Buoyed by constant focus on product innovation, Select Comfort Corp. (SCSS) posted second-quarter 2014 earnings of 16 cents per share, which came ahead of the Zacks Consensus Estimate of 14 cents. However, earnings declined 11.1% year over year.
Investors seemed bullish on the company exceeding expectations as the shares jumped 10.4% in the post-market trading session.
Quarter in Detail
Net sales advanced 13.2% year over year to $234.8 million, cruising ahead of the Zacks Consensus Estimate of $224.0 million. Moreover, comparable-store sales in the quarter ascended 7% on a year-over-year basis.
The company’s results mainly benefitted from its strategy concentrated on product innovations. Select Comfort gained majorly from the favorable response of customers to its latest SleepIQ technology.
Driven by robust sales, the company’s gross profit climbed 8.4% to $142.4 million. However, Select Comfort’s gross profit margin contracted 270 basis points (bps) to 60.7%, as it was adversely affected by greater-than-expected demand leading to supply chain inefficiencies.
Total operational expenses rose 11.5% to $275.3 million in the quarter, mainly due to increase in sales and marketing costs as well as general and administrative expenses. This led Select Comfort’s operating income to plunge 23.5% to $38.5 million with the operating margin contracting 330 bps to 7.5%.
Balance Sheet and Cash Flow
Select Comfort, which competes with Leggett & Platt, Inc. (LEG) and Hooker Furniture Corp. (HOFT) ended the quarter with cash, cash equivalents and marketable-debt securities of $120.8 million, inventories of $43.2 million and total shareholders’ equity standing at nearly $233.0 million. At the quarter end, the company had no loans under its revolving credit facility.
During the second quarter of 2014, Select Comfort generated $49.6 million in cash from operations. Additionally, capital expenditures during the first half of 2014 increased to $40.0 million as against $37.0 million recorded last year. The rise was due to increased investment in stores, technology and product innovation.
Further, during the quarter, the company bought back 0.5 million of shares for about $10 million.
Select Comfort opened 16 stores, relocated 16 outlets and shuttered 8 outlets during the second quarter, taking the total store count to 451 by the end of the quarter.
Going forward, the company plans to introduce 20–30 net new outlets and take its store count to 460–470 by the end of 2014.
Following the second quarter and considering sustained technological investments coupled with a sluggish macroeconomic recovery, Select Comfort reiterated its outlook for 2014. The company continues to expect earnings for the year to be $1.07 per share. The Zacks Consensus Estimate for full-year 2014 currently stands at $1.08 per share.
The company anticipates margins to remain affected by unfavorable product mix for the back half of the year. However, with the expectation of some relief from improved volumes and efficiency, the company projects gross margin near 62% in the second half of 2014.
Furthermore, Select Comfort still intends to make a capital expenditure of $70–$80 million in 2014, allocated towards market development, further innovations and infrastructure enhancements.
Overall, management aims to maintain its focus on undertaking growth initiatives in order to drive customer value, which in turn will facilitate the company to boost shareholder returns.
Other Stocks to Consider
Currently, Select Comfort carries a Zacks Rank #3 (Hold). Another stock worth investment is Virco Mfg. Corporation (VIRC), which has a Zacks Rank #2 (Buy).