing and turning at night if you're a shareholder. Only in your dreams will this company earn 50% annual returns. In the bright light of day the company is losing market share and deteriorating financially. There's no value hidden under these covers.

Think Select Comfort can make a comeback? Let us know in our community intelligence database: CAPS. Right now, Select Comfort has a three-star rating. Sign up for free, and issue a thumbs-down on this stock.

Want to know what other companies give us the frights? You can view the rest of our hair-raising stocks here.

Select Comfort is a Motley Fool Hidden Gems recommendation. You can try this market-beating service 30 days for free.

Costco is a Stock Advisor selection.

Mike Kasprzyk doesn't own any of the companies mentioned in this article but does sleep on a Select Comfort Sleep Number Bed. The Fool has a disclosure policy that sleeps hanging upside-down.