Why Select Comfort's Shares Dropped

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of specialty mattress manufacturer Select Comfort (NAS: SCSS) were causing investors to toss and turn as they fell as much as 11% in intraday trading after the company reported first-quarter results.

So what: In an interesting twist, Select Comfort managed to beat analysts' estimates on both the top and bottom lines, but shares still fell. For the first quarter, the company tallied total sales of $262 million versus the estimated $234 million. Earnings per share were $0.45, easily above the $0.40 average estimate from Wall Street.


The concern may be that while the company notched solid growth, both gross and operating margins fell as the company's cost of sales climbed. Investors may worry that higher costs could crimp future growth.

Now what: Based on the company's projection of earnings per share of $1.38-$1.46 for all of 2012, investors are paying a reasonably high price for Select Comfort's shares. Recent growth, including the 35% year-over-year jump in net income in the first quarter, makes a rich price seem more reasonable, but it will also keep investors on edge if there are signs that growth will stall out -- an issue that's hit the company in the past.

That said, the first quarter looks pretty darn good and it makes me wonder whether investors are overreacting here.

Want to keep up to date on Select Comfort?Add it to your watchlist.

At the time this article was published Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.Fool contributorMatt Koppenhefferdoes not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting hisCAPS portfolio, or you can follow Matt on Twitter@KoppTheFoolorFacebook. The Fool'sdisclosure policyprefers dividends over a sharp stick in the eye.

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