Wednesday, February 09, 2005

Why I bought Select Comfort

For our first bed, Joy and I bought a expanded queen Sleep Number mattress and foundation from Select Comfort. I think you can guess where I'm headed. Our bed has performed flawlessly. My sleep number is 55 (0 is the softest and 100 is the firmest) and Joy's is about 35, we never would have found a conventional mattress that would have worked for us. When Joy was pregnant, she could adjust so that she had good support, but still be comfortable. I sometimes have a sore neck, but it goes away if I make my side a bit more firm. (I set it softer if I have sore shoulder muscles.)

At the time, I looked into buying Select Comfort stock for my portfolio. Peter Lynch talks about how much effort people go to buying things like pantyhose, microwaves and cars, yet they throw money at companies they don't understand or research. He suggests people would be better off buying shares of the companies that make the products they buy. If I had followed that advice, I would have had a four-bagger or more. But I was worried about both our bed and the company. Now I feel pretty comfortable about both.

At the time, Select Comfort was a "penny stock", which hovered around $5. It also was owned in large part by a St. Paul Venture Capital that had bought the bed maker and turned it around. Eventually it would want to cash out, and I wasn't comfortable with what it might do to shareholder value. In fact, in May 2003 Select Comfort had a secondary offering at $13 a share which diluted shares significantly. (Oddly it didn't hurt the price of those shares. I suspect that I wasn't the only one waiting to see what the "exit strategy" would be.)

Meanwhile, I heard that one of my cousins had bought a Select Comfort bed that he replaced a little while later. I don't know the details, but it made me wonder if getting an air bed was really such a good idea. Traditional mattresses, whatever their weaknesses, just seem more "solid" than air-, water-, and foam-filled mattresses.

Time corrected my view of these factors. My bed works great and I don't see why other people won't have the same sort of experience. I think the VC has done most of its damage. (Though in fairness, it really did turn a failing company around.) At the same time, Select Comfort's remarkable advantages are becoming more clear. It control's most of its distribution channels, it avoids holding much finished inventory by direct shipping products to the customer, and it has a unique and growing brand name. Unlike its department store and showroom competitors, Select Comfort needs only a little mall storefront to demonstrate a handful of models. On average each locatation generates over a million dollars in revenue per year. I recently noticed their logo on the Extreme Home Makeover TV show.

I bought Select Comfort on Feb. 9, 2005 at $19.95 a share.

No comments: