On Mar 12, 2014, Zacks Investment Research downgraded Select Comfort Corporation (SCSS), the mattress retailer, to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Estimates for Select Comfort have shown a downtrend since it reported dismal fourth-quarter 2014 results on Feb 5. The quarterly earnings of 12 cents a share missed the Zacks Consensus Estimate of 15 cents and dropped 45.5% from 22 cents delivered in the prior-year quarter. Tough macroeconomic conditions, higher costs and lower-than-anticipated sales were the primary factors behind the disappointing performance. In the trailing four quarters the company has missed the Zacks Consensus Estimate by an average of 15.2%.
Sales for the Minneapolis, Minn. based company came in at $230.9 million, up 4.7% year over year but fell short of the Zacks Consensus Estimate of $233 million. Comparable-store sales in the quarter remained flat year over year.
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 lower gross margin.
Anticipating revenue growth in the mid-to-high single-digit range and 20–30 additional net new stores during 2014, Select Comfort expects earnings for the year to come at par with 2013 adjusted earnings of $1.07 per share.
The lower-than-expected results triggered a downtrend in the Zacks Consensus Estimate, as analysts become less constructive on the stock’s future performance. This is evident from the movement witnessed in the Zacks Consensus Estimate, which fell 13.7% to $1.07 for 2014 and 17.6% to $1.26 for 2015 in the past 60 days.
Stocks that Warrant a Look
Better-ranked stocks in the retail sector include Hanesbrands Inc. (HBI) and Michael Kors Holdings Limited (KORS) with a Zacks Rank #1 (Strong Buy), and Columbia Sportswear Company (COLM) carrying a Zacks Rank #2 (Buy).