Public debut, Select Comfort earns a high berth on our annual ranking
Select Comfort earns a high berth on our annual ranking of Minnesota's largest publicly held companies.
Dan McAthie, COO and CFO of Plymouth-based Select Comfort Corp., has an unusually personal fed for his company's product.
"The nice thing about working here, if you have a bad day you go home, jump into bed," says McAthie. "It really does make your life better."
Select Comfort is a bedding and twin size futon mattress manufacturer, marketer, and retailer of air-filled mattresses. Made without the traditional coil springs, the mattresses are advertised as being more comfortable and providing a better-quality night sleep for customers, and as relieving back and other body pain. The company also makes foundations to replace traditional box springs.
Founded in 1987, Select Comfort had only three retail stores in 1992. But by the end of 1998, the company had 264 stores. McAthie says an additional 75 ones should be opened in 1999.
A portion of this growth can be attributed to the alliance Select Comfort formed in December with Bed Bath & Beyond stores, one of the leading home furnishings chains, according to Alan Rifkin, who was managing director of research fundamentals at Piper Jaffray Inc. (now U.S. Bancorp Piper Jaffray) when it underwrote Select Comforts IPO. Six months ago, there were only three Select Comfort retail outlets in Bed Bath & Beyond stores; today there are 13. Rifkin says another 25 will be added each year in 1999 and 2000.
Apparently the investors are beginning to see the possibilities. Since the company's initial public offering (IPO) in December 1998, the company's stock has risen from an offering price of $17 per share to $23 in early March. And with annual revenue of $246.3 million, up 33.5 percent from last year, the company looks like a good bet for investors, Rifkin says.
"I think they are uniquely positioned to continue their growth rate by at least 30-35 percent on the top line and at least 50 percent compounded annually on the bottom line over the next two to three years," Rifkin says. Select Comforts net income for 1998 is $5.2 million.
Select Comfort, at No. 64, is the highest-debuting company in Corporate Reports Public 200 list this year. It far outranks the other companies that are new to the list or are returning after absences of a year or more. In fact, Select Comfort is one of the few true IPOs on the list. Many of the companies on this year’s list that have no prior-year rank noted were not on previous lists, because they had moved or were spinoffs of other companies.
At a time when investors seem to be going for high-tech and Internet stocks (witness Seattle-based Amazon.com Inc.'s January trading price of $199 per share), why would a company that makes air-beds be attractive to investors?
"The industry is $8 billion," says Rifkin, "growing at about 6 percent per year with strong ties to the housing environment, which continues to hit a record level month after month after month. Right now they have less than a 4 percent market share, but I think that can more than double in the next three years."
Mattress industry leaders include Sealy Corp. Inc., Serta Inc., Simmons Co., and Spring Air Bedding Inc., otherwise known as the "Four S's." Cleveland-based Sealy, with a sizable Minnesota presence at its 125-employee plant in St. Paul, leads the market with 18 percent market share. Select Comfort is comparatively small, with about 3.5 percent market share, but its vertical integration (the company manufactures, markets, and retails its product) gives it a distinct edge.
"They're able to control the whole process and capture margins on both sides of the business," Rifkin says.
At Select Comfort's Plymouth facility, the mattresses are manufactured on the first floor, and upstairs, telemarketers take calls prompted by direct mail pieces, which account for about 35 percent of the company's sales. Retail outlets and road shows account for the remainder.
McAthie says the company's biggest challenge is getting the kind of name recognition that the Four S's do. But if customers include Select Comfort as an option, they usually buy it, he says.
"Most people don't know what brand of mattress they sleep on," McAthie says. "When you're in the market for a bed, we want to be at least in the decision set, and then once we get you in there, it's a pretty easy sell.
"I would also say our IPO helped our awareness," he says. Select Comforts management had previously considered an IPO in the fall of 1997 but decided against it because of the strike by United Parcel Service, Select Comfort's primary delivery service.
In further efforts to gain name recognition, Select Comfort purchases more than 200 magazine ads annually. The company also employs celebrity spokespeople, such as radio announcers Paul Harvey and Rush Limbaugh; and sports celebrities, such as golfer Tom Lehman and Minnesota Vikings wide receiver Jake Reed. In fact, a little ingenuity on the company's part made Reed an avid spokesperson for the company.
"We heard about [Reed's back] surgery," says McAthie, "went and called him up, and said, 'Gee, we'd like to help you,' and we gave him a bed. And he will sit and tell you, 'The reason I got back to playing this year is because of Select Comfort.'"
But Select Comfort's sell to consumers is not without obstacles. Consumers only buy a new mattress or king size futon mattress every 11 or 12 years, McAthie says. And the price is steep.
"Clearly they have a very high average ticket," says Rifkin. "It's approximately $1,200 on average."
But McAthie claims that Select Comfort mattresses are competitively priced (prices range from $499 for a "classic" twin size futon mattress and foundation to almost $2,000 for the "ultra" king-size mattress and foundation).
To prove to its customers that "sleeping on air" is better than sleeping on other mattresses, Select Comfort commissioned studies at major universities including Stanford, the University of Memphis, and Duke. According to McAthie, these studies showed that the Select Comfort mattress improved spinal alignment during sleep, and that those who slept on Select Comfort mattresses got 24 percent more rapid eye movement, or REM, sleep (the deepest kind) than those who slept on traditional mattresses. In addition, McAthie claims that his mattress relieves back pain for most sufferers.
In fact, McAthie is so enthusiastic about his product that it's hard to get him to talk about his company. McAthie came to Select Comfort in October 1995 from Minnetonka-based Fingerhut Cos. Inc., where he was senior vice president and CFO. Rob Hawthorne, president and CEO, was at Minneapolis-based The Pillsbury Brands Group for five years before joining Select Comfort in 1977.
"The management is certainly very capable of leading their growth," says Rifkin. "[Hawthorne] heads a very capable management team that is, in my opinion, equal to the task at hand of rolling these stores out."
McAthie says the company is working on several new products, including adjustable beds and bed frames suitable for the home environment. Other projects include the use of low-frequency sound to treat back pain, a technology that may be incorporated into both beds and chairs. Select Comfort is also experimenting with home-delivery and set-up services. Now, customers must set up the beds themselves after UPS delivers them.
"We've always got new things on the drawing board that we're looking at, to always enhance our existing product as well as introduce new products," McAthie says.
He suspects that's enough to give any investor a good night sleep.
Calendar year 1998 was a time of restructuring and retrenching for Minnesota's publicly traded companies. Paradoxically, their preparations for the new millennium consisted of both bulking up and trimming down - efforts geared toward creating not only the mass to compete for sales in the global marketplace, but also the efficiency to turn big sales into bigger profits.
These preparations were carried out at the expense of 1998 earnings.
But first things first: Composite revenue of the 200 largest public companies reached $201.13 billion in 1998. The year-over-year increase of only 3.7 percent, the smallest gain in nearly a decade, was a direct result of losing four of last year's top 50 companies. Those four firms contributed $13.01 billion to the 1997 revenue total of $193.97 billion.
Composite earnings of $7.85 billion were down a whopping 32.7 percent from 1997's $11.66 billion ... and only $1.63 billion of the decrease can be traced to those four missing firms. The rest is mostly attributable to both the record amounts and the record numbers of special charges. UnitedHealth Group ($900 million), The St. Paul Cos. ($656 million), and 3M Co. ($493 million) alone combined for $2.05 billion in one-time pretax charges. No fewer than 18 other top-50 companies took similar charges, albeit to a lesser degree. One-time charges also contributed to this distressing statistic: Only 135 of our 200 companies turned an annual profit.
Further evidence of retrenchment: A grand total of 980,300 workers ultimately report to the list's 200 headquarters. That figure represents a decline of 1.4 percent from the previous year.
The financial information in the main list was distilled from quarterly reports and SEC documents issued by the companies themselves. Ranking is by 1998 revenue from continuing operations, as calculated by the sum of the previous four quarters without regard to fiscal year-end. Earnings figures are after taxes and extraordinary items, but before any preferred dividends. One-time gains or losses that exceed 10 percent of earnings are footnoted.
Also included in the main list: prior-year rank, headquarters city, phone number, stock symbol, and a brief business description.
To find a specific company, look for its rank in the alphabetical index of companies on pages 48 and 49.
25 FASTEST-GROWING LIST
The "fastest-growing" list ranks companies according to their revenue growth over the five-year period from fiscal 1993 through fiscal 1998. We calculated annualized growth rates for all companies that reported: (1) a full year of results from base year 1993; and (2) a revenue increase from 1997 to 1998. A "fastest-shrinking" list, ranking the bottom 10 companies, is also presented.
TOP 10 LISTS
The Top 10 lists highlight calendar-year company accomplishments in eight specific categories. Averages for total assets and stockholders' equity were calculated from the company's quarter-end balance sheets.
The CRM 200 is a list of the largest publicly traded companies in Minnesota as measured by annual revenue. To determine this figure, we summed financial results from the trailing four quarters released by March 1, 1999. In most cases, that period approximates calendar year 1998.
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