(SCSS) Select Comfort Corporation – Margin Expansion and Operational Efficiencies

Select Comfort Corp. (SCSS) recently hit a new multi-year high above $7 on strong Q3 results from October and an ongoing commitment to respond to the challenging consumer environment.

Company Description

Select Comfort Corp develops, manufactures and sells adjustable foam beds and other sleep related accessories in the United States and Canada. As of January 2009, the company operates 471 retail stores with an additional 800 ‘partner’ doors. Select Comfort was founded in 1987 and has a market cap of $$304 million.

Shares of SCSS posted a huge rally in the second half of 2009 as the company continued to execute its strategy to increase operational efficiencies and close less competitive stores. The effort showed up in the company’s better than expected Q3 results from late October.

Third-Quarter Results

Total sales were down 6% from last year on an absolute basis, but when factoring the company closing 14 stores during the quarter, sales were actually up 9%. Select Comfort closed a total of 71 stores during 2009. Earnings came in strong at 20 cents per share, 13 cents ahead of the Zacks Consensus Estimate.

Margin Expansion and Operational Efficiencies

Gross margin was up 120 basis point from last year and 180 basis points from just last quarter to 63.4%. Sales and marketing costs dropped 20% to $66 million. Operating cash flow came in at $53 million, helped by tax credits from previous year losses, a big improvement from $12.2 million in the first nine months of 2008. Cash and cash equivalents are up to $4.8 million.

Estimates Jump

The strategic initiatives have pushed estimates higher, with the current year climbing from a loss of 7 cents 90 days ago to 18 cents. The next-year estimate has more than doubled, climbing to 34 cents, a bullish 85% growth projection.

Valuation

In light of recent gains, this stock doesn’t come cheap, trading with a forward P/E multiple of 36X, a sharp premium to the overall market.

The Chart

Shares of SCSS caught fire in the 2nd half of 2009, bottoming out in late July at $1 before hitting a new multi-year high above $6. Take a look at the big jump below.

Michael Vodicka is the Momentum Stock Strategist for Zacks.com. He is also the Editor in charge of the market-beating Zacks Surprise Trader Service.

Zacks Investment Research

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