Select Comfort's miscue over ads hurts first-quarter results

First-quarter sales for adjustable-bed maker Select Comfort Corp. sagged 2 percent while operating earnings plunged 13 percent because of advertising miscues, the company said Wednesday. Including one-time items, net income rose 4.7 percent.

Select Comfort officials, who discussed results after the market closed Wednesday, also lowered their earnings guidance for the full year. Select Comfort shares fell during after-hours trading, dropping 6 percent to $16.50 a share.

In March, the company warned that it probably would miss its internal earnings forecast for the quarter because of changes to its media buying strategy. The Plymouth-based manufacturer and retailer switched from using eight agents to buy advertising space to using a single large agency.

That consolidation mistakenly narrowed the target audience and caused a 30 percent drop in national TV advertising spots during February's critical Presidents' Day ad campaign. While the company quickly discovered the problem and worked to fix it, the error affected sales.

"We moved too much, too quickly," CEO Shelly Ibach told analysts during a conference call Wednesday. "But we took decisive action to correct the issue and are making steady progress against a backdrop of soft industry performance. During the quarter, we progressed as planned in the other key areas of our customer-focused growth strategy, specifically, exclusive distribution and product innovation."

Select Comfort has rehired a former ad-buying consultant and worked with the new agency to reinstate the national TV ads. Ibach said that the fix is already working to increase store traffic and that things should be back to normal by the middle of the second quarter.

Still, the damage was done.

Analysts on average expected earnings of 43 cents a share and revenue of $287 million. During Wednesday's call, analysts repeatedly questioned executives about the ad purchasing mistake and looked for other causes for sales declines.

Ibach, the six-year Select Comfort executive who became CEO in May, said she was frustrated and "so disappointed" that the ad consolidation problem "happened on my watch." She assured analysts that the blame for the quarter lay in the ad buys and that the problem had been fixed. However, she also cited industry trade studies that signaled slightly weaker bed sales for the rest of 2013 and adjusted expectations.

Select Comfort now expects full-year earnings to be $1.30 to $1.45 a share, compared with the previous guidance of $1.65 to $1.80 a share.

During the quarter, the company opened 10 stores and closed nine. It ended March with 411 stores and expects to have 435 to 445 stores by the end of the year.