After a weak quarterly report from a leading mattress company, should investors of its competitor also be worried?
Select Comfort Corp. (NASDAQ:SCSS) and Tempur Sealy International Inc (NYSE:TPX) tend to piggyback off the other, as one company’s earnings is an indication of the other. Granted, with Tempur Pedic’s acquisition of Sealy there are a few fundamental changes that will occur, but for the most part, these two companies are the primary players in the luxury mattress space.
Select Comfort Corp. (NASDAQ:SCSS) was the first to report earnings for the second quarter, and is now trading lower by almost 10%. The company missed revenue expectations with top-line growth of 1% year-over-year. However, it was the bottom-line miss and the fall in margins that really took Wall Street by surprise.
In the quarter, Select Comfort Corp. (NASDAQ:SCSS)’s operating income fell to $15.1 million from $25.9 million in the year prior, as operating margins fell 530 basis points over the prior year. Much of this fall was related to a 6% drop in comparable sales, but the macro environment is requiring that mattress prices be lowered in order for companies to stay relevant. I think with Select Comfort Corp. (NASDAQ:SCSS), we are seeing this play out right now.
Round Two of Weak Performance?
With Select Comfort Corp. (NASDAQ:SCSS), the damage has already been done, but with Tempur Sealy International Inc (NYSE:TPX)(NYSE:TPX)(NYSE:TPX)’s quarter being announced on July 22, Tempur Sealy International Inc (NYSE:TPX) could still experience significant loss. Immediately, Tempur Sealy International Inc (NYSE:TPX) bulls will say that the business approach for these two companies are different, and that Select Comfort Corp. (NASDAQ:SCSS)’s weakness does not indicate poor performance for Tempur Sealy International Inc (NYSE:TPX). However, it is the fact that the business approach is different that is causing a reason for concern.
For the last few years, Select Comfort has transitioned much of its business from a third-party distribution only company to a direct seller with its own stores. In the process, margins have been a bit weak throughout this transition, but once established, Select Comfort’s direct sales approach returned significantly greater margins than its third-party approach.
With a third-party approach, Select Comfort competes with the likes of Tempur Sealy International Inc (NYSE:TPX) in pricing, and with it being a competitive space, prices have continuously declined. In fact, it was this space that led to much of the company’s fundamental disappointment.
