Tempur Sealy(TPX)2023-11-02 15:17Financial Data and Key Metrics - Consolidated sales for Q3 2023 were approximately $1.3 billion, with adjusted EPS of $0.77, consistent with the previous year despite a challenging macroeconomic environment [23][26] - Consolidated adjusted gross margin improved by 340 basis points year-over-year, driven by successful management of commodity fluctuations, improved supplier contracts, and operational efficiencies [18] - North American net sales declined 3% in Q3, with wholesale channel down 4% and direct channel down 1%, while adjusted gross margin improved by 300 basis points to 43.2% [20] - International net sales increased 12% on a reported basis and 7% on a constant currency basis, with gross margin improving by 320 basis points to 56.6% [36] - Operating cash flow for Q3 was approximately $230 million, and the company has paid down $200 million of debt over the first nine months of 2023 [27] Business Line Performance - The new Tempur product lineup, including the Breeze mattresses, drove a 5% increase in Tempur Mattress and Foundation ASP in Q3, with strong retail advocacy and favorable mix [35] - Stearns & Foster products saw double-digit ASP growth year-over-year, with search interest and e-commerce traffic up 50% [17] - Dreams, the UK retail operation, outperformed the broader market with record customer satisfaction and solid sales growth [1] - The company completed the rollout of the new Stearns & Foster mattress collection earlier in 2023, which is resonating with premium inner-spring consumers [17] Market Performance - The U.S. market underperformed expectations, with estimated volume down low double-digits in Q3, but the company mitigated the impact through solid international performance [5] - International operations, particularly in Europe and Asia, performed well, with the new Tempur lineup launched in over 90 markets, including key markets in Europe and Asia [1] - The UK market, despite being tough, saw growth in sales for Dreams, indicating significant market share gains [80] Strategic Direction and Industry Competition - The company is focused on operational efficiencies, with significant improvements in supply contracts, labor productivity, and logistics efficiencies expected to drive further margin expansion [19] - Tempur Sealy is progressing towards the acquisition of Mattress Firm, with post-closing supply agreements signed to ensure a multi-branded retail strategy and avoid supply disruptions [9][39] - The company continues to invest in advertising and product innovation, with a record $480 million spent on advertising in 2023 to support leading brands and new products [37] Management Commentary on Operating Environment and Future Outlook - Management highlighted the normalization of seasonality in the U.S. market, with deeper troughs during non-holiday periods and growth during holiday periods [42][43] - The industry has been in decline for nine quarters, with unit volumes at levels similar to the Great Recession, driven by macroeconomic factors and reduced advertising [44] - Management remains optimistic about market share gains in 2024, even in a softer market, driven by internal cost controls and continued investment in advertising and product innovation [56] Other Important Information - The company expects adjusted EPS for 2023 to be in the range of $2.30 to $2.50, with a midpoint based on sales consistent with the prior year [37] - Tempur Sealy has refinanced its credit facilities, extending debt maturities and improving financial flexibility, with a leverage ratio expected to be between 3 and 3.25 times post-acquisition of Mattress Firm [28] - The company has signed multiple post-closing supply agreements with Mattress Firm suppliers to ensure a stable market and avoid supply disruptions [9] Q&A Session Summary Question: Demand Environment and Trends in Q3 [32] - The U.S. market saw deeper troughs during non-holiday periods and growth during holiday periods, with the industry in decline for nine quarters due to macroeconomic factors and reduced advertising [42][43][44] Question: Growth Investments and SG&A Increase [3] - The company made growth investments in Q3, including advertising and new store openings, which contributed to the increase in SG&A [3][60] Question: Industry Advertising and Market Share [33][52] - The industry has seen a significant reduction in top-of-funnel advertising, with manufacturers down 64% and retailers down 44%, impacting overall traffic and market performance [33][52] Question: 2024 Cost and Expense Outlook [48] - The company expects continued operational efficiencies and cost reductions in 2024, with tailwinds from improved supply contracts and labor productivity [48][50] Question: Supply Agreements and Gross Margin Impact [53] - The new supply agreements signed with Mattress Firm suppliers are expected to provide stability and benefit gross margins in 2024 [53] Question: Industry Recovery and Advertising [64] - Management believes that a recovery in industry advertising is key to returning to normalized unit levels, as the industry relies on triggering customer interest through advertising [64] Question: Market Share Gains and Competitive Strategy [78] - Tempur Sealy is gaining market share from competitors in both the U.S. and international markets, driven by strong product offerings, advertising, and long-term strategic decisions [78][71] Question: Mattress Firm Performance [83] - Mattress Firm has performed better than expected in the challenging U.S. market, outperforming the industry, which was down low double-digits in Q3 [83] Question: Commodity Price Trends [85] - Commodity prices have normalized but remain elevated compared to 2020 levels, with the company benefiting from favorable commodity markets and long-term supplier agreements [85] Question: Entry-Level Customer Challenges [86] - The entry-level customer segment is under pressure, with higher-end products like Tempur and Stearns & Foster performing well, while entry-level Sealy products face challenges [86]