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Headquartered in Minneapolis, Select Comfort Corporation (SCSS - Snapshot Report) – a retailer of bed mattresses and other sleep related goods – recently posted better-than-expected third quarter 2012 financial results. Both the top line and bottom line of the company were above the Zacks Consensus Estimates.

Quarterly earnings of 46 cents per share surpassed the Zacks Consensus Estimate of 40 cents and jumped 48% from 31 cents earned in the comparable prior-year quarter. The increase in earnings is mainly attributable to double-digit top-line growth and significant improvement in margins.

Quarter in Detail

Select Comfort witnessed a substantial increase of 24% in net revenue, reaching a level of $247 million compared with $200 million in the prior-year quarter. The double digit growth in revenue was mainly due to 21% increase in comparable store sales cushioned by a growth of 31% in retail sales-per-comparable store over the previous one year. Moreover, revenue exceeded the Zacks Consensus Estimate of $246 million.

Gross profit increased 27.8% to $160.7 million, versus $125.8 million in the third quarter of 2011. Consequently, gross margin improved 210 basis points (bps) to 65.1% in the quarter. The improvement was noticed due to contraction of cost of goods sold as a percentage of sales along with the positive impact of pricing and mix related to new product innovations.

Improvement in gross margin, leverage on marketing and sales expenses, led to a double fold increase in operating income to $40.2 million, reflecting an expansion of 300 bps in operating margin to 16.3%. Moreover, it is witnessed that the company has been achieving double digit growth in operating income since the last 15 consecutive quarters.

Other Financial Aspects

Select Comfort, which faces stiff competition from Sealy Corporation , ended the third quarter with cash and cash equivalents of $157.6 million (including the current marketable debt securities). During the first nine months of 2012, Select Comfort generated $98 million from operating activities compared with $75 million in the last year quarter. This will enable the company to make capital investments, pay dividends and repurchase shares.

The company incurred $37 million towards capital expenditure, attributable to funds invested in opening new stores and improving IT systems.

During the quarter the company bought back 0.4 million shares worth of $10 million. Year-to-date the company has deployed $20 million to buy back around 0.8 million shares of its common stock. This demonstrates that the company remains committed to return value to its shareholders.

Raised Outlook

Based on better-than-expected and strong quarterly results, the company raised its outlook for the year 2012. Select Comfort now expects earnings to be in the range of $1.51–$1.53 per share, representing a year-over-year growth of 41%–43%. Earlier, the company has guided earnings range of $1.41–$1.47, an increase of 32%–37% compared with the prior-year quarter. The new earnings guidance range anticipates a 20% increase in net revenue for the fourth quarter 2012.

The company maintained its capital expenditure guidance at $50 million, to be used mainly for new store openings, renovations and remodels along with improvement in IT systems. Further, Select Comfort estimates to continue the share repurchase activity for the rest of 2012 with an aim of maintaining its share count.

Stores Update

Management believes that the increase in sales was also attributable to 20 new store openings year-to-date, comprising 13 new stores launched in the third quarter. At the quarter-end the company operated 394 stores and plans a total store count of 408–412 by the end of 2012. This represents an increase of 7%–8% compared with 381 stores at the end of 2011.

Zacks Rank & Recommendation

Select Comfort currently carries a Zacks #1 Rank, implying short-term Strong Buy rating on the back of continued positive earnings surprise over the last four quarters. However, we maintain our long-term ‘Neutral’ recommendation on the stock.

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