Is Now the Time to Buy Select Comfort?


Volatility can affect any stock, but typically, it's reserved for the high-tech, the micro cap, and sometimes, just the subject of market hysteria. You wouldn't think mattress makers would be wildly swinging stocks from month to month, or even day to day, but some are. For premium mattress manufacturer Select Comfort , a look at the one-year chart would suggest the mattress market is completely unhinged, with people binge buying beds for months followed by periods of nationwide sleep-abstinence. The company recently announced a largely encouraging earnings report and tepid guidance, sending the stock sliding down from over $28 per share, to just $17 -- a 35% drop in a matter of a month. But, with top-line sales up double digits, and valuable acquisitions in process, is the company oversold?

Mixed plate
Select Comfort's fourth quarter results seemed strong in some ways, but ultimately disappointed investors and analysts. On the top line, net sales grew an impressive 17%, to a record $221 million. That compares to $189 million in the prior year's fourth quarter. In company-owned stores, comps were up a remarkable 11%, which marks 13 consecutive quarters of double-digit comp growth.

On the downside, operating income sank 3%, to $19.4 million, based on weaker margins. Further down the income statement is where things really set off the bear roars -- bottom line earnings were down 19%, to $0.22 per share, from $0.27 per share the year before. Investors should note, though, that in the prior year's quarter, the company had a favorable interest expense change worth $0.03 per share in the quarter.

In the fourth quarter alone, the company opened twenty stores, ending the year with 410 total outlets for the mattresses, 19% of which are company-owned stand-alone stores.

For the full year, things were much brighter, and contradictory to the massive drop-off in stock price. Top-line results came in 26% higher than the year ago, to $935 million. Company-controlled comps grew 23%. Without the $5.6 million CEO-transition charge, results would have been even higher. Operating margins were up 1.5%, to contribute to a bottom line adjusted EPS of $1.43 (excluding the CEO charge).

At the end of December, the company held $178 million in cash with no debt on the books.

With the exception of the final two weeks of December, Select Comfort had a banner, record-breaking year.

So why has more than one-third of its market value vanished since the earnings release?

The why
The Street demands that companies hit a certain number on that bottom line. If it's not up to snuff, the stock gets a temporary smackdown. But Select Comfort didn't exactly have a bad year, to put it mildly.

At the time of its earnings release, Select Comfort was expecting a 15%-26% increase in full-year earnings for 2013, fueled by targeted comparable-store sales growth of 10% annually. By year's end, the company is looking to boost its store count to 445 from the aforementioned 410 currently. While that will raise expenses, yet again, as well as increas marketing costs, the top-line growth and solid operating margins should keep growth propped up.

Fast forward to last week, when the company hit a 52-week low. Management announced that February sales had been softer than they expected, due to a combination of consumer sentiment and poor media buying. This should prevent the company from reaching its first quarter goals, but ultimately is to be viewed as a short-term aberration. Still, the stock sank double-digits.

What now?
At nine times 2013 expected earnings, Select Comfort is far less expensive than competitor Tempur-Pedic at more than 15 times forward earnings. Tempur-Pedic is a similarly volatile stock that can crash double digits if management whispers any derivative of the phrase "softened demand."

Given the company's growth prospects, but with volatility in mind, investors should only look at Select Comfort as a long-term play on the housing recovery and the continued build-out of company-owned stores, which seem to be driving growth. Competition in this space is fierce, and non-premium brands, such as Mattress Firm, have stepped up to try and take a piece of the space currently dominated by the Tempur-Pedic and Select Comfort duopoly.

Short-term fluctuations will likely swing the stock wildly, as it has in the recent past. Five-year performance of Select Comfort shows near 360% growth. Tempur-Pedic has risen 170%. Does the stock still have room to grow? Current valuation and growth prospects suggests yes; just don't check in on your stock every day.

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Fool contributor Michael B. Lewis has no position in any stocks mentioned. The Motley Fool owns shares of Tempur-Pedic 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.

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