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Select Comfort Misses Earnings, Guides Low

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Select Comfort Corporation reported third-quarter 2013 earnings per share of 36 cents, which came below the Zacks Consensus Estimate of 42 cents and fell 21.7% from the year-ago quarter earnings of 46 cents. Heightened macroeconomic challenges, higher costs and lower-than-expected sales were the primary factors behind the dismal performance. Consequently, the company lowered its full-year earnings guidance.

Quarter in Detail

Net sales rose 7.0% year over year to $263.7 million but fell short of the Zacks Consensus Estimate of $278 million. Comparable-store sales dropped 1% year over year.

Due to the increased cost of sales, Select Comfort’s gross profit margin as a percentage of net sales contracted 200 basis points (bps) to 63.1%. Gross margin was also impacted by rise in product returns, partly offset by supply-chain efficiencies.

Total operational expenses rose 12.6% to $135.7 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 24.0% from the prior-year period to $30.6 million, while operating margin as a percentage of net sales contracted 470 bps to 11.6%. The decline in margin was due to rise in sales and marketing expenses as well as research and development expenditure, and a lower gross margin. These were partly offset by lower general and administrative expenses.

Adjusted EBITDA for the quarter was $39.7 million, down 15.1% year over year, while EBITDA margin as a percentage of net sales fell 390 bps to 15.0%.

Balance Sheet and Cash Flow

Select Comfort ended the quarter with cash, cash equivalents and marketable-debt securities of $164 million compared with $193 million at the end of the year-ago quarter. During the first nine months of 2013, Select Comfort generated $90 million in cash from operations as against $98 million generated in the comparable period of 2012.

Capital expenditures for nine months period were $57.8 million as against $36.8 million recorded in the nine months ended Sep 29, 2012. The rise was due to increased investment in stores, technology and product innovation. During the quarter, the company bought back nearly 0.4 million shares for about $10 million.

Store Update

Select Comfort opened 16 new stores, shut down 6 outlets and ended the quarter with 423 stores. The company expects to increase the store count to 435–445 by the end of 2013.


Select Comfort projected its fourth-quarter 2013 earnings in the range of 18–26 cents, GAAP earnings in the band of $1.14 –$1.22 from $1.30–$1.45 as projected earlier. Further, management expects total net sales to increase in low double digits and comparable-store sales are anticipated to grow in mid single digits.

The Zacks Consensus Estimate for the fourth quarter 2013 and full year 2013 stands at 31 cents and $1.32, respectively. Given the trimmed guidance, it is most likely that these estimates will be revised downward in the near future.

Also, Select Comfort might face a change in its rank owing to downward estimate revisions. Currently, the company carries a Zacks Rank #2 (Buy).

Other stocks that are performing well in the furniture sector include American Woodmark Corp. (AMWD - Free Report) , La-Z-Boy Incorporated (LZB - Free Report) and Leggett & Platt, Incorporated (LEG - Free Report) . While American Woodmark and La-Z-Boy both carry a Zacks Rank #1 (Strong Buy), Leggett & Platt has a Zacks Rank #2.

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