Raymond James Still Sees Select Comfort As Buy, Says Core Products Are Stronger Than Ever

Select Comfort Corp. (NASDAQ: SCSS) products are "stronger than they've ever been," according to financial services firm Raymond James.

The U.S.-based manufacturer of the Sleep Number beds' core product portfolio is viewed by the firm as "the most powerful and differentiated" it has ever been.

The company also has an exclusive distribution model that continues to deliver impressive sales productivity. Select Comfort has an average of $1,063 sales per square foot.

Reiterated Strong Buy, Lowered PT

Raymond James reaffirmed their Strong Buy rating on SCSS, despite the financial services company lowering their target price to $32 (~48 percent upside) from $35 and cutting their 2016 GAAP EPS estimate to $1.65 from $1.74.

Although SCSS delivered better-than-expected sales and earnings, revenues declined 20 percent YTD vs. a ~1 percent gain for the S&P 500.

"High comparable sales comparisons (22 percent in 4Q15 and 22 percent in 1Q16) and management's company wide ERP implementation have spooked short-term investors. Irrespective, operating performance and execution has been strong throughout 2015, and management reaffirmed its 2015 guidance following its 3Q15 report," Raymond James noted.

As of Wednesday, Raymond James' FY16 estimates now include higher marketing and sales expense and slightly higher R&D expense in the back half of 2016.

Justification And Looking Ahead

"Overall advertising expense was elevated in 3Q15, and we expect it to be higher as a percentage of sales again in 4Q15, as management launched its new Kids IQ bed and10th aggressive growth market," the firm noted.

Select Comfort's management is planning to launch another new product at this year's CES show. "We are assuming this product's introduction will have a similar timeline to the Sleep IQ Kids bed introduction," Raymond James commented.

The firm's bullish stance remains unchanged.

"We believe SCSS's ~20 percent YTD decline is overdone, and at current levels, we believe the risk/reward overwhelmingly favors reward," Raymond James concluded.