Select Comfort (SCSS)

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See all Bulls Reasons Bulls: Reasons To Buy Operation in the fastest growing segment in the industry 0% agree Operation in the fastest growing segment in the industry Select Comfort's Sleep Number Bed operates in the fast growing specialty sleep segment. View or Edit Reason 0 votes 0% agree Expansion of retail stores 0% agree Expansion of retail stores An expanding number of independently-owned stores should boost Select Comfort brand awareness and sales. Essentially, Select Comfort will be able to reach more consumers by having retail stores in more locations. View or Edit Reason 0 votes 0% agree Switch in software bodes well for Select Comfort 0% agree Switch in software bodes well for Select Comfort Current increases in media and R&D expenses should benefit sales in 2008. Select Comfort expects 2007 R&D expense to be 50% higher than 2006. Also, a switch to using SAP software should lead to more efficient operations. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell Competition encroaching onto market segment 0% agree Competition encroaching onto market segment Large competitors, such as Sealy (ZZ) and Simmons Bedding, are placing more advertising spending towards their specialty bedding products, in which Select Comfort operates. View or Edit Reason 0 votes 0% agree Weak same-store sales 0% agree Weak same-store sales Same store sales have been week for the last year. This weakness may continue, which would negatively impact income. View or Edit Reason 0 votes 0% agree Demand for premium mattresses to go down 0% agree Demand for premium mattresses to go down Weak consumer spending in 2008, could adversely affect sales. Select Comfort's mattresses usually list for higher prices than traditional innerspring mattresses. If the U.S. experiences a recession, then consumers may not buy a new mattress or may opt for the cheaper innerspring ones. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

Top Contributors Andrew Liyana Related Articles Sealy (ZZ) Aging Baby Boomers Consumer credit E-Commerce Same store sales

Select Comfort (NASDAQ: SCSS) makes and sells premium mattresses and pillows. Their "Sleep Number" mattresses differentiate themselves from the competition by allowing customers to customize the firmness of their beds. This features allows the company to charge nearly double the price on average ($1,700) compared to a traditional innerspring mattress ($900)^[1].

Select Comfort is vertically integrated, meaning that it has a hand in manufacturing and selling its mattresses. In fact, 90% of its sales are made directly to consumers,^[2] most of which come through its over 400 stores in the U.S. and Canada.

The company will likely benefit from the aging of baby boomers, many of whom are willing to pay premiums to ease the pains of growing older and sleep more comfortably. Already, consumers such as these have made the specialty sleep market the fastest growing segment of the $12 billion U.S. bedding market. ^[3] However, a slowdown in the U.S. housing market could decrease the number of upgrades to larger homes (with more bedrooms) and second home purchases, both which directly drive mattress sales. ^[4]

[edit] Business Overview

Select Comfort operates a mostly vertically integrated business, meaning that it does everything from manufacturing to distributing and selling its mattresses (the company does rely on a few raw materials suppliers).

The bedding company distributes its Sleep Number beds and accessories through four channels: retail, direct, e-commerce, and wholesale. Its retail channel accounted for 76% of 2006 net sales^[5] and is divided into two subdivisions:

• Company owned and operated stores: As of September 30, 2007, Select Comfort indepedently owns 471 stores
• Retail partner program: The company had partnerships with 11 home furnishing retailing and specialty bedding retailers, which gave them access to 770 retail locations. ^[6]. E-Commerce and direct sales accounted for 15% of 2006 revenue^[7].

[edit] Key Operating Metrics

Select Comfort Financial Data^[9][10][11]

Increases in company-owned retail stores and retail partner doors, along with a healthy rise in same-store sales numbers, led to higher net sales and income. Select Comfort also benefited from a price increase in late 2005 and shift towards more expensive models by the consumer^[12].

^{[13][14][15][16][17][18][19][20][21][22][23][24]}

The graph compares same store sales figures with diluted earnings per share data. For instance, Q1-2007 shows a -11% decrease in same store sales and no change in EPS growth. This means sales at stores opened at least one year fell 11% from the same period a year ago. Likewise, EPS for Q1-2007 did not change much from earnings in Q1-2006. Sales for the first nine months of 2007 were relatively flat compared to the first nine months of 2006 due to an increase in the number of company-owned stores, offset by a 10% decline in comparable same-store sales. Mattress units and price in 2007 were fairly close to 2006 numbers, and sales of other accessories experienced a 2% rise^[25].

[edit] Summary of Company Forecasts

• Select Comfort has stated plans to increase its retail locations to 600-650 company-owned locations in the United States and 1,000 U.S. partner doors.
• The company anticipates increasing media expense in order to expand market awareness through channels such as the QVC Television Shopping Channel and Radisson Hotels and Resorts^[26]
• Select Comfort expects research and development expenditures to be 50% higher in 2007 than 2006, and the costs should benefit results of operations starting in 2008^[27]
• Select Comfort will implement SAP software in the beginning of 2008. Select Comfort expects the SAP application to increase flexibility and functionality of its business model, and be less expensive to maintain in the long-run^[28].

[edit] Key Trends and Forces

• Specialty Sleep is the fastest growing segment of the estimated $12 billion bedding retail market^[29]. An increasing number of consumers are looking for products to help them get a good night's sleep, and as a result, looking to buy specialty sleep products, which range from water, foam, air, and visco-elastic bedding (Select Comfort uses air in its mattresses). A complementary trend is affecting the pillow segment as well. Should this move away from traditional innerspring mattresses and feather pillows continue, Select Comfort will likely experience an increase in sales.

• Aging Baby Boomers have increasing demands for Select Comfort's mattresses and pillows. As baby boomers age, they will likely experience increases in pain in joints and muscles, and buy products that diminish the pain. Moreover, they may experience more difficulty sleeping. Select Comfort's mattresses have been clinically tested to prove that they can help someone fall asleep quicker and experience deeper sleep compared to traditional innerspring mattresses^[30].

• Dependence on a single product-line, its Sleep Number beds, may make the company highly susceptible to changes in the specialty sleeping market. For instance, the major traditional mattress players, Select Comfort (SCSS), Sealy (ZZ), Simmons, and Serta, could develop a product that rivals or copies the Select Comfort mattress, thus weakening Select Comfort sales. Sealy (ZZ) and Simmons already offer air bed mattresses.

• A US recession could adversely affect Select Comfort sales. With the majority of revenue being generated in the United States, weak consumer spending could hurt Select Comfort sales. The average Select Comfort mattress sells for roughly $1,700, while innerspring mattresses cost around $900 on average^[31]. If consumer is overextended, they may opt to withhold renewing their mattress or buy the cheaper traditional one.

• The U.S. Housing Market could affect the overall market for mattresses. If Americans add second homes and buy larger houses, this would likely increase mattress demand. This increased demand would result from a need to buy bedding for a secondary home and an increase in space leads to buying bigger mattresses.

[edit] Competition and Market Share

The mattress industry consists a few large national players, Serta, Sealy (ZZ), Select Comfort (SCSS), Simmons, Tempur-pedic International (TPX), and Spring Air. These six leaders account for more than 60% of the industry's sales and lead approximately 500 U.S. bedding manufacturers^[32].

Bedding products fall in either traditional and/or specialty sleep products and most companies have developed products in recent years to address the faster growing specialty segment. Sealy (ZZ), the largest bedding manufacturer in the world, and Simmons Bedding offer air mattresses that directly compete with Select Comfort's Sleep Number Beds.

The International Sleep Products Association reported that wholesale bedding manufacturers reported total sales of $6.4 billion in 2005, with a 6.3% in 2006^[33]. Wholesale bedding shipments increased at a compound annual growth rate of 6.8%, 7.2%, and 6.8% for the 5-year, 10-year, and 20-year periods ended 2005, respectively^[34]. The market for U.S. bedding retail industry was $12 billion in 2005 and estimated to have been $12.5 billion in 2006^[35].

The following table shows total domestic sales figures, along with the number of retail outlets, for the largest firms in the mattress manufacturing industry.

Comparing Companies in the U.S. Bedding Industry^{[36][37][38][39]}

[edit] References

1. ↑ Select Comfort Form 10-K, Fiscal Year 2006, "Competitive Strengths", Page 2
2. ↑ Select Comfort (SCSS) Form 10-K, Fiscal Year 2006, "Competitive Strengths", Page 2
3. ↑ Select Comfort Form 10-K, Fiscal Year 2006, "Competitive Strengths", Page 2
4. ↑ Select Comfort (SCSS), Fiscal Year 2006, "Risk Factors", Page 12.
5. ↑ Select Comfort (SCSS) Form 10-K, Fiscal Year 2006, "Sales Distributions", Page 4
6. ↑ http://www.selectcomfort.com/corporation/investor_relations/select_comfort_investor_relations.cfm
7. ↑ Select Comfort (SCSS) Form 10-K, Fiscal Year 2006, "Sales Distribution", Page 4
8. ↑ http://www.selectcomfort.com/air_mattress_beds/sleep_number_9000.cfm
9. ↑ Select Comfort (SCSS) Form 10-K, Fiscal Year 2006, "Risk Factors", Page 13
10. ↑ Select Comfort (SCSS) Form 10-K, Fiscal Year 2006, "Overview", Page 30
11. ↑ Select Comfort (SCSS) Form 10-K, Fiscal Year 2006, "Selected Financial Data", Page 28
12. ↑ Select Comfort Form 10-K, Fiscal Year 2006, "Comparison of 2006 and 2005", Page 32
13. ↑ Select Comfort (SCSS) Form 10-Q, 3Q Fiscal Year 2007, "Financial Statements", Page 4
14. ↑ Select Comfort (SCSS) Form 10-Q, 2Q Fiscal Year 2007, "Financial Statements", Page 4
15. ↑ Select Comfort (SCSS) Form 10-Q, 1Q Fiscal Year 2007, "Financial Statements", Page 4
16. ↑ Select Comfort (SCSS) Form 10-Q, 1Q Fiscal Year 2006, "Financial Statements", Page 4
17. ↑ Select Comfort (SCSS) Form 10-Q, 2Q Fiscal Year 2006, "Financial Statements", Page 4
18. ↑ Select Comfort (SCSS) Form 10-Q, 3Q Fiscal Year 2006, "Financial Statements", Page 4
19. ↑ Select Comfort (SCSS) Form 10-Q, 3Q Fiscal Year 2007, "Results of Operations", Page 14
20. ↑ Select Comfort (SCSS) Form 10-Q, 2Q Fiscal Year 2007, "Results of Operations", Page 14
21. ↑ Select Comfort (SCSS) Form 10-Q, 1Q Fiscal Year 2007, "Results of Operations", Page 14
22. ↑ Select Comfort (SCSS) Form 10-Q, 1Q Fiscal Year 2006, "Results of Operations", Page 14
23. ↑ Select Comfort (SCSS) Form 10-Q, 2Q Fiscal Year 2006, "Results of Operations", Page 14
24. ↑ Select Comfort (SCSS) Form 10-Q, 3Q Fiscal Year 2006, "Results of Operations", Page 14
25. ↑ Select Comfort (SCSS) Form 10-Q, 3Q Fiscal Year 2007, "Comparison of Nine Months ended September 30", Page 16
26. ↑ Select Comfort (SCSS) Form 10-K, Fiscal Year 2006, "Growth Strategy", Page 3
27. ↑ Select Comfort (SCSS) Form 10-K, Fiscal Year 2006, "Accelerating Innovation", Page 4
28. ↑ Select Comfort (SCSS) Form 10-K, Fiscal Year 2006, "Information Systems", Page 7
29. ↑ Tempur-pedic International (TPX) Form 10-K, Fiscal Year 2006, “Our Market Position”, Page 2
30. ↑ Select Comfort Form 10-K, Fiscal Year 2006, "Competitive Strengths", Page 2
31. ↑ Select Comfort Form 10-Q, 3Q: 2007, "Comparing Nine Months", Page 16
32. ↑ Simmons Form 10-K, Fiscal Year 2006, "Competition", Page 5
33. ↑ Simmons Form 10-K, Fiscal Year 2006, "Industry", Page 2
34. ↑ Select Comfort Form 10-K, Fiscal Year 2006, "Industry and Competition", Page 8
35. ↑ Select Comfort Form 10-K, Fiscal Year 2006, "Industry and Competition", Page 8
36. ↑ Sealy From 10-K, Fiscal Year 2006, "Results of Operations", Page 32
37. ↑ Simmons Form 10-K, Fiscal Year 2006, "Customers", Page 4
38. ↑ http://www.selectcomfort.com/corporation/investor_relations/select_comfort_investor_relations.cfm
39. ↑ Tempur-Pedic Form 10-K, Fiscal Year 2006 "Comparing Sales", Page 27