Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Net sales were approximately $1.2 billion, with adjusted EBITDA of $231 million, a 6% improvement versus the second quarter of 2023.
- Adjusted EPS grew by 9% to $0.63, indicating solid earnings growth.
- The US business outperformed the market, driven by strong brands, new consumer-centric innovations, and compelling marketing initiatives.
- International business generated strong results, with the Tempur International team delivering solid growth year over year.
- Achieved consolidated adjusted gross margin expansion of 200 basis points and adjusted EBITDA margin expansion of 170 basis points year over year.
Negative Points
- Net sales in North America declined by 4% in the second quarter.
- The industry experienced a mid-single-digit decline, which was more than the anticipated low-single-digit decline.
- Operating margin in the international segment declined by 90 basis points to 12.5%, driven by investments in growth initiatives and the Asia joint venture performance.
- The promotional environment was slightly more aggressive, impacting the depth and duration of promotions.
- The company is facing litigation related to the Mattress Firm acquisition, limiting the ability to provide further comments on the matter.
Q & A Highlights
Q: Can you talk about how demand trends evolved through the second quarter and your expectations for the back half of the year?
A: The quarter started solidly, likely due to retailers preparing for the holiday. However, sell-through was weak during the holiday, and sales were lighter towards the end of the quarter. Post-quarter end, sales returned to normal levels, with high-end Tempur products performing positively. We expect slight growth in the back half, driven by share gains and new product launches.
Q: How do you view the promotional environment and pricing trends for the back half of the year?
A: The promotional environment is slightly more aggressive this year, with longer promotional periods rather than deeper discounts. Some manufacturers with excess capacity have become more promotional. We focus on matching promotions while maintaining profitability. We expect the environment to remain slightly more promotional if market conditions stay soft.
Q: Can you discuss the sustainability of your current gross margin levels?
A: Our gross margin performance is driven by operational productivity improvements and favorable commodity prices. These efficiencies are sustainable and will continue to drive gross margin and EBITDA improvement. We expect gross margin expansion to continue, especially when the market grows.
Q: How would a decline in interest rates impact your business?
A: A 100 basis point decline in interest rates would generate approximately $10 million in EBITDA, split between $5 million in interest savings on variable debt and $5 million in reduced financing costs for our retail operations. Lower interest rates would also indirectly benefit us by enabling more aggressive retail financing offers.
Q: Can you elaborate on the performance of your North American business and any changes in the competitive landscape?
A: The industry was slightly better sequentially from Q1 to Q2. Our performance was impacted by lapping floor models, but we still captured share year-over-year. The competitive landscape saw some manufacturers becoming more promotional, but we continue to focus on profitability and share gains.
Q: What are your expectations for international growth in the second half of the year?
A: We expect mid to high single-digit growth internationally, driven by the success of new product launches and easier year-over-year comparisons. The underlying legacy international business has been approaching double-digit growth.
Q: How are your newer products performing relative to the rest of your assortment?
A: Newer products, such as the Adapt collection, are performing exceptionally well. We are looking forward to launching the 2025 Sealy brand, which we expect to be robust. Advertising, consumer confidence, and innovation continue to drive demand.
Q: How are you allocating your marketing spend, and have you made any changes to your strategy?
A: We maintain a balanced media mix but have redirected some advertising dollars to support promotional activities. This shift ensures our products are on sale when others are, making it EBITDA neutral as we reallocate funds between advertising and promotions.
Q: Can you provide more details on the impact of commodity costs on your gross margin and expectations for the second half?
A: Commodity costs provided about a 100 basis point benefit year-over-year, driven by lower prices for steel, chemicals, and cotton. However, transportation costs, particularly ocean cargo, were a drag. We expect the commodity benefit to moderate in the second half but still contribute to gross margin and EBITDA improvement.
Q: How do you reconcile your expectation for moderating industry declines with broader consumer market concerns?
A: Our expectation for moderating declines is primarily due to easier year-over-year comparisons, as the bedding market entered a downturn earlier than other sectors. This is more about industry-specific issues rather than a more optimistic view of the general economy.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
