essays pieces of the puzzle
Wednesday, February 6th, 2013
finding the right number

13 0206 zSCSS

Select Comfort (SCSS) came public in late 1998.  Since that time it has suffered a couple of near-death experiences, but it was only sleeping.  (OK, I couldn’t resist.)

The maker of the “sleep number” beds has been on a tear since the bottom of the recession, beating analyst estimates fifteen quarters in a row — until the most recent one, when it missed big.

However, the top panel of the chart shows that free cash flow has been flat to down during most of that time, even as earnings continued to rise.

Operating margins have also flattened after the big rebound from negative territory, as illustrated in the middle panel.  The company has set forth goals (which Bloomberg reports as “guidance”) of a 15% operating margin and “at least $1.5 billion in sales” by 2015.  Sales for the last twelve months were $934 million.  Are the goals attainable or just growth promises?

The bottom panel plots the total return of the stock since its debut, relative to the Russell 2000 Index.  It started getting wobbly during 2012, amid reports of increased competition in the bedding market.  SCSS looked to be avoiding those problems until that earnings miss.

Like many consumer cyclicals, this one appears to have a lot of macro risk.  In addition, we’ll see whether there are any lingering bed bugs (to give the Street’s cockroach analogy a twist) from the growth push that it has been on.  (Chart:  Bloomberg terminal.)

I am honored to be included in the new Wall Street Journal expert forum with a group of industry stalwarts.  It will be interesting to see where this exciting new initiative goes from here.