On Monday, the maker of the Sleep Number bed, Select Comfort (SCSS) sent shudders through the furniture and bedding manufacturing industry when it warned that not only would fourth-quarter sales miss the mark but that the challenging times would continue into 2014:
Select Comfort Corp…reported that preliminary fourth-quarter 2013 total net sales grew 5% year-over-year to $231 million, with flat company-controlled comparable sales growth. The mid-point of the company’s fourth-quarter EPS guidance range of $0.18 to $0.26 assumed low-double-digit growth in total net sales and mid-single-digit growth in company-controlled comparable sales. Through November, company performance was trending consistent with the EPS guidance range, with solid sales results and expense controls. From Cyber Monday through the end of December, however, sales trends fell below internal goals. As a result, the company now expects fourth-quarter EPS to be below the low end of its guidance range.
“The sales slowdown following the Thanksgiving holiday reflected a tepid retail holiday shopping season. We expect this challenging environment to continue in 2014 and are planning accordingly,” said Shelly Ibach, president and CEO, Select Comfort.
Shares of Select Comfort are trading at the low end of our fair value range (at the time of this writing), but we’re not ready to pull the trigger. As is customary in our process, we like to consider undervalued equities only when their prices begin to move higher, not at the time that they have fallen abruptly. This basic tenet to the Valuentum process helps us avoid ‘falling knives’ (stocks that keep going down) and holding stocks that may trade below their intrinsic value for extended periods of time as they continue to be shunned by the market (stocks that generate opportunity cost). Most of the ‘Household Durables’ industry is trading down on the news, including peers Tempur Sealy International (TPX) and Mattress Firm (MFRM).
Household Durables: ETH, HAR, JAH, LEG, LZB, NWL, SCSS, TPX, WHR
Also on Monday, home electronics retailer hhgregg (HGG) announced that fiscal third quarter sales (ended December 31, 2013) fell 11.6% compared to the same period a year ago. The company’s comparable store sales also decreased more than 11%, as its consumer electronics category plummeted nearly 20% and its computing-and-wireless category fell by nearly 25% (both categories well below expectations).
In what we had been expecting as a result of the shortened holiday shopping season, hhgregg noted its “holiday sales were significantly impacted by increased promotional offerings of televisions and tablet products across a variety of retail formats.” This is a red flag for gross margins at peer Best Buy (BBY) as the electronics retailer likely sought to match prices to retain market share.
Still, hhgregg indicated that the appliance category was healthy, up about 1.5% in the period, indicating that not all areas suffered from promotional activity. This bodes comparatively well for Whirlpool (WHR) and may help stem the declines at Sears (SHLD). We’ll need more details, which aren’t yet available.
Valuentum’s Take
Monday brought a bevy of news that suggests that firms in the ‘Household Durables’ industry may have faced demand pressure and that electronics retailers may have been fighting viciously over market share (hurting gross margins) during the holiday season. We don’t hold any firm mentioned in this article in the portfolio of the Best Ideas Newsletter, but we do think both Select Comfort’s and hhgregg’s performances are important data points. As always, our best ideas are included in the Best Ideas portfolio and Dividend Growth portfolio.