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Select Comfort Corp. (NASDAQ: SCSS)

Select Comfort Corp. (SCSS) develops, manufactures, markets and distributes adjustable-firmness beds and other sleep-related accessory products in the United States and Canada. It offers mattresses under the Sleep Number brand name. The Company also provides a line of accessory bedding products, including specialty pillows, mattress pads, comforters, sheets, bed foundations and leg options. In addition, the Company markets a group of comforters and blankets under the brand name Personal Warmth Collection; and Precision Comfort, an adjustable foundation that enables consumers to raise the head or foot of the bed, as well as to experience the comfort of massage, using a handheld remote control. Further, it provides home delivery, including bed assembly and mattress removal services.

The Company distributes its products through retail, direct marketing and e-commerce channels primarily to end users, home furnishings retailers, and specialty bedding retailers. As of January 3, 2009, it had 471 company-owned stores and 801 retail partner doors.

The Company was founded in 1987 and is headquartered in Minneapolis, Minnesota.

Source: Reuters.com, SEC Filings.

Financial Summary

Net sales for the second quarter of 2009 totaled $120.6 million, a decrease of 21% compared to $152.1 million in second quarter of 2008, primarily due to an 11% comparable-store sales decline for the company-owned retail stores and a reduction in SCSS store base. Comparable-store sales trends have improved relative to a decline of 29% in the fourth quarter of 2008 and a decline of 14% in the first quarter of 2009.

The Company reported second-quarter net loss of $4.0 million, or $0.09 per diluted share, compared to a net loss of $6.6 million, or $0.15 per diluted share, in the second quarter of 2008. Second-quarter results include a $3.6 million charge to eliminate the Company’s remaining deferred tax assets. Excluding this non-cash expense, the Company would have reported a net loss of $0.3 million or $0.01 per diluted share. SCSS continued to focus on its priorities of aligning costs with current and anticipated sales levels, reigniting the Sleep Number brand, and preserving cash and improving its capital structure.

During the second quarter, the company generated cash flow from operating activities of $11.5 million, reduced borrowings under its revolving credit facility to $43.8 million and reached an agreement with Sterling Partners for a $35.0 million cash investment into the company, subject to shareholder approval.

Shares of the Company rose from approximately $1 in July to $6.63 due to the rejection of a May 2009 deal with Sterling, significant fund raising initiative to retire debt and increase flexibility and anticipation of a strong fourth quarter of 2009.

Analyst Consensus

SCSS announced that it expect sales declines to moderate in the second half of 2009, as the Company lap the impact of the significant economic downturn it experienced during the second half of 2008. According to Reuters Estimates, analysts were expecting the Company to report revenue of $504 million for the fiscal 2009.

Consensus estimates, $

Source: http://www.reuters.com/finance/stocks/estimates?symbol=SCSS.O

Six analysts recommend a “Hold” strategy for the Company.

Consensus rating

Source: http://markets.ft.com/tearsheets/analysis.asp?s=scss

Investment Highlights

SCSS is the leading developer, manufacturer and marketer of premium-quality, adjustable-firmness beds. The air-chamber technology of the Company’s proprietary Sleep Number® bed allows adjustable firmness on each side of the mattress and provides a sleep surface that is clinically proven to provide better sleep quality and greater relief of back pain compared to traditional mattress products. SCSS generates revenue by selling its products through four complementary distribution channels. Three of these channels: Retail, Direct Marketing and E-Commerce, are company-controlled and sell directly to consumers. The Wholesale channel sells to and through leading home furnishings retailers, specialty bedding retailers, the QVC shopping channel and to several end users such as Radisson Hotels and Resorts.

Shareholders of SCSS have rejected a proposal that would have given control of the Company to the investment firm Sterling Partners. Sterling had proposed buying 50 million shares for 70 cents each, a deal worth $35 million. Shareholders rejected the deal in a vote that took place on August 27. As a result of the vote, the Company announced that it has terminated the Securities Purchase Agreement entered into with Sterling Partners on May 22, 2009.

In September, SCSS entered into a new Securities Purchase Agreement with Sterling Partners. As part of the agreement, both companies mutually released claims relating to the original agreement. The Company agreed with Sterling Partners for an investment of $10 million through June 2010. Under the terms, Sterling Partners has the right to purchase 2.5 million shares at $4 a piece, and will receive warrants to buy 2 million shares at 1 cent each. With the close of the investment and exercise of the warrants, Sterling Partners will own about 8.9% of the Company’s common stock.

SCSS has filed a shelf registration statement with SEC to allow the Company to issue up to $50 million worth of registered equity securities. At such time the shelf registration statement is declared effective, the Company will have the ability to issue common stock, preferred stock, warrants to purchase common stock, subscription rights, or any combination of such securities. The Company can issue these securities at its discretion in one or more separate transactions with size, price and terms to be determined at the time of issuance.

The U.S. bedding manufacturing industry is a mature and generally stable industry. According to the International Sleep Products Association (ISPA), since 1984 the industry has consistently demonstrated growth on a dollar basis, with a 0.3% decline in 2001 and 11.9% decline in 2008 being the only exceptions. According to ISPA, industry wholesale shipments of mattresses and foundations were estimated to be $6.1 billion in 2008, an 11.9% decline compared to $6.9 billion in 2007. The industry growth has been primarily driven by population growth, and an increase in the number of homes (including secondary residences) and the increased size of homes. Furniture/Today, a furniture industry trade publication has ranked SCSS as the largest U.S. bedding retailer for seven consecutive years, most recently in its August 11, 2008, issue.

Technical Analysis

Source: http://stockcharts.com/h-sc/ui

SCSS is trading above its 13-day moving average. This is considered to be the sign of a bullish trend. There is added weight to this indication because the moving average is rising and suggests that there has been buying interest in this stock.

SCSS is trading within its Bollinger Bands. This is a normal condition and suggests that the stock is neither overbought nor oversold relative to the recent price action.

The MACD for SCSS currently indicates a strong bullish signal for two reasons. First, the MACD is above the signal line, a 9-day moving average. Second, the MACD is above 0, which implies that the underlying moving averages are trending higher.

Comparative Analysis

Source: Thomson Financial, Yahoo! Finance, Analyst estimates.

Insider Trading Activity

Net Share Purchase Activity

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