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Select Comfort Misses Estimates

Zacks Equity Research

Select Comfort Corporation (SCSS), a retailer of bed mattresses and other sleep related goods, recently posted lower-than-expected fourth quarter financial results. Quarterly earnings of 22 cents per share lagged the Zacks Consensus Estimate by 10 cents and declined 8.3% from 24 cents earned in the comparable prior-year quarter. The decrease was mainly attributable to a significant fall in operating margin.

Let’s Unveil Further

Minneapolis based Select Comfort witnessed a substantial increase of 16.7% in net revenue, reaching a level of $220.6 million compared with $189.1 million in the comparable prior-year quarter. The double-digit growth in revenue was mainly due to 11% increase in comparable-store sales and a benefit of 6 points coming from net new store growth. However, revenues missed the Zacks Consensus Estimate of $231.0 million.

Gross profit increased 17.6% to $139.9 million, versus $119.0 million in the fourth quarter of 2011. Consequently, gross margin improved 60 basis points (bps) to 63.5% from 62.9%. The improvement was attributable 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.

Operating expenses increased 21.7% year over year to $120.5 million primarily due to a rise of 23.3% in sales and marketing expenses. Consequently, operating income declined 2.8% to $19.4 million, reflecting a contraction of 180 bps in operating margin to 8.8%.

Other Financial Aspects

Select Comfort ended the fiscal with cash and cash equivalents of $139.2 million (including the current marketable debt securities). During the period, Select Comfort generated $100.6 million from operating activities compared with $91.0 million in the previous fiscal. This will enable the company to make capital investments, pay dividends and repurchase shares.

The company incurred $51.6 million towards capital expenditure, attributable to funds invested in opening new stores and improving IT systems.

During the quarter, the company spends $10 million to buy back 0.4 million shares. Year-to-date the company has deployed $30 million to buy back around 1.1 million shares of its common stock. This demonstrates that it is committed to return value to its shareholders.

Fiscal 2013 Outlook

Select Comfort provided its outlook for the year 2013. The company expects earnings to be in the range of $1.65–$1.80 per share, representing a year-over-year growth of 15%–26%. The new earnings guidance range is anticipated to result in at least 10% hike in comparable store sales and 25–35 new stores.

Moreover, the company is anticipating capital expenditure in between $70.0 million and $80.0 million, mainly for new store openings, renovations and remodels along with improvement in IT systems. Further, Select Comfort is likely to continue share repurchase activity in 2013 with an aim of maintaining its share count.

Other Recent Events

In an effort to expand its product portfolio, on Jan 17, 2013, this Zacks Rank #3 (Buy) company acquired Comfortaire Corporation for $15.5 million. The deal was funded through its available cash and reserves. Comfortaire –the second largest manufacture and market adjustable air-supported sleep systems – is expected to further strengthen Select Comfort’s competitive advantage against Flexsteel Industries Inc. (FLXS), Furniture Brands International Inc. (FBN) and Kimball International Inc. (KBALB). All these companies carry Zacks Rank #3 (Buy).

Apart from this, Select Comfort also made an equity investment of $4.5 million in one of its product development partners, which complies with its planned product launch over the next 12 to 24 months.

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