Tempur Sealy International Inc. (TPX, Financial) is the world's largest bedding provider. It develops, manufactures and markets mattresses, adjustable bases, pillows and other sleep and relaxation products. The company sells its products globally in approximately 100 countries.
Tempur Sealy operates in three segments: Tempur North America (comprises of two U.S. manufacturing facilities in Virginia and New Mexico and its Tempur North America distribution subsidiaries), Tempur International and Sealy. The company's brand portfolio includes Tempur, Tempur-Pedic, Sealy, Sealy Posturepedic, Optimum and Stearns & Foster.Â
Performance check
On July 30, Tempur Sealy reported financial results for the second quarter ended June 30. The company’s reported sales increased 6.9% to $764.4 million from $715.0 million in the second quarter of 2014. Excluding foreign currency headwinds, net sales increased 10.9%, with double digit growth in both the North America and International business segments. Adjusted EPS increased 35.9% to 53 cents, compared to adjusted EPS of 39 cents in the second quarter of 2014. On a constant currency basis, adjusted EPS increased 46.2%.
Tempur Sealy’s reported adjusted gross margin was 39.4% as compared to 37.6% in the year ago quarter. The solid improvement in gross margin of the North America business segment has increased the company’s total profit margin. For 2Q 2015, the company’s adjusted operating income was $70.4 million, or 9.2% of net sales, as compared to $55.9 million, or 7.8% of net sales in the year ago quarter. Further, Tempur Sealy reported adjusted net income increased 38.8% to $33.3 million, compared to adjusted net income of $24 million in the second quarter of 2014. On a constant currency basis, adjusted net income increased 49.2%. Adjusted EBITDA shot up 16.2% to $90.3 million as compared to $77.7 million for the second quarter of 2014. Tempur Sealy ended the quarter with cash and cash equivalents of $35.4 million, and long-term debt of $1.5 billion. A chart has been provided below to show the company’s segment's (include North America and International) performance.
The improvement in North America adjusted operating margin during the second quarter of 2015 was the result of an improvement in adjusted gross margin of 280 basis points, offset partially by higher advertising expenses as compared to the same period in 2014. On the other hand, the decline in international adjusted operating margin was primarily the result of a decline in adjusted gross margin of 140 basis points, which declined because of higher mix of Sealy brand sales.
Projections for 2015
After providing such a beautiful quarter with positive numbers, Tempur Sealy has raised its outlook for 2015. Tempur Sealy expects its net sales will be in the range of $3.125 billion to $3.175 billion, up from the previously expected figure of $3.1 million to $3.175 million. Adjusted EPS is expected to range from $3.00 to $3.20 per diluted share. Previously, this was expected to be in the range of $2.80 to $3.15 per share. Further, the company’s annual base growth targets from 2015 to 2018 are as follows:
- Sales growth of 6%.
- Adjusted operating margin improvement will be 50bps.
- Adjusted EPS growth of 15%.
- Deleveraging to 3x and return value to shareholders.
Growth opportunities
Tempur Sealy has enough growth opportunities in North America as well as in the international arena. In the U.S., the $9 billion market is growing by the mid-single digits annually, with significant unit growth potential. Additionally, U.S. bedding specialty stores are consolidating, and new channels of distribution are emerging. The company has introduced two new products: Tempur-Flex and Posturepedic. Further, Tempur Sealy is continuously building awareness of brands and driving sales through effective marketing. The following are the Sealy U.S. gross margin improvement initiatives:
- Product design
- Procurement
- Price-Margin-Realization (PMR)
- Factory productivity
To strengthen its position, Tempur Sealy is taking the following steps:
- Introducing new products that will expand addressable opportunity.
- Expanding third party retail distribution and company-owned stores.
- Making opportunistic accretive acquisitions of licensees and joint ventures.
A peek into the bedding industry
Until 2007, the global mattress industry has achieved positive results, and during 2008 to 2009, it had experienced a decrease in overall sales. The main reasons behind the decrease were economic pressures, decline in consumers' wealth, and weak housing market. Then, in 2010, the industry started to show signs of recovering, and is now expected to experience healthy growth in the upcoming years. As per Global Industry Analysts, the global mattress market will reach $24.65 billion by 2017. People are now ready to spend more for mattresses as sound sleep is one of the most important necessities of life. Therefore, Tempur Sealy has enough room to strengthen its position.
On a concluding note
Overall, Tempur Sealy is a rock solid company with strong and improving financial characteristics, improving capital structure, and significant operating cash flow with a commitment to enhance stockholder value. Further, the company is leveraging and strengthening its comprehensive portfolio of iconic brands and products, expanding distribution and seeking best dealer support, expanding margins with focus on driving significant cost improvement and leveraging global scale for competitive advantage. Therefore, I expect that this leading bedding provider will deliver exceptional returns in the near future.
(Source: Company’s Website)
