Seeking Alpha
Profile| Send Message|
( followers)  
Select Comfort (NASDAQ:SCSS) is an upscale vertically integrated mattress and other sleep accessories designer, manufacturer, marketer and retailer. Its mattresses are marketed under the Sleep Number brand name and based on its proprietary air-chamber technology which adjusts the softness of the bed with the touch of a button.

The bed’s two sides adjust separately from each other which increases each partner’s experience. Its beds are clinically proven to provide people who sleep on its mattresses with better sleep than people who sleep on the traditional innerspring mattresses.

Select Comfort is a Minnesota based corporation which was founded in 1987. It was ranked as the 6th largest mattress manufacturer in 2005 according to Furniture/Today. At that point, it held a 5% market share of industry revenue and a 2% market share of industry units.

It runs a lean inventory system with most of the mattresses manufactured after a purchase. Its inventory on hand is minimal. It's currently working on dual sourcing suppliers because its proprietary parts are mostly made by one manufacturer. This will help Select Comfort continue normal business operations if something happened to its main suppliers.

Industry

The mattress industry is stable and mature. It has been growing steadily. Over the past 20 years, the annual growth rate for U.S. wholesale bedding shipments is 6.8%. It is a very competitive and fragmented industry. There are also a wide variety of government regulations. The main competitors for air-bed products consist of Simmons and Sealy (ZZ). Its largest competitors from the innerspring mattresses consist of Sealy, Serta, Simmons and Spring Air.

Select Comfort will benefit from the health mega trend and the aging of baby boomers mega trend. People will want better mattresses that will help them with a better sleeping experience. This in turn will help people be more productive during the day.

Company
bed
Select Comfort makes some of the most expensive mattresses on the market, with prices averaging from $900 to $4,000 per mattress. It offers a 20 year warranty on all of its brand new Sleep Number mattresses. There is an exclusive Comfort Club for members who have purchased Sleep Number beds through company owned channels; members are provided with gifts if they refer someone to purchase a mattress. Select Comfort also provides a Home Delivery Service, which offers delivery, assembly and mattress removal services to improve the total customer experience, with the purchase of their mattress.

Over 90% of their sales come from their three company owned distribution channels, retail, direct and e-commerce. Wholesale and e-commerce have been the two fastest growing channels; they are the only two channels that grew in the 1st quarter compared to the same time period in 2006. Select Comfort consistently spends over 40% on Sales and Marketing expenses. They have been working on expanding their presence in other retailers; they currently have 841 stores that carry their products.

With all of this extra retail exposure, will it dilute its brand? Historically it has sold only through company controlled channels. Select Comfort has partnership agreements with Winnebago (NYSE:WGO) and Radisson Hotels to help promote its brand.

Valuation

SCSS is currently trading at a trailing p/e ratio of 21.43 and a forward p/e ratio for 2008 of 15.02. Its PEG ratio is .9. Its current ratio is .897, which is troublesome. Its balance sheet is solid, no debt and $66.8 million in cash and investments. 9.2% of the company is owned by insiders. Its accounts receivable rose significantly in 2006 compared to 2005, accounts receivable turnover decreased from over 110 times in 2005 to just over 66 times in 2006. It has been actively repurchasing its shares and shrinking the share count going from 59,252 outstanding diluted shares in 2004 to 51,798 outstanding diluted shares as of last quarter.

Select Comfort just authorized an additional $250 million of share repurchases for a current total of $290 million. Its Capital Expenditures are a significant use of its cash, it had expenses of $31 million in 2006, $26 million in 2005 and $21 million in 2004. Its CAPEX is mostly due to its retail store openings and as of recently, for its SAP implementation. Nevertheless, it still provided Free Cash Flow of $28 million, $62 million and $31 million in the past 3 years. SCSS is owned by Ron Baron, who is a famous growth investor. He mostly invests in small and medium size growth companies. This was a top 50 Magic Formula Stock with a market cap bigger than $100 million as of 6/3/2007.

Technicals

It is currently trading at around $18 a share. The long-term trend is down, the short-term trend is up and the medium-term trend is neutral. It just recently crossed above the 20DMA and the 50DMA. It is still below the 200DMA. The $17 level is proving to be a very strong support level. It’s been trading between $17 and $20 a share in the past 6 months. MACD and RSI are both showing a positive divergence. Both of them are trending up while the stock has been stuck in the range. Volume is also showing a positive divergence with the On Balance Volume in an uptrend. All three indicators are showing positive signs, but the stock is still stuck in its range and not trading above its three major moving averages. This bears watching, it could be due for a breakout with volume accumulating in bullish hands.

SCSS_06_03_2007

Conclusion

Select Comfort operates in a mature and stable market with solid growth. It's a narrow-scope differentiator and it knows what it is, it does not try to be everything to everyone. Management expected 2007 to be challenging for the company, but it still managed to beat 1st quarter analyst estimates. Its outlook for 2007 is earnings between $1.02 and $1.09 per share. Currently, the analysts estimate $1.00 a share. The resignation of J. Douglas Collier, who was the Chief Marketing Officer, should not be a problem since he was there for a very short time. The recent drop of stock price is due to the prospects of a challenging 2007 and its struggles late in 2006.

There is a lot to like about Select Comfort, its product, cash flows, management, growth and the price. I will be keeping a VERY close eye on it.

Disclosure: I don’t have a position in SCSS.

Source: Select Comfort: Much To Like, From Product To Price