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Select Comfort: Is the Previous 63 Bagger in 3 Years Worth Being Considered?

December 16, 2011 | About:
Another large bagger has been spotted with the extreme swing in its stock price for the last 13 years. This stock was not just 25 baggers like Lululemon Athletica (LULU) or Crocs (CROX), but rather it was nearly 63 baggers in just a three-year span.

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As it can be seen above, the stock price was high up at $22.6 in the beginning of 1999. Then it plunged to just $0.36 in the middle of 2001. Right after reaching that level, it began to rally to $20 per share in two years, then stayed at the $10 to $20 range for four years.

Like the majority of stocks during the financial crisis in 2008 – 2009, it experienced a free fall, from $27.3 in middle of 2006 to $0.3 in the beginning of 2009, back to the same level eight years previous at $0.3 per share. Any investor who dared to take large position in this stock in January 2009 has been rewarded very generously. The stock reached $21.5 in October 2011 and it is staying at $18.8 level. At this current level, it would realize investors who bought at the depressed price in 2009 the return of 297% per year for three years. The company is called Select Comfort Corporation (SCSS).

SCSS was considered one of the nation’s leading bed manufacturers and retailers. It designs, manufactures, markets and distributes premium quality, adjustable firmness beds and other sleep-related accessory products. As of beginning of 2011, SCSS operated 386 company-owned stores in the US and expected to end the year by 380 stores. And it was reported in its annuals that unlike traditional mattress manufacturers, which mainly sell through third-party retailers, more than 90% of company’s net sales, were through one of three company-controlled distribution channels including retail, direct marketing and e-commerce. The channel of retail stores generated the most sales, taking 84% of total net sales in 2010.

It was always good to see companies with diversified customers portfolios. In the case of SCSS, no single customer accounts for 10% of total net sales, with just a little bit of seasonality, lower sales in the second quarter and increased sales in the holiday and promotional period.

Regarding SCSS’s financial health, it has quite a liquid balance sheet with nearly 49% of total asset in cash. The D/A is at 53.67%, whereas the biggest item of liabilities is accounts payable, with no more long-term or short-term debt. In addition, as any retailer, the contractual obligations totaled nearly $120 million total, with payment due $37 million this year and $49 million for the next three years. The enterprise value would be roughly equal the market capitalization, as $116 million in cash is offsetting the $120 million in total contractual obligations.

Over the history of 10 years, it has had fluctuating but somehow consistent earnings, and a high level of return on equity.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Net Income ($Mil) -12.06 37.12 27.17 31.55 43.76 47.18 27.62 -70.17 35.55 31.56
ROE (%) -178.1 68.1 29.3 27.6 36.1 40.8 114.5 168.6 158.4 54.4


It was quite interesting to note that the level of return on equity is increasingly high over time, reaching triple digits in 2007-2009, especially in 2008, with negative income, but return on equity is still positive up high. So the equity in 2008 must be the negative figure. Let’s look at the shareholders’ equity components for the last 10 years.

USD million 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Common stock 0 0 0 0 0 1 0 0 1 1
Additional paid-in capital 82 92 104 96 60 4 4 33 37
Retained earnings -75 -38 -11 20 64 111 24 -46 -11 21
Accumulated other

comprehensive income
-1 -2 -3
Total stockholders' equity 7 55 93 114 121 116 24 -42 22 58


We can see that the stockholders’ equity has been subject to large fluctuations over time, resulting from the changes in the additional paid-in capital and the retained earnings. Normally the additional paid-in capital is not like the changing figures in other companies. What is the accounting standard here? Digging deeper in the notes of previous reports, especially in 2006, 2007 and 2008, it was because of stock repurchases. The cost of stock repurchases was first charged to additional paid-in capital. Once additional paid-in capital is reduced to zero, any additional amount would be charged to retained earnings.

The good thing is the company keeps generating positive operating cash flow and free cash flow over time.

USD million 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
CFO 0.41 36.14 49.2 52.48 87.49 59.37 44.03 2.97 66.63 71.21
FCF -4.44 28.34 30.84 31.09 61.65 28.3 0.52 -29.23 64.19 63.88


The only year which experienced negative FCF was in 2008. The reason was that the asset impairment charges occurred in 2008, making the loss of the operation up to $70 million, and the decrease in accounts payable as well as the income taxes payment makes the CFO around $3 million in 2008, pushing the FCF to negative figures. So it seemed to be a stock that worth considering, but it was all dependent on the price paid. Currently the market is valuing SCSS at 20.2x P/E, 14x P/CF and 9.6x P/B. The very high valuation in P/B is understandable, because of the large fluctuations and current low book value.

In terms of guru trades, this stock belongs to the holdings of Magic Formula stock-picking author, Joel Greenblatt. He has bought more than 50,000 shares of SCSS for the price of $15.9 the last three to four months before. In contrast with that, the insiders, including the president and CEO have kept selling shares in the price range of $20 to $21 per share.

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With the historically wide fluctuations in its stock price, along with the double-digits earnings and cash flow multiples, plus the consistent selling of its insiders, I would not consider this stock at this price, but rather watch it until it dropped significantly to the undervalued zone.

This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 3.8/5 (18 votes)

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