Select Comfort facing uncertain future as financing deadline looms

When an auditor expresses doubts about a company’s ability to continue as a going concern, that’s about as bad as it gets. So last week’s news that Select Comfort’s auditor had issued just such an opinion was a verbal body blow to a company that has suffered mightily for more than a year.

In essence, it means that Select Comfort, which makes the Sleep Number airbed, may soon run out of money to fund its day-to-day operations if new financing can’t be found.

The company is trying to raise more capital by issuing new debt or equity securities, but that’s a dicey proposition at best in the midst of the sharpest economic downturn since the Great Depression.

“If we are unable to obtain additional capital, we may not be able to fund our operating needs, we would face a risk of default under our Credit Agreement and we may not be able to continue as a going concern,” Select Comfort said matter-of-factly in a recent filing with the Securities and Exchange Commission.

The company would have been in default at the end of last year if its principal lender hadn’t agreed to waive compliance with several loan covenants and delay a scheduled $5 million reduction in its revolving credit line until the end of March.

A $23 million federal tax refund Select Comfort received earlier this month would help, but the lender required those funds to be placed in an escrow account until negotiations on possible new financing are completed.

To its credit, the company is reducing overhead by slashing advertising costs and capital expenditures, and closing at least 55 of its more than 470 company-owned retail store. But it’s still not clear if those and other cost cuts will be enough.

Same-store sales tumbled 25% in 2008, on top of an 11% decline in 2007. That may be too difficult to offset in any financial restructuring.