Don't Sleep on These Investments

05/16/2016 9:12 am EST

Focus: STOCKS

Michael Berger

President & Founder, Technical420.com

Weakness in the retail sector has served as a headwind for the broader market and Michael Berger, Associate Editor of MoneyShow.com, highlights two best-in-class bedding stocks that he would buy once the weakness subsides.

Sleeping is an extremely important part of every person’s day.  Studies have shown that a good night's sleep improves learning.  The Dalai Lama has even said that sleep is the best meditation.

Although the retail sector is under heavy pressure after several of the largest retailers reported disappointing earnings (and even worse guidance) people will still need to sleep and will purchase beds.

Two Leaders that are Not Sleeping

When looking at the residential furniture sub-sector of the consumer goods sector, our top two investments are Select Comfort Corp (SCSS) and Tempur Sealy International, Inc. (TPX).

Select Comfort is the second-largest player in the specialty sleep segment of the domestic bedding industry. The company sells its adjustable firmness air mattresses and accessories through more than 460 company stores, directly-to-consumer, online, and in retail partner locations.

Tempur Sealy is the industry leader in the specialty sleep segment.  The company is a vertically integrated manufacturer, marketer, and distributor of memory foam and non-memory foam mattresses and other bedding products. Its products are sold in approximately 100 countries under the TEMPUR, Tempur-Pedic, Sealy, Sealy Posturepedic, and Stearns & Foster brands.

Select Comfort Earnings are…Comforting

SCSS reported better-than-expected first quarter earnings results even though the Enterprise Resource Planning (ERP) system transition was more disruptive than management expected; they completed its implementation and made meaningful progress toward improving customer delivery execution.

While there are short-term inefficiencies that will persist into the second quarter, operating performance is improving and the core fundamentals of the Sleep Number brand remain intact. Furthermore, we believe that the new ERP system will unlock opportunities to drive future efficiencies throughout Select Comfort’s operations.

Following the earnings report, management reaffirmed its full year 2016 sales guidance of low-teens net sales growth. In addition, it guided to essentially breakeven earnings for the second quarter as it works through the remaining ERP inefficiencies in a seasonally low volume quarter.

We view the current risk/reward scenario favorable, especially after SCSS fell more than 8% last week.

Tempur Sealy a Margin Improvement Story

Although TPX beat Wall Street earnings expectations for the first quarter by $0.06 per share, the company reported slightly lower revenue than anticipated.

On a year-over-year basis, Tempur Sealy saw 2.4% lower revenue in North America and 3% lower revenue internationally. Although revenue was weak, both segments recorded better than expected operating income. Significant gross margin expansion as a result of pricing, improved operating performance, as well as lower commodity cost, drove the improvement.

Our favorable view on TPX reflects our increased confidence that Sealy margins will continue to improve over the near and intermediate terms as management’s focus on Sealy plant operations continues and gains incremental traction.

TPX has fallen almost 20% this year and although we are more favorable on SCSS, we would be buyers of Tempur Sealy on continued weakness.

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