Which Industry Is Conn's Telling You to Buy?

Before you go, we thought you'd like these...
Before you go close icon

Conn's is a fast-growing retailer of electronics, furniture, and other household products, making it a direct competitor to the likes of Best Buy and RadioShack. And while Conn's may be a great investment, its earnings are a great indication of economic performance, which suggests that mattress companies are a good space to explore.

A fast-growing retailer
In the last year, Best Buy's stock has soared more than 210%, and much of those gains have been created with flat year-over-year sales. Essentially, Best Buy reached a bottom in its fundamental decline and found a way to better monetize its square footage. Thus, investors bought shares of the company.

On the other hand, Conn's has soared nearly 160% in the last year, and it has done so very quietly. Unlike Best Buy, Conn's is seeing explosive growth. In its last quarter , Conn's announced record revenue as sales rose an incredible 50.6% year over year, and the company guided for full-year same-store sales growth of 22%-25%.

A growth driver to explore
While Conn's' growth is something to admire, what might be just as important is what the company's report tells us about consumer demand. For example, Conn's' growth was driven, in part, by the performance of mattresses and furniture.

In the quarter, mattresses and furniture accounted for $63.2 million of the company's $310.9 million of total sales. This represents year-over-year growth of 95.7 %. Moreover, Conn's noted that mattress unit volume increased 40%, while the average selling price soared 19%.

Both Conn's' mattress volume and price increases are bullish signs for an industry that has struggled as of late with slowed volume and record-low prices.

With that said, when a company such as Conn's sees such tremendous growth from an unexpected industry, investors must look at what exactly Conn's is selling. According to the company's website, Conn's sells Serta and Sealy mattresses.

A company to watch - Tempur Sealy International
As you might expect, Conn's did not provide specifics per brand, but if Conn's is seeing such rapid growth in this segment one has to believe that other companies are seeing an increase in demand. Tempur Sealy International is a company that investors must monitor.

Tempur Sealy was one of the better-performing stocks in the three years following the recession, but since April 2012, its stock has declined nearly 40%. The company has struggled as mattress sales have been weak, and increased competition has caused pricing pressure and significant margin declines.

Tempur Sealy's current operating margin of 12% hardly compares to the 25% it had in 2011. However, with Conn's noting a 19% increase in the prices per-unit, investors have to assume this relates to Sealy. With that said, Tempur Sealy has seen one-month gains of 27%. But if, in fact, the overall mattress business is improving, there are far higher gains to be created.

Another mattress company to monitor - Select Comfort
While Tempur Sealy is the obvious stock to watch given Conn's' earnings, investors might also monitor Select Comfort . Conn's does not sell Select Comfort products, but it and Tempur Sealy tend to trade in tandem.

Like Tempur Sealy, Select Comfort has faced the same problems and has seen its stock decline at the same rate over the last 16 months. However, Select Comfort is an interesting company because it sells its products at company-owned stores , rather than relying solely on third-party retailers.

Select Comfort has the potential to create higher margins by cutting out the middle-man retailer, and despite industrywide pricing pressure, Select Comfort has not faced near the margin weakness of Tempur Sealy. The reason is because of Select Comfort's transition to owning more product-focused stores, which might make the stock attractive if the mattress market continues to recover.

Final thoughts
If signs of a mattress turnaround persist, then investors definitely want to keep an eye on Tempur Sealy and Select Comfort in the near future. These are two beaten-down stocks that could soar with a reemergence in the mattress industry.

With that said, Conn's is an obvious investment choice, a retailer with industry-leading growth that trades at just 18.5 times next year's earnings. Overall, there's a lot to be seen from Conn's' earnings report, and a lot to like for investors.

These two companies are winners in retail
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

The article Which Industry Is Conn's Telling You to Buy? originally appeared on Fool.com.

Brian Nichols has no position in any stocks mentioned. The Motley Fool owns shares of Tempur Sealy International. 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. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

People are Reading