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Analyst Blog

Yesterday, Select Comfort Corp. disappointed investors again by reporting weak financial results for the fourth quarter and full-year 2013. Investors reacted negatively to the announcement and the share price of this mattress retailer fell nearly 2.9% in the after-hour trading session.

The company’s fourth-quarter earnings of 12 cents per share declined 45.5% from the comparable year-ago quarter figure of 22 cents and lagged the Zacks Consensus Estimate of 15 cents. Heightened macroeconomic challenges, higher costs and lower-than-expected sales were the primary factors behind the dismal performance.

Quarter in Detail

Net sales rose 4.7% year over year to $230.9 million primarily driven by store openings, product innovation and pricing action. However, quarterly sales fell short of the Zacks Consensus Estimate of $233 million. Comparable-store sales in the quarter remain flat year over year.

Gross profit in dollar terms came in at $140.5 million against $139.9 million in the year-ago period. However, Select Comfort’s gross profit margin contracted 260 basis points (bps) to 60.9% primarily due to higher cost of sales as a percentage of net sales and rise in product returns.

Total operational expenses rose 8.6% to $130.9 million in the quarter, mainly due to increase in sales and marketing costs as well as research and development expenses.

Select Comfort’s operating income decreased 50.3% from the prior-year period to $9.7 million, while operating margin as a percentage of net sales contracted 460 bps to 4.2%. The decline in margin was due to increased operating expenses as a percentage of net sales, along with a lower gross margin.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter was $19.3 million, decreasing 25.7% year over year, while EBITDA margin as a percentage of net sales fell 350 bps to 8.3%.

Full-Year 2014 Performance

Select Comfort’s adjusted earnings for the year fell 25.2% year over year to $1.07 and fell short of the Zacks Consensus Estimate of $1.10. On a reported basis, the company’s earnings per share came in at $1.08, registering a 21.2% year over year decline. Net sales for the period improved 2.7% to $960.2 million from the year-earlier quarter. However, it missed the Zacks Consensus Estimate of $962.0 million.

Balance Sheet and Cash Flow

Select Comfort, which competes with Leggett & Platt, Incorporated ended the year with cash, cash equivalents and marketable-debt securities of $110.4 million compared with $139.2 million at the end of 2012. During 2013, Select Comfort generated $88.1 million in cash from operations versus $100.6 million in 2012.

Capital expenditures for the period were $76.8 million as against $51.6 million recorded in 2012. The rise was due to increased investment in stores, technology and product innovation. During the quarter, the company bought back 0.5 million shares for about $10 million while in the full year, it repurchased 1.8 million shares for $40 million.

Store Update

Select Comfort opened 28 stores while shuttering 11 outlets during the fourth quarter. In 2013, the company opened 71 stores and closed 41 stores, thereby bringing the total store count at the end of the year to 440. The company expects to increase the store count by 20–30 by the end of 2014.

Guidance

Anticipating revenue growth in the range of mid-to-high single-digit range and 20–30 additional net new stores by the end of 2014, Select Comfort expects earnings for the year to come at par with 2013 adjusted earnings of $1.07 per share. The Zacks Consensus Estimate for the full year 2014 stands at $1.23 per share.

Furthermore, Select Comfort intends to make a capital expenditure of $70–$80 million in 2014 toward opening stores, relocating and remodeling outlets and enhancing information technology.

Other Stocks to Consider

Currently, Select Comfort carries a Zacks Rank #5 (Strong Sell). Investors interested in the furniture industry may consider stocks like Hooker Furniture Corp. and Virco Mfg. Corp. . While Hooker Furniture sports a Zacks Rank #1 (Strong Buy), Virco has a Zacks Rank #2 (Buy).

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