I’ve never been crazy about mattress stocks. Mattresses are kind of like cars in that they are a long-term purchase, but one that eventually gets repeated.
The difference, however, is that mattresses always seemed to me to be commodities. Cars are not. So I’ve always looked askance at Select Comfort (NASDAQ:SCSS), but so much time has gone by that I think SCSS has proven it’s unique in the marketplace.
Select Comfort’s latest earnings report certainly supports that argument. The company delivered record sales of $205 million, up 27% year-over-year, and record earnings per share of 30 cents, up 44%. Gross margin was 64.1%, thanks to a 13% increase in average sales price, and operating margin also hit a record at 12.6%. The company also generated free cash flow of about $20 million.
Even better, SCSS boosted earnings guidance to between $1.41 and $1.47, and plans to boost its store count from 381 to as high as 410.
So, yes, Select Comfort is quite comfortably leading the charge in terms of its original brand of mattress. Its Sleep Number bed has caught on big-time, which I never believed it would.
Furthermore, Select Comfort’s beds are considered luxury models, so people fork over premium prices for them. The company’s new Sleep Number m9 foam bed retails for a whopping $4,699 for a queen set. That’s multiples of what the same mattresses sell for at Macy’s (NYSE:M) or Sears (NASDAQ:SHLD) or J.C. Penney (NYSE:JCP).
Part of the success might be attributed to the increased media spend the company initiated, some 37% YOY. This marketing push has increased unaided brand awareness from 15% to 20%.
In short, management seems exceptionally focused, with a solid understanding of their brand and how to communicate effectively to potential customers.
Meanwhile, competitor Tempur-Pedic International (NYSE:TPX) is struggling, despite what Wednesday’s stock bump might indicate.
The company’s EPS fell by more than 40% in its second quarter, mattress sales decreased 4%, gross margins fell from 52.9% to 50.7%, and operating margins got hammered — falling to 14.4% from 24.2%. Debt increased by almost a hundred million bucks to $681 million, offset by $134 million in cash.
Tempur-Pedic’s management is, in my opinion, foolishly buying back shares to the tune of $138 million instead of deleveraging. In the comparable six-month period, free cash flow fell to $66 million from $89 million.
You probably can see the stark contrast between the two companies, which is why I’d buy Select Comfort and sell Tempur-Pedic.
Lawrence Meyers is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs. As of this writing, he was long JCP.
