Tempur-Pedic stock falls 20 percent

ssloan@herald-leader.comOctober 24, 2012 

Shares of Tempur-Pedic International fell nearly 20 percent Wednesday, a day after the company again reduced its sales and profit expectations for the remainder of the year.

In reporting a quarterly loss on Tuesday, the company, which is based in Lexington, lowered its prediction for annual sales to $1.4 billion from $1.43 billion earlier in the year — a difference of $30 million. The company also lowered its profit expectations from $2.80 per share to $2.55 per share for the year.

It's been a rocky year for the company, as it struggled with increased competition from other mattress makers. When executives warned in June that the increased competition would lower sales and profit projections, the company's stock lost half its value in one day.

Since then the stock has generally risen. During that time Tempur-Pedic announced plans to acquire rival Sealy in a deal valued at $1.3 billion.

The company cited a number of reasons for its weaker performance during a conference call with analysts Tuesday evening. Among those reasons were lower international sales growth than anticipated as well as higher costs and less interest than expected in its new line of lower-priced mattresses.

"While our international business once again delivered a solid quarter in what many would consider to be a difficult economic environment, our international sales were below our expectations," CEO Mark Sarvary told analysts.

In the quarter, international sales of mattresses grew one percent while pillow sales increased 16 percent. Those results were weighed down by currency exchange rates.

"Whether it's a blip on the radar screen or not, only time will tell," Chief Financial Officer Dale Williams said Wednesday.

Driving the weakness in recent months has been the company's North American business, the victim of increased competition from rivals unveiling products in the foam-based mattress market.

To reverse its declines, the company recently announced a number of initiatives, including extending warranties and lowering prices for retailers.

"It's important to note that these new initiatives have come with a price, and are more costly than we had initially estimated," Sarvary told analysts. "Tempur-Pedic was the key driver of change within the industry over the past decade. And we've always anticipated that as we grew the specialty category, we would get more competitive and that's what has happened.''

Sarvary said the acquisition of Sealy was vital to address that landscape because Tempur-Pedic's competitors benefit from having all types of mattresses available for sale. With its acquisition, Tempur-Pedic will now be able to save on manufacturing and distribution costs, he said.

But the acquisition of Sealy has been greeted with some skepticism.

Analyst Jon Andersen of William Blair noted in a research report to clients Wednesday that "while the Sealy transaction may ultimately improve Tempur's broader market positioning, we remain cautious nearer term given persistent heightened competition in the company's core specialty segment."

He also noted that the acquisition opens Tempur-Pedic to risks because the inner-spring mattress segment in which Sealy is a major player is not as profitable or experiencing high growth.

Earlier this year, Tempur-Pedic entered the lower-priced mattress market by launching its Simplicity line, but it hasn't been the success envisioned.

The company dropped its already lower-than-usual prices in July by an additional $100, Williams said.

"We're still doing good with Simplicity," he said. "It's sells well. It just hasn't been the home run yet we thought it would be."

Scott Sloan: (859) 231-1447. Twitter: @HeraldLeaderBiz

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