Do Mattress Companies Look Comfortable to Investors? Tempur-Pedic International Inc. (TPX), Select Comfort Corporation (SCSS)

In the last year, though, the company’s selling general and administrative expenses have risen by 43%. This means that the company is paying more money to run its stores. The top line growth has been 32%, but just one line-item of operating expenses has risen by 43%. The company has been struggling to keep up with the growth. The third quarter net profit margin was only 4.4%, compared to 9.1% before the acquisitions.

New store acquisitions have also caused an increase in debt. The quick ratio is only .64 and the current ratio is only .90. The company’s net receivables have also been growing each quarter. Mattress Firm’s ability to convert receivables into cash could fuel issues in the future with increased capital expenditures from store acquisition and store rebranding.

With rising costs and increased debt, earnings shouldn’t be too high this past quarter. Some analysts are expecting a 31% decline in earnings from last quarter. The stock is already down 2.2% at the time of this writing on March 15, 2013. This decline in earnings is already being reflected in the stock price.

Mattress Firm – and other specialty home goods retailers – is tied directly to the housing market and the general economy. As 2013 and 2014 stabilize and lead to growing markets, Mattress Firm has the potential to increase its earnings and profitability.

The key to future success with Mattress Firm is reducing its SGA growth and strengthening its net profit margin. Look for this stock to have a flat or slow gain over the next few months. Within the year Mattress Firm could see a price of $32-$33 based on its growing revenue from acquisitions and store rebranding. If the net profit margin and SGA rate does not improve in the next two quarters and liquidity issues are still around, the price target may come down.

Austin Higgins is the Principal Consultant for Avant Venture Group. and focuses on building businesses through innovation, growth and investment. Read his company’s blog at BuildInvestGrow.com and follow him on Twitter @Austin_Higgins.

The article Do Mattress Companies Look Comfortable to Investors? originally appeared on Fool.com.

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