Market woes sink Select Comfort

The last thing that Select Comfort needed was Wall Street's meltdown. The beleaguered air-mattress maker that is known for its humorous commercials isn't laughing much these days, as jittery investors have dumped the shares in droves.

The stock fell to less than $1 a share last week, down from $14.75 a year ago and a far cry from its $25 price two years ago.

With that decline, it joins thousands of stocks sunk by nervous investors who are unsure how to react in the wake of Wall Street's staggering $700 billion bailout by Congress and President Bush on Oct. 3.

Market troubles aside, some analysts say Select Comfort has needed a bailout of its own. In February, CEO Bill McLaughlin stepped down as chairman and announced that he would not take an annual salary until conditions improved for the company.

They haven't.

The dwindling economy is the company's primary culprit. As consumers have slashed discretionary spending, they've largely shunned the company's high-price Sleep Number beds.

Of the 11 analysts that follow Select Comfort, none currently has a "buy" recommendation on the shares. Nearly all have lowered earnings expectations and at least five downgraded the stock to "hold" or "underperform" in the past year.

Short-sellers made money hand over fist on bets that the price would continue to fall. In April, when the stock traded in the $3 range, more than 20 percent of shares were in the hands of short-sellers, betting it would fall further.

Still some of the company's problems are of its own doing. It repurchased large amounts of stock at high prices just as the market was softening.

In June, the Clinton Group, which owns roughly 7 percent of the company, asked the board to replace McLaughlin, stop new store openings, kill the current ad campaign and return to a direct-marketing strategy.

First-quarter sales fell 7 percent. Second-quarter sales slumped 15 percent, to $152 million, as second-quarter earnings went from $2.9 million in 2007 to a $6.6 million loss in 2008. Third-quarter earnings are due out Oct. 22.

"The stock has come under pressure because of fears about the economy and the overall market. And Select Comfort is clearly in an economically sensitive business right now and has had some major disappointments during the year," Craig-Hallum Capital research analyst Bob Evans said. Going forward "they have got to show top-line growth again. They have to be able to stabilize their same-store sales and show some growth there."

Evans said he's expecting a 27-cent loss on earnings for 2008. He downgraded the stock to "neutral" in December and has not set any price targets since.

So far, the company's focus has been in cutting expenses, closing 25 underperforming stores, laying off workers and changing marketing efforts. The company said previously that it expects to be profitable sometime during the second half of the year. If true, profit would come from strict cost-cutting and not sales growth, Evans noted.

On June 28, McLaughlin told analysts that the company would introduce a new bed model this fall and a host of bedding accessories in the hopes of wooing more customers into stores.

One potential blow to Select Comfort going forward is the nationwide credit crunch that the Federal Reserve, Treasury Department and Congress have tried to ease, but have so far failed to do. It's hard to get loans these days.

Select Comfort's own consumer financing partner, GE Money, has begun to pull back credit offerings in some industries.

In a letter recently sent last month to manufacturers and dealers of windows, furnaces, air-conditioning systems, landscaping products and other home-related goods, GE Money said that it has tightened underwriting guidelines and expects to fund future purchases for only those consumers who have stellar credit.

Officials at ATV, snowmobile and motorcycle maker Polaris Industries in Medina said that they learned that GE Money has stopped financing some consumer purchases of recreational vehicles and boats, a move that makes the company nervous, officials said.

It's not clear how GE's pullbacks might affect Select Comfort. Employees working the phones of Select Comfort's loan application center said that it has not had any trouble putting through loan requests.

Analysts are taking a wait-and-see approach.

"The purchase prices for their beds are generally between $1,000 and $4,000, and a lot of the areas of GE that have tightened up are items bigger than that," Evans said. "But it is certainly a risk and worth watching."

Dee DePass • 612-673-7725