Select Comfort: Sacrificing Short Term Results For Long Term Strength

| About: Sleep Number (SNBR)
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Select Comfort (SCSS) reported 2Q 2007 results yesterday.


  • Revenue decreased 5% to $179 million from $188.1 million in 2Q 2006
  • SSS down 14%
  • Cost of sales $69.46 million from $74.44 million in 2Q 2006
  • Sales and marketing costs $86.76 million from $78.63 million in 2Q 2006
  • Media spending up 12% to $25.2 million from 2Q 2006
  • Operating margin 2.7% from 8.8% in 2Q 2006
  • Net income $2.9 million ($0.06 per share) from $10.7 million ($0.19 per share) in 2Q 2006
  • Profit margin 1.6% from 5.7% in 2Q 2006
  • Diluted share count 49,858,000
  • Cash flow from operating activities $19.63 million from $7.1 million in 2Q 2006
  • Cash flow from investing activities $59.16 million from -$29.01 million in 2Q 2006
  • Cash flow from financing activities -$77.78 million from -$11.06 million in 2Q 2006
  • Total cash and marketable securities $12.7 million
  • Repurchased 3 million shares ($51.5 million worth) in the quarter
  • Company has repurchased $94.3 million worth of shares (5.4 million shares) through June 30, 2007
  • Opened 16 stores and closed 3 stores during quarter
  • Currently operating 460 stores
  • Fiscal 2007 Outlook

  • Expecting $840 million to $860 million in revenue
  • Expecting EPS of $0.87-$0.93
  • Remains confident in long-term outlook of 15% revenue growth and 20% sales growth
  • Analysts were expecting sales of $178.83 million and an EPS of $0.09. So Select Comfort was just able to beat sales estimates, but margin pressure pushed earnings below estimates. The main driver behind lower margins was a good-sized jump in sales and marketing expenses. Over the next few quarters we will get a better idea if this increased marketing is beneficial to the company or not. Increased spending isn't necessarily a bad thing, it's just a matter of whether or not this increased marketing will come back and reward the company. Select Comfort has been trying to reboot their advertising, so it will be interesting to see how this turns out. I'm confident enough in management to hold my position through these tough times, if their advertising is successful then this should really boost future results. What I like about this management team is that they are at least trying different things, looking at options, and putting out the effort to keep this company growing. It's a place this company hasn't really been in before, so it will definitely take time. But over the next 10-15 years and beyond, there's a lot of potential with this business.

    The business is still in pretty good shape, the business produced close to three times the cash flow produced in 2Q 2006. Cash is being produced, the balance sheet is still healthy, so the company can handle more rough spots. The company continues to snap up a lot of shares which can't be a bad sign, although it hasn't exactly been a great sign either over the past couple quarters. A lot of cash is being reinvested into the business; I think this management team is confident about the long-term. Currently I really think it looks like they're sacrificing short-term results for the long-term strength of the business. There will be many bumps in the road going forward because this product is a new idea and still has pretty small market share of the mattress industry. But, I simply think this company still has a lot of upside and I have faith in the current management team. Select Comfort is going through a transition year -- putting good amounts of money into research and equipment, changing around the advertising program, increasing advertising and marketing spending -- and this will likely continue at least through this year. If management is successful in this transition, I love the looks of the company's future.

    For the 3Q 2007, analysts are expecting an EPS of $0.26 on sales of $217.27 million. I think analysts have underestimated how long this transition will take, we'll most likely see these estimates (at least the EPS) lowered over the next few months. I remain confident in Select Comfort as a long-term investment, but it will require a lot of patience.

    Disclosure: Author has a long position in SCSS

    SCSS 1-yr chart