Shares of Lexington-based Tempur-Pedic International lost almost half their value Wednesday, after the high-end mattress company announced that it expects sales and earnings to decline in the second quarter.
"If you look at sales overall, they're all disappointing," CEO Mark Sarvary told analysts in a morning conference call.
The announcement led to downgrades by at least three stock analysts who were caught off-guard by the news.
SunTrust Robinson Humphrey analyst Keith Hughes told Sarvary during the call that he and his counterparts were "hearing a dramatically different story" than the company's most recent earnings presentation in April.
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Hughes later moved off his buy rating on the stock, according to stock tracker Seeking Alpha.
Company executives said they expect sales to be 3 percent to 5 percent below last year's quarterly revenue. Driving that decline are weaker results in North America, where sales are expected to drop 8 percent year over year.
They cited Tempur-Pedic's rivals all offering new foam-based mattress products and supporting them with advertising.
Tempur-Pedic makes and sells premium non-spring mattresses and pillows and was a pioneer in manufacturing "memory foam" products.
"We entered 2012 anticipating a more competitive environment; however, we did not expect the competitive environment to change this fast and have this significant an impact on our North American business," Sarvary said.
The sales decline is expected to severely hamper profits, and the company predicted that earnings would fall by half in the second quarter.
Chief financial officer Dale Williams told analysts that the company expects sales in the third and fourth quarters to be about equal to second-quarter sales. Last year, those quarters saw sales grow 12 percent and 7 percent, respectively, compared to the second quarter.
For the full year, the company expects sales to be $1.43 billion, which would be up about 1 percent from 2011's results. That's down from previous guidance of a range of $1.6 billion to $1.65 billion.
"We're taking actions to realign our expense structure appropriately given the new sales projections," Sarvary said.
Williams said, "As part of our lower sales expectations, we will lower advertising, ... but we are still going to advertise. We believe that's important."
When asked about other expense cuts, Sarvary said executives will review every type of expense.
"Advertising is the big one, but by no means the only one," he said.
The company's spending on advertising was criticized in its previous conference call, with analysts questioning whether the expense was too high given the rate of return on sales at that point. Tempur-Pedic defended the practice at the time, saying it takes time for those results to pay off.
That day marked the start of a recent decline in the company's stock value, which was amplified severely by Wednesday's announcement.
The stock peaked this year at $87.43, just days before the April quarterly earnings announcement that sent it spiraling down more than 20 percent to close at $66.53. The company's stock price continued a more steady decline to close at $43.67 on Tuesday.
That crashed to $22.39 on Wednesday.
Company officials, as a general practice, decline to comment on stock price. Williams did not return a call from the Herald-Leader requesting comment.
In emphasizing that the problems are limited to North America, he told analysts that the company continues to expect double-digit sales growth from its international business.
The announcement comes a little more than three months after the company announced its intention to double sales by 2016. One of the ways it intended to fulfill that goal was its new Simplicity product line, which is priced at $1,499 and brings the company into a lower-priced portion of the market.
Sarvary said sales of that product were within the company's planned range, but "our sales across the board are disappointing."
He said he thinks the industry will continue to see growth in non-spring mattresses, and the company is committed to its long-term strategy.
"We are best positioned to benefit from this growth over time," he said.