Select Comfort's earnings dive by 80%

Consumers shunned Select Comfort's stores in December, leading to an 80 percent drop in fourth-quarter earnings.

Earnings fell from $10.8 million a year ago to $2.2 million, or 5 cents a share, far below the 13 cents analysts were expecting.

Total sales rose 4 percent to $190.7 million with the help of online sales and 36 new stores that opened earlier in 2007. Same-store sales, however, fell 13 percent, mostly in December. Margins were squeezed by lower sales, higher fixed costs associated with new stores and a 10 percent increase in media spending, which totaled $26 million in the quarter.

Jim Raabe, CFO of the Plymouth-based company, declined to give guidance for 2008 but said he expects it to be a "challenging" year and for earnings to be lower than 2007.

The earnings news was announced after the stock market closed Wednesday. In after-hours trading the stock lost 11 percent of its value, hitting $6.30 a share. The stock had closed the regular trading session at $7.15.

The results, which signaled the difficulties faced by all furniture makers during this housing slump, marked Select Comfort's fifth quarter of disappointing earnings. Some analysts said privately that they won't be surprised to see a management shake-up. Most pointed fingers to Select's marketing efforts, which they said have repeatedly failed to entice people to shell out $1,000 to $5,000 for one of the company's high-tech adjustable air mattresses.

"Weaker-than-expected consumer spending following the Thanksgiving holiday offset positive sales trends during the first two months of the fourth quarter," CEO and Chairman Bill McLaughlin said in explaining the results. "Given the outlook for economic softness in 2008, we are focused primarily on reducing costs and improving operational efficiencies, while continuing to execute our long-term strategies for profitable growth."

In 2008 Select will open 30 new stores, close 15 low-performing ones and cut five of its 10 retail partners, which will remove its products from 140 partner stores. Eliminated partners generated less than 1 percent of sales, Raabe said.

"We also will introduce two new products to the line, beginning with a mid-range price-point introduction in late February. Also, in March, we'll launch a new marketing campaign to help increase consideration and purchase of Sleep Number products," McLaughlin said.

Piper Jaffray analyst Tony Gikas said it will take some time for Select Comfort to turn around. "This isn't something that is going to turn around in three or six months," he said.

"Here is a company where there has been poor execution over the past year," Gikas said. "They have had a failed marketing initiative and a management team that bought back stock at much higher levels when business was softening. And they have had real problems providing earnings guidance to Wall Street."