Making Money in Mattresses: Select Comfort Corp. (SCSS), Tempur-Pedic International Inc. (TPX)

Look at the distributors

Investors may want to skip the industry’s manufacturers and focus on the distributors of mattresses and related products.  One of the category leaders with consistent growth and 1,400 stores is Bed Bath & Beyond Inc. (NASDAQ:BBBY).  Founded in 1971, the company built its business around the sale of household merchandise, including linens, furnishings, and health and beauty items.  As growth has slowed in its core household goods market, Bed, Bath, & Beyond has been expanding into related areas, including entering the commercial linen distribution business with its recent purchase of Linen Holdings.

In FY2012, the company reported increases in revenues and operating income of 11.0% and 2.2%, respectively, versus the prior year.  While sales were positively impacted by the purchase of the Cost Plus retail chain, Bed, Bath, & Beyond’s operating margin was hurt by lower transaction volumes and higher promotional costs.  However, the company continues to earn substantial free cash flow, which it is using to improve shareholder value through stock repurchases.

The bottom line

With the elimination of a major competitor, the mattress business should earn higher returns, as long as global economies continue to grow marginally.  Instead of picking a winner in the sector, though, investors may want to own a distributor that benefits from rising sales across the product spectrum.  For my money, Bed, Bath, & Beyond is still the one to beat.

The article Making Money in Mattresses originally appeared on Fool.com and is written by Robert Hanley.

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