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Select Comfort Misses on Earnings

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Muted sales and increased promotional expenses took a toll on Select Comfort Corporation’s second-quarter fiscal 2013 results. The mattress retailer posted quarterly earnings of 18 cents a share that missed the Zacks Consensus Estimate of 23 cents and plunged approximately 40% year over year.

Net sales for this Zacks Rank #4 (Sell) stock inched up 1% year over year to $207.4 million but came below the Zacks Consensus Estimate of $215 million. Moreover, comparable store sales decreased 6% year over year at company-controlled stores.

Gross profit remained almost flat at $131.4 million, while gross margin contracted 70 basis points to 63.4%. The decline reflected soft sales coupled with a 70 basis points expansion in cost of goods sold as a percentage of sales.

Select Comfort’s operating income plunged 41.6% year over year to $15.1 million, whereas the company’s operating margin contracted 530 basis points to 7.3%, reflecting rise in sales and marketing expenses coupled with an increase in research and development costs.

The company ended the quarter with cash and cash equivalents of $58.2 million and generated cash flow from operating activities of $36.1 million in the first half of fiscal 2013. Moreover, the company incurred capital expenditures of $37.1 million during the first six months of 2013. During the quarter, Select Comfort repurchased $10 million worth of shares. The company had no borrowings under its revolving credit facility. 

During the quarter, the company opened 17 stores and closed 15, bringing the total store count to 413. 

Outlook Maintained

Despite delivering sluggish results, Select Comfort stood by its earlier guidance for fiscal 2013. The company forecasts GAAP earnings per share to be in the range of $1.30 – $1.45. It expects net sales to increase in the high-teens rate.

Moreover, the company is anticipating capital expenditure in the range of $70 million – $80 million, mainly for new store openings, renovations and remodels along with improvement in IT systems. Further, Select Comfort is likely to continue with its share repurchase activity.

Other Stocks to Consider

Not all retail stocks are performing as poorly as Select Comfort. Here are some other retail companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Deckers Outdoor Corp. (DECK - Free Report) , Earnings ESP of +13.21% and a Zacks Rank #2 (Buy).

The Gap, Inc. (GPS - Free Report) , Earnings ESP of +1.70% and a Zacks Rank #2 (Buy).

Rent-A-Center, Inc. (RCII - Free Report) , Earnings ESP of +1.33% and a Zacks Rank #2 (Buy).

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